Financing a home can be a difficult task, especially if this is your first time taking yourself through the gauntlet of real estate. It is possible, however, and many people that you know have done it without losing their minds. How? Here are seven tips for your next home financing negotiation that will save you money, time, and sanity.
1. Should I get preapproved first?
If you are a first time home buyer, then you should definitely look to a preapproval before you make any official offers to sellers for properties. As a first timer, you likely do not have the long credit history that attracts lenders and puts sellers at ease. You will have to convince people another way that you are a stable, responsible financial entity. The preapproval does this in many ways. First of all, you learn exactly how much a bank is willing to give you. Secondly, the process itself makes you take ownership of your finances and organize them in a professional manner. Thirdly, sellers perk up when they see that a reputable lender is already backing you. They take you much more seriously when this happens.
2. Should I put offers on more than one house?
Keep in mind that every offer that you make will cost you something. Your time is definitely an important expense, and so is your reputation, so do not bid on properties that you do not plan on following through on. You will also probably have to put an earnest money deposit, or a deposit of good faith, on any offer that you make. The seller may keep this earnest money if you back out of the offer, and even if he does not, it is held until the end of escrow.
However, you can get a better negotiation from sellers by bidding on multiple properties that you are seriously considering. Just make sure that you have the finances to do this.
3. When should I check my credit?
You should check your credit during the preapproval process, i.e., before you get into the thick of things with your sellers. Check your credit well before the preapproval process, actually. The major credit rating agencies often make mistakes, meaning that you may get a higher interest rate because of something that you did not do. Challenge everything on your credit record that creates problems for your finances, even if you think that you are guilty.
4. What else about my finances is important?
Your debt to income ratio should be lower than 30 percent. You should also attempt to use less than 30 percent of your available credit. Not only will this make your application look better to a lender, but they are just good financial habits. You should expect that your mortgage will take up 25 percent of your income every month. Overall, this is already about 85 percent of your income if you max these three stats out. That is hardly enough left over for furniture, pest control, lawn service, calling the plumber, and turning the AC down a couple of degrees when it gets warm. In short, you must consider all of the expenses of running a household. The mortgage is the first expense, but it is hardly the last.
You should also have a cash reserve of at least six months of these living expenses in an account. You never know what might happen over the term period of your loan, especially if that loan is 30 years long.
5. What kinds of closing costs should I expect?
Closing costs are a fixed cost that no buyer can get rid of. In places like California and New York, these costs can quickly become quite substantial. Although you may be able to negotiate some of these costs over to the seller, you will still pay some of them, so prepare yourself for them.
Closing costs make everyone who participated in the real estate negotiation whole. The attorneys, the agents, the insurance companies, and the government agencies all want a piece of the final discussion, and they will get it to the tune of between one and five percent of the total mortgage cost. You need this money ready in cash, and it must be separate from your down payment and your cash reserve that was mentioned above.
6. What are mortgage points?
Mortgage points are an extra charge that buyers can take on during the closing costs that will reduce the ongoing interest rate for the term period of the loan. They may be advantageous for you to consider if you have any money left over from all of the other charges. Take a close look at them so that you can determine the best strategy for saving money in the long term and covering all of your costs in the short term.
7. Am I eligible for government subsidies?
Although this is the last tip, this is the first thing that you should check for. The Federal Housing Administration, the United States Department of Veterans Affairs, the Navy Federal Credit Union, and the United States Department of Agriculture all run programs to help first time home buyers pay less money for a house. These agencies are not lenders, meaning that you still need to impress your banker in order to get a loan with these programs acting as your mortgage insurance company, so do not get lazy here.
2 Point Highlight
The major credit rating agencies often make mistakes, meaning that you may get a higher interest rate because of something that you did not do.
The Federal Housing Administration, the United States Department of Veterans Affairs, the Navy Federal Credit Union, and the United States Department of Agriculture all run programs to help first time home buyers pay less money for a house.
