How to succeed in today’s real estate market
Housing affordability is declining. In fact, according to a new report from ATTOM Data Solutions, today’s homes are less affordable than historical averages in 61% of U.S. counties.
But that doesn’t mean you should give up on your home buying dreams. It just means you need to get creative.
By planning ahead and being smart about financing, buying a home could be much more affordable than you thought. Here’s what to do.
Verify your home buying eligibility (Jul 6th, 2021)In this article (Skip to…)
Typical costs of buying a home
First things first: you should know what costs to expect when buying a home so you can budget appropriately.
Today’s home buyers should plan to cover:
- The down payment — 3-20% of the sale price
- Closing costs — 2-5% of your home loan amount
- Earnest money — Around 1-3% of the home’s purchase price, paid when you make an offer and later applied to your down payment
Say you’re buying a home worth $450,000. If you plan to put 20 percent down, your upfront costs might look like this:
- 20% down payment: $90,000
- 2.5% closing costs: $9,000
- Total home buying costs: $99,000
Even with home prices spiking, though, you don’t necessarily need a huge down payment.
Today’s buyers can often qualify with as little as 3 percent down. (Or zero down, if you meet special eligibility requirements.)
Say you choose a 3 percent down conventional loan instead of putting 20% down. You’ll now have to pay private mortgage insurance (PMI), which increases your monthly mortgage payments. But your upfront costs are far lower:
- 3% down payment: $13,500
- 2% closing costs: $8,730
- Total home buying costs: $22,230
As the home buyer, you have a lot of control over your own costs.
Make sure you research loan options and mortgage lenders before buying. Doing so could save you thousands.
Find a low-cost home loan (Jul 6th, 2021)8 tips to lower your costs as a home buyer
Fortunately, home prices aren’t the only factor that impacts affordability.
If you’re trying to buy a new home and are disheartened by the rising costs of homeownership, try one or more of these strategies to keep things within budget:
1. Shop around for your mortgage
Mortgage rates vary from one mortgage lender to the next — sometimes quite a bit, too. So shopping around? That’s one of the best ways to ensure you get the lowest rate possible.
Your best bet is to compare quotes from several types of lenders — a credit union, a bank, a well-known mortgage company, and an online lender.
You should consider your home banking institution, too, as it may offer loyalty discounts or perks you can take advantage of.
Remember: The lower your interest rate is, the lower your monthly payment will be. This can help offset rising home prices and help you better afford today’s housing.
Compare mortgage rates and fees (Jul 6th, 2021)2. Negotiate your fees
You can also negotiate the fees that come with your mortgage. This is a great way to lower your closing costs and save money upfront.
Start by asking lenders to lower their loan origination fees; using another lender’s quote can help with this.
Check your Loan Estimate for other lender charges as well, like an application fee or underwriting fee. They’ll have wiggle room on any of these and may be willing to negotiate if they really want your business.
You should also skip to page two of your Loan Estimate and check out the “Services You Can Shop for” section.
This has a list of fees you’re able to shop around for. Often, comparison shopping for these services can help you save hundreds of even more at closing.
Other tricks include:
- Rolling the upfront mortgage insurance premium on an FHA loan or USDA loan into your mortgage balance to save money at closing
- Rolling the VA loan funding fee into your loan amount
- Paying discount points to lower your interest cost over the life of the loan,
- Avoiding discount points to save money upfront (depending on your priorities)
Just note that some costs are non-negotiable.
For instance, your lender doesn’t control the appraisal fee, home inspection fee, homeowners association fees (HOA), or title search/title insurance fees. So plan on budgeting the full quoted amount for these items.
3. Apply for down payment and closing cost assistance
Even in this competitive real estate market, you don’t need a huge down payment to succeed — despite what real estate agents might say.
In fact, about 70% of first-time home buyers put less than 20% down in the spring of 2021.
A low down payment might make it tough to buy a higher-priced home. But down payment assistance can help bridge the gap to affording your dream home.
Every state has multiple down payment assistance (DPA) programs that offer grants and/or loans to make home buying more affordable. The funds can typically be used for your down payment and closing costs, as well.
Ask your loan officer or Realtor about local DPA options in your area. These programs make a huge difference when trying to afford a home in today’s high-priced market.
4. Improve your credit
Increasing your credit score is another way to get a lower interest rate and make homebuying more affordable.
The logic behind this one’s pretty simple: Borrowers with higher credit scores are more likely to repay their loans and are, therefore, less risky to lenders. As a result, lenders are able to offer these borrowers lower rates and more affordable loans on the whole.
So before you start shopping for a home, do a quick credit check-up first.
The best rates go to those with 760 scores or higher. So if you’re below this threshold, take some time to increase your score before going any further.
You can do this by paying down your debts, settling any late or overdue accounts, alerting the credit bureau of any errors on your credit report, or even requesting a credit line increase on one of your credit cards.
5. Choose your location carefully
Home prices diverge substantially from one city to the next. It all depends on costs of living, local incomes, area property taxes, supply, demand, and a whole slew of other factors.
If you’re really looking to snag a low-priced (or just affordable) property, consider looking outside your current locale. This might mean moving a few miles out — to a more affordable suburb or rural town — or even moving out of state if you’re in a particularly high-cost market.
Fortunately, many employers are allowing continued remote work, even post-pandemic, so this may make it easier to up and move to a more affordable area.
6. Close at the end of the month
When you close on a mortgage loan, you’ll pay for something called “prepaid items” in addition to your down payment and other closing costs.
These cover the mortgage interest, property taxes, and homeowners insurance premiums from closing day until the day your first mortgage payment is due. And they can often amount to hundreds or even thousands of dollars.
To avoid sky-high prepaid costs, try and schedule a closing date as close to the end of the month as possible.
Prepaids are calculated on a daily basis, so this cuts down on the number of days you’ll need to cover and can reduce your closing costs significantly.
7. Buy a fixer-upper
Move-in ready homes come at a premium. So if you really want to find a bargain of a home? Consider a fixer-upper.
You’ll need to put in some work (and cash) to get the home up to speed. But it will often come out to much less than a move-in property would cost at full price.
Keep in mind there are mortgages designed just for these types of purchases.
For instance, the FHA 203k loan — backed by the Federal Housing Administration — can help you both buy a home and finance the repair costs all in one.
There are other options, too. So if you go this route, talk to a mortgage broker about the best ways to finance your purchase and renovations before moving forward.
8. Time it right
Housing costs are seasonal. Prices are typically highest in the spring and summer, and they start to decline as we head into fall and winter. If you can, try and delay your purchase to one of these lower-cost times.
According to ATTOM, the absolute best days to buy a house are December 4, January 26, December 6, and December 26. At the monthly level, December is your best bet, while June is the worst.
Verify your home buying eligibility (Jul 6th, 2021)Will home prices go down in 2021?
Throughout the COVID pandemic, low interest rates have helped to make home buying more affordable.
But rising home prices and low inventory have reversed the affordability trend in 2021.
“While super-low mortgage rates have certainly helped in a big way, prices have simply shot up too much to maintain historic affordability levels,” said Todd Teta, chief product officer for ATTOM.
Unfortunately, home buyers shouldn’t expect prices to start dropping anytime soon.
The reason? Simple supply and demand.
“Given the low mortgage interest rate environment, the high demand and the need for more space, we expect this [housing] shortage to continue into the near future.”
The U.S. is in the middle of an epic housing shortage that will take a long time for builders to fill. And demand — especially from first-time buyers — continues to outpace supply.
“Given the low mortgage interest rate environment, the high demand and the need for more space, we expect this shortage to continue into the near future,” said Freddie Mac in May 2021.
There’s some possibility the current market could cool off a little as rates rise and home buying interest decreases. But for now, buyers shouldn’t expect any massive reversal in home prices.
Says Teta, “The near future of affordability remains very uncertain, as it has throughout the pandemic.”
That means if you’re really motivated to buy a home this year, it’s time to take affordability into your own hands.
Take affordability into your own hands
Home prices may be rising, but there are still ways to lower your costs and afford a home in today’s market.
Are you on the hunt for that dream home? Work on improving your credit, shop around for your loan, and time the home buying process right. Homeownership may still be within reach (and budget).
Verify your new rate (Jul 6th, 2021)
