Save Money when Buying Your First Home

With real estate prices rising, first-time buyers should be on the lookout for ways to save money. Start early, from the moment you begin searching for homes. For example, you can look for homes in inexpensive neighborhoods or find homes that need updating. Save up for a large down payment so that you don’t pay mortgage insurance and shop around for the most competitive interest rate.

Steps

Choosing a Less Expensive Home

1. Find inexpensive housing markets. Housing prices vary widely around the country. However, prices can also vary even within cities or counties. Be flexible on where you need to live. You can compare neighborhood prices on websites such as Trulia or by working with a real estate agent.
   • Consider moving an hour outside a city. Often, home prices are very competitive in these areas, and the commute won’t be unbearable.
2. Look for homes with dated kitchens. When people are looking to sell their homes, they often update the kitchen. For $5,000, they can increase the purchase price by $10,000 or more. Because of this, you should look for homes that haven’t been remodeled. You can get the home for a cheaper price and pay for remodeling on your own.
3. Pursue homes with bad paint jobs or old carpets. These are the types of cosmetic fixes that can be made cheaply and easily. However, many buyers will shy away from these types of homes. Identify one and you might be getting a great deal.
4. Check for unkept landscaping. A home with curb appeal will probably sell faster, so homeowners have no incentive to negotiate on price. However, if the home looks a little rundown, then you are more likely to be able to negotiate a better deal.
5. Find homes being sold by the owner. A For Sale By Owner (FSBO) is often a great deal. The seller wants to save money but probably doesn’t know how much their home is worth. In this situation, you might be able to drive a hard bargain and get a great deal.
   • Drive through any neighborhood and look for sale signs. People also typically advertise on Craigslist or in the newspaper.
6. Pursue homes that have been sitting on the market. The longer a home sits unsold, the more likely an owner is to negotiate. Look for homes that have been on the market for at least 30 days.
   • Some homes might be sitting on the market because they are over-priced or because there are structural problems. You don’t want a home with a lot of problems, so you should still have an inspection done to check for major and minor problems.
7. Look into Buy Foreclosure Homes for Sale. You can find foreclosure listings online. As you comb through them, pay attention to the agent listed. You can call the agent up and tell them you are interested in buying a foreclosed property.
   • Don’t give too much credit to the prices listed for foreclosed homes. Often, banks either underprice or overprice foreclosed properties. You’ll come up with your bid by looking at comparable homes nearby and considering how long the property has been on the market.
   • You can also buy foreclosed properties at an auction. As a first-time buyer, you might be uncomfortable doing this. However, you can attend auctions as an observer to get a feel for the bidding process. You should secure your funding ahead of time, or get preapproved for a mortgage at a minimum.
8. Buy less house than you can afford. To really save, purchase a smaller home than you can afford. You’ll save on monthly mortgage payments, and you’ll have lower upkeep expenses. Remember that your first home isn’t your last home, so find something well within your budget.

Negotiating a Lower Purchase Price

1. Get preapproved for a mortgage. You can find out if you qualify for the lowest interest rates by having a bank preapprove you. Being preapproved will also give you power when you negotiate with the seller.
2. Keep a poker face when touring homes. You should visit every home for a walkthrough before making an offer. Be pleasant, but keep your emotions in check. Never gush about a home, regardless of how you feel. A seller who knows you love the house will drive a harder bargain, so keep sellers off balance by remaining neutral. Speak honestly about the house only when alone with your agent.
3. Have the home inspected. The inspection lets you find out everything that’s wrong with the home. You can then ask the seller for a credit, which should lower the purchase price even further. Order your inspection and then go over the report with the inspector.
   • If the home needs major repairs, then get an estimate from a contractor so you know how much it will cost to repair.
4. Offer less than the asking price. Talk with your real estate agent about what you should offer, but if you want a deal, then you should offer less than the asking price. However, you don’t want to offer a price that is too low because you’ll risk offending the homeowner.
   • Your offer will be driven by market conditions. In a buyer’s market, you should offer 5-10% less than you want to pay. For example, a home might be listed at $200,000 and you want to pay $180,000. Open negotiations with a bid for $165,000, which gives you room to go up.
   • By contrast, in a hot market, you might need to make your best offer first. If you only want to pay $180,000 for a house, then make that your first offer.
5. Be prepared to walk away. One technique sellers use is to claim that there is another person interested in the house. Whether true or not, the purpose of telling you this is to induce you to increase your offer. To really save money, walk away from a home you can’t get cheaply.
   • Even if you fall in love with the home, realize that you might find a new home in a month that you also fall in love with.
6. Request that the seller cover closing costs. Your “closing costs” cover a variety of things, such as an appraisal, title report, title insurance, and loan origination fees. These costs can add up to 2-5% of the purchase price. Ask the seller to cover those costs.
   • Even if the seller won’t cover them, you can still Save on Closing Costs. For example, you can choose your own title insurance provider, and probably get the insurance cheaper.
7. Agree to close at the end of the month. You’ll need to pay mortgage interest, mortgage insurance, hazard insurance, taxes, and homeowners association (HOA) dues from the date you close. For this reason, try to close at the very end of the month, so you won’t have to pay them.

Choosing the Right Mortgage

1. Choose a 15-year term. Your monthly payment will be higher with a 15-year loan instead of a 30-year loan. However, you’ll save a lot of money over the life of the loan. If you can afford the monthly payments, then get a 15-year mortgage.
2. Commit to paying more each month. Even if you must get a 30-year mortgage, you can save a considerable amount of money by paying more each month. You’ll pay off your mortgage faster and pay less in interest overall.
   • For example, imagine you have a 30-year mortgage at 4% interest for $220,000. If you make an extra payment each quarter, you’ll pay off your loan 11 years early and save $65,000 in interest.
3. Consider a hybrid adjustable rate mortgage. With a fixed mortgage, your interest rate never changes. However, there’s another option: adjustable rate mortgages (ARM). These mortgages received a lot of bad press during the housing meltdown. Nevertheless, a hybrid ARM can save you money and carries less risk than older ARMS did.
   • With a hybrid ARM, the interest rate will be fixed for a certain amount of time (e.g., 5, 7, 10 years). At the end of the fixed period, the mortgage changes to an adjustable rate. Generally, the initial fixed rate is lower than what you can get with a fixed rate mortgage. For example, a 7/1 Hybrid ARM might be a full percentage point lower.
   • At the end of the fixed period, your mortgage rate will probably increase. However, at that point you can refinance your mortgage.
4. Borrow less than 80% of the home’s value. You typically must pay for private mortgage insurance (PMI) if you borrow more than 80% of the value of your home. PMI can be quite expensive—up to 1% of the loan amount. If your loan is $200,000, you might pay as much as $2,000 for insurance.
   • If you have excellent credit (700 or higher), you might be able to get an 80/10/10 mortgage. Essentially, you take out two mortgages, often from the same lender. Because neither mortgage is for more than 80% of the home’s value, you don’t pay PMI for either one.
5. Avoid getting steered toward an FHA loan. An FHA loan probably won’t save you money over the long haul. However, it’s a great option for buyers who don’t have a large down payment saved or maybe don’t have the greatest credit.
   • Because of the low down payment, you’ll need to pay mortgage insurance, which comes out to about 0.8%--not cheap. FHA loans have made home ownership possible for many people, but don’t assume they are your cheapest option.
   • Always ask your lender to give you a comparison of an FHA loan versus a conventional mortgage. Compare the monthly mortgage payments and the total overall costs.

Getting the Lowest Interest Rate

1. Check your credit score. You’ll qualify for the lowest interest rates if you have a credit score of 740 or higher. However, if your score is less than 620, you might struggle to get any mortgage. You can obtain your credit score in the following ways:
   • Use a free online service, such as Credit.com or Credit Karma.
   • Look on your credit card statements or check your online credit card account. Some credit card companies will share your credit score for free.
   • Talk to a HUD-certified housing counselor, who can obtain your credit score.
   • Pay for your FICO score at myfico.com.
2. Fix errors on your credit report. Pull your credit report at least 12 months before shopping for a mortgage. You can get one free annual report from each of the major national credit reporting agencies. Go through your report and look for common errors:
   • Accounts inaccurately listed as closed or in collections.
   • Accounts with the wrong balance or wrong credit limit listed.
   • Accounts that belong to your ex-spouse.
   • Someone else’s account listed on your credit report because they have a similar name or tax ID number.
3. Pay down debt to improve your credit score. You want your score to be as high as possible when you apply for a mortgage. For this reason, you should pay down your debts, in particular your credit card debt. Create a budget and lower your Reduce Entertainment Expenses as much as possible. Funnel all extra cash toward your debt payments.
   • Your debt payments shouldn’t be more than 43% of your income. For example, if your income is $5,000 a month, then your monthly debt payments shouldn’t exceed $2,150.
   • At the same time, don’t close credit card accounts. This will lower your overall available credit, which will push up your “utilization.” Your utilization is the amount of available credit you use. For example, you might have two credit cards with $5,000 limits on both and $4,000 in debt. If you close one card, your utilization rises to 80%.
   • Visit a credit counselor if you need help developing a budget. The counselor can also negotiate with your creditors to waive late fees and lower your interest rates.
4. Obtain multiple mortgage quotes. Don’t grab the first mortgage offer made to you. Instead, shop around. Visit multiple banks, credit unions, and online mortgage lenders. Find the lender that provides the lowest rate.
   • Work with a mortgage broker to make the process easier. They can obtain quotes from multiple lenders.

Sources and Citations

See also

• Buy Property in a Retirement Community
• Determine Land Value
• Buy a House with Bad Credit
• Buy Your First Home With Bad Credit
• Prevent Identity Theft
• Read a Land Survey
• Buy an Apartment Complex
• Get a Quit Claim Deed
• Get Started in Real Estate Investing
• Buy Property in Canada

Read more ...