While the housing collapse is in our rearview mirror, the financial lessons learned should be on the mind of every home buyer. Your house is usually the biggest investment of your life. You pay on it for 15 to 30 years, so you want a home that fits in your budget even if you’re only staying for a few years. When you’re buying a home, stay on budget with these 8 smart money moves.
Home buying financial tips
Create an emergency fund
When you’re budgeting for your home, consider your emergency fund. There’s nothing more unexpected than a crack in the foundation or a plumbing leak. Even with a thorough home inspection, something is bound to happen at some point as a homeowner. Plan for the unexpected.
Your emergency fund needs to cover unexpected housing repairs, expenses, job loss, and medical issues. Plan for at least 3 to 6 months of living expenses. While we’re mostly concerned with your housing budget, the financial collapse showed us how every other aspect of your life affects your ability to pay your mortgage.
While you may not have a full 3 to 6 months worth of savings the minute you buy your home, build in a way to build up that savings when you’re budgeting. Make sure every month, some of your income goes toward your emergency fund.
Search for homes within your budget
Once you have your budget figured out, stick with it! Don’t look at houses above your budget, expecting to negotiate the buyer down. Instead, set a budget and stick to it.
When you look at homes outside your budget, your emotions take over. Who isn’t wowed by the extra perks like granite countertops instead of Formica?
Keep your expectations within reason and your emotions in check, by sticking with a housing budget. Calculate how much house you can afford with our mortgage calculator.
When you make an offer on a home, you better have a pre-approval letter in hand. That is a letter from a lender or bank that shows they’ve verified your finances.
You’ll show lots of financial documents to the bank to get the pre-approval letter. Bank regulations are stricter than ever, in light of how many sub-prime loans landed homeowners in foreclosure.
The pre-approval letter will also help you narrow your budget and housing search because you’ll get pre-approved for a specific loan amount.
This letter also puts you in a better position to make a serious offer when you do find the right house.
Lenders base pre-qualification on a cursory review of your finances. Pre-approval depends on your actual income, debt and credit history. That’s why a pre-approval letter is considered the gold standard in real estate.
If you’ve been late on bills in the past, and are not sure about your credit score or history, check it first. You can get your credit history for free once a year from the three bureaus — Experian, Equifax, and TransUnion. Go to annualcreditreport.com and check for delinquencies or other credit errors. It’s not unusual to have errors. Clear these up before you apply for a loan.
If you notice problems, your score may need improvement too. Some credit card companies offer a free score.
It is possible to improve your credit score to afford a home purchase.
Shop around for a mortgage
When you’re getting a mortgage, shop around for the best rates and offers. The prices and payment programs vary by institution. You can save thousands of dollars a year, by shopping around for a mortgage.
Do this before you find a house – so it’s smooth sailing once you spot your dream home.
New lending rules make it easier than ever to compare mortgages and understand the terms of the loan. Take the time to review the mortgage documents and understand the actual cost of the loan. Is there a pre-payment penalty? Do you have to pay Private Mortgage Insurance or PMI?
Consider different payoff terms – 15, 20, or 30-year loans. While 30 years may seem like a long time, it offers you a lower monthly payment, with the option of paying an additional principal when you can. That way you’re less likely to finance your way into trouble, should the economy dip again.
You can even consider an adjustable rate mortgage (ARM) versus the traditional fixed rate. With low-interest rates, though, an ARM may not be the best option in today’s real estate market. However, it’s for some buyers depending on their short-term goals. Know, though, that the rate will rise with interest rates.
When you’re financing a home, you want to be able to survive the good and the bad times. Remember, prepare for the unexpected.
When choosing a mortgage, you usually have the option of paying down the interest rate through points. It’s a portion of the interest that you pay at closing in exchange for a lower rate. If you plan to stay in the house for a long time, taking the points will save you money.
Look into down payment assistance
While traditional loans typically require 20-percent down, there are ways around it. Ask your Realtor® and lender for other financing options if 20-percent isn’t possible.
There are great down payment assistance programs available to Kansas City area buyers.
There are FHA and VA loans that often offer lower down payment amounts for single-family homes.
Do your homework before making an offer
Before you make an offer on a home, do some research on the sales trends of similar homes in the neighborhood. If you’re working with a Realtor®, they’ll run the comparable sales for you. You can also get an instant home value report now.
Consider sales of similar homes in the last three months. For example, if homes sell above list price then base your offer accordingly. Or, if you notice homes selling for significantly under list price it could be a sign that the market is starting to decline and you want to adjust your offer price to follow suit.
Always listen to your agent’s expert advice, as they’re aware of the latest real estate market trends.
When you make an offer, have an end price in mind. A strategy is a big part of the home buying process and negotiation.
Keep the appraisal in mind
The appraisal isn’t connected to your finances directly, but the two work hand in hand. Appraisals don’t always keep pace with a strong seller’s market. When you make an offer above list price, the appraisal may not come back at the same level.
Demand drives up prices, but it doesn’t necessarily drive up appraisals. You need an appraisal that’s in line with the amount the bank will loan you unless you have cash to offset the difference.
As both a buyer and seller, there are ways to prepare for the home appraisal in a seller’s market.
Financing is one of the most important parts of buying a home, yet, the least enjoyed. It takes time to find all the financial paperwork you need for the bank. However, the strict rules keep your house hunting adventure on track so you don’t buy a house you can’t afford.
As a Realtor®, I work with lenders throughout Kansas City who I trust to finance your loan. Let me know how I can help or if I can put you in touch with one.