Home Buying Tips for 2018
Springtime typically means warmer temps and blooming flowers in the Charlottesville area, although the start to this year’s spring has been anything but typical with snow showers on the first official day of spring, and interspersed with sunnier days ever since.
The market is indeed different from year to year, and spring 2018 is already shaping up to be a uniquely challenging one for Buyers, especially those looking for starter homes. This is due to several factors: low inventory, higher prices, and rising interest rates.
If you’re looking for a starter home, adjust your expectations. With high demand and plenty of competition, prices are rising for starter homes to the tune of 9.6 percent more this spring than last year.
Trade-up and premium homes are also more expensive this year — 7.5 percent and 5.2 percent more, respectively. If you’re looking for a starter home, consider older or smaller options. Even better, look for a fixer-upper. There are 8.3 percent more fixer-upper starter homes than there were six years ago. That’s good news for anyone willing to put a little elbow grease into their investment.
Despite rising prices, compared to historical housing costs, homes today are actually more affordable than they were in past decades.
Why? Two words: mortgage rates. To take out a mortgage loan in the 1980s, you’d likely pay up to 16 percent in interest — compare that with today’s mortgage rates of around 4.5 percent. For a $200,000 loan, at 4.5 percent interest, you’d pay $1,013 a month (before taxes, insurance, and other fees), but with 16 percent interest, you’d pay $2,690.
Smart choices can help Buyers in this spring’s tight housing market. So what’s your strategy going to be for buying a home this spring? Here’s what you need to know to decide.
Keep Your Money Where It Is
We’ve said this many times before, avoid making any huge purchases or move your money around three to six months before buying a new home. You don’t want to take any big chances with your credit profile.
Lenders need to see that you’re reliable and they want a complete paper trail so that they can get you the best loan possible. If you open new credit cards, amass too much debt or buy a lot of big-ticket items, you’re going to have a hard time getting a loan.
When you’re taking out a mortgage loan, your credit will be one of the key factors in whether you’re approved, and it will help determine your interest rate and possibly the loan terms.
Check your credit before you begin the buying process. Dispute any errors that could be dragging down your credit score and look for opportunities to improve your credit, such as making a dent in any outstanding debts.
Get Pre-Approved for Your Home Loan
There’s a big difference between a Buyer being pre-qualified and a Buyer who has a pre-approved mortgage.
Anybody can get pre-qualified for a loan. Getting pre-approved means a lender has looked at all of your financial information and they’ve let you know how much you can afford and how much they will lend you.
Being pre-approved will save you a lot of time and energy so you are not running around looking at houses you can’t afford. It also gives you the opportunity to shop around for the best deal and the best interest rates. Do your research: Learn about junk fees, processing fees or points and make sure there aren’t any hidden costs in the loan.
If you wait until after you’ve found a home to start the mortgage pre-approval process, you might lose the home in this market to someone who already has their financing ducks in a row.
It’s common to put 20% down, but many lenders now permit much less, and first-time home buyer programs allow as little as 3% down. But putting down less than 20% may mean higher costs and paying for private mortgage insurance, and even a small down payment can still be hefty. For example, a 5% down payment on a $200,000 home is $10,000.
Play around with a down payment calculator to help you land on a goal amount. Some tips for saving for a down payment include setting aside tax refunds and work bonuses, setting up an automatic savings plan and using an app to track your progress.
Research mortgage options
Is a 30-year, fixed rate mortgage a given, or is another loan type right for you? If you can afford larger monthly payments, you can get a lower interest rate with a 20-year or 15-year fixed loan. Is a 15-year or 30-year fixed mortgage is a better fit for you? Or you may prefer an adjustable-rate mortgage, which is riskier but guarantees a low interest rate for the first few years of your mortgage.
Many Buyers get a rate quote from only one lender, but this often leaves money on the table. Comparing mortgage rates from at least three lenders can save you more than $3,500 over the first five years of your loan, according to the Consumer Financial Protection Bureau. Get at least three quotes and compare both rates and fees.
Lenders often allow you to buy discount points, which means prepaying interest upfront to secure a lower interest rate. There may also be an option for negative points, in which the lender pays some of your closing costs in exchange for a higher interest rate.
How long you plan to stay in the house is one of the key factors in whether buying points makes sense. You’ll need to do some calculations or speak to a mortgage broker or loan officer to help you decide if buying points is worth it for you.
Research state and local assistance programs
In addition to federal programs, many states offer assistance programs for first-time home buyers with perks such as tax credits, low down payment loans and interest free loans up to a certain amount. Your county or municipality may also have first-time home buyer programs.
Budget for closing costs
In addition to saving for a down payment, you’ll need to budget for the money required to close your mortgage, which can be significant. Closing costs generally run between 2% and 5% of your loan amount.
You can shop around and compare prices for certain closing expenses, such as homeowners insurance, home inspections and title searches. You can also defray costs by asking the Seller to pay for a portion of your closing costs or negotiating your real estate agent’s commission. Calculate your expected closing costs to help you set your budget.
Avoid Sleeper Costs
The difference between renting and home ownership is the sleeper costs. Most people just focus on their mortgage payment, but they also need to be aware of the other expenses such as property taxes, utilities and homeowner-association dues.
New homeowners also need to be prepared to pay for repairs, maintenance and potential property-tax increases. Make sure you budget for sleeper costs so you’ll be covered and won’t risk losing your house.
Don’t Try to Time the Market
Don’t obsess with trying to time the market and figure out when is the best time to buy. Trying to anticipate the housing market is impossible. The best time to buy is when you find your perfect house and you can afford it.
Real estate is cyclical, it goes up and it goes down and it goes back up again. So, if you try to wait for the perfect time, you’re probably going to miss out.
Hire the right Buyers agent
You’ll be working closely with your real estate agent, so it’s essential that you find someone you get along with well. The right buyers agent should be highly skilled, motivated and knowledgeable about the area.
Use this as another opportunity to scope out the neighborhood and your potential neighbors. Pay close attention to the home’s overall condition and look for any smells, stains or items in disrepair. Ask a lot of questions about the home, such as when it was built, when items were last replaced and how old key systems like the air conditioning and the heating are.
If several other potential Buyers are viewing the home at the same time as you, don’t hesitate to schedule a second or third visit to get a closer look and ask more questions.
Bigger Isn’t Always Better
Everyone’s drawn to the biggest, most beautiful house on the block. But bigger is usually not better when it comes to houses.
There’s an old adage in real estate that says “don’t buy the biggest, best house on the block.” The largest house only appeals to a very small audience and you never want to limit potential Buyers when you go to re-sell.
Your home is only going to go up in value as much as the other houses around you. If you pay $500,000 for a home and your neighbors pay $250,000 to $300,000, your appreciation is going to be limited.
Sometimes it is best to is buy the worst house on the block, because the worst house per square foot always trades for more than the biggest house.
Avoid Emotions If You Can
Buying a house based on emotions is just going to break your heart. If you fall in love with something, you might end up making some pretty bad financial decisions.
There’s a big difference between your emotions and your instincts. Going with your instincts means that you recognize that you’re getting a great house for a good value.
Going with your emotions is being obsessed with the paint color or the back yard. It’s an investment, so stay calm and be wise.
To be successful and not make a rash decision, be as prepared as possible before you start looking by knowing the type of home and neighborhood you desire.
Research the Neighborhood
Before you buy, get the lay of the land – drop by morning noon and night. Many Buyers think they have found the perfect home, only to find out the neighborhood wasn’t for them.
Drive by the house at all hours of the day to see what’s happening in the neighborhood. Do your regular commute from the house to make sure it is something you can deal with on a daily basis. Find out how far it is to the nearest grocery store and other services.
Even if you don’t have kids, research the schools because it affects the value of your home in a very big way. If you buy a house in a good school district versus bad school district even in the same town, the value can be affected as much as 20 percent.
Many Buyers prefer neighborhoods full of homeowners, so figuring out the character of an area is essential. Here’s a tip: Hot spots for homeownership share one attribute — increased household incomes. Research neighborhood demographics to pinpoint median incomes and homeownership rates.
Also, be sure to talk with the locals or neighbors.
The Secret Science of Bidding
Your opening bid should be based on two things: what you can afford (because you don’t want to outbid yourself), and what you really believe the property is worth.
Make your opening bid something that’s fair and reasonable and isn’t going to totally offend the Seller. A lot of people think they should go lower the first time they make a bid. It all depends on what the market is doing at the time.
You need to look at what other homes have gone for in that neighborhood and you want to get an average price per square foot. Sizing up a house on a price-per-square-foot basis is a great equalizer.
Also, see if the neighbors have plans to put up a new addition or a basketball court or tennis court, something that might detract from the property’s value down the road.
Sellers respect a bid that is an oddball number and are more likely to take it more seriously. A nice round number sounds like every other bid out there. When you get more specific the Sellers will think you’ve given the offer careful thought.
The more earnest money you contribute, the more serious you look to the Seller. For example, on a $400,000 purchase, be ready to put up $7,500 to $10,000.
In hot markets, Buyers should be prepared for bidding wars. Fortunately, bidding wars aren’t always just about money.
A shorter closing, willingness to rent the house back to the seller, a super-quick inspection period, and offer letters can help make a lower offer the best offer.
Get That Home Inspection
Would you buy a car without checking under the hood? Of course you wouldn’t, so hire that home inspector. It’ll cost about $350-$500, but could end up saving you thousands.
A home inspector’s sole responsibility is to provide you with information so that you can make a decision as to whether or not to buy. It’s really the only way to get an unbiased third-party opinion.
If the inspector does find any issues with the home, you can use it as a bargaining tool for lowering the price of the home. It’s better to spend the money up front on an inspector than to find out later you have to spend a fortune.
Buy homeowners insurance
Before you close on your new house, your lender will require you to buy homeowners insurance. Shop around and compare rates to find the best price. Look closely at what’s covered in the policies; going with a less expensive policy usually means fewer protections and more out-of-pocket expenses if you file a claim.
Be aware that your insurer can drop your property if it thinks the home’s condition isn’t up to snuff, so you may have to be prepared to find a new policy quickly if it sends someone out to look at the property and isn’t happy with what it finds. Also, flood damage isn’t covered by homeowners insurance, so if your new home is in a flood-prone area, you may want to buy separate flood insurance.
Avoid a Border Dispute
Get a survey done on your property so you know exactly what you’re buying. Knowing precisely where your property lines are may save you from a potential dispute with your neighbors. Also, your property tax is likely based on how much property you have, so it is best to have an accurate map drawn up.
Set aside more money for after move-in
Once you’ve saved for your down payment and budgeted for closing costs, you should also set aside a buffer to pay for what will go inside the house. This includes furnishings, appliances, rugs, updated fixtures, new paint and any other touches you’ll want to have when you move in.