What you should know before bidding on that house
June Buying Advice: The housing market is heating up. But are first-time buyers ready to put down an offer and secure a loan?
Warming trends in the housing market have more buyers out strolling into open houses — especially first-time homebuyers. But how many of these first-timers are ready to make an offer? Not as many as you might think. Before shopping for a home, homebuyers must shop for a loan so they know if they can swing payments on that two-story Colonial.
In this installment of Buying Advice, we'll take buyers through a quick mortgage-shopping primer and provide resources to help them navigate the often confusing world of home financing. We'll also check in on the latest housing statistics and answer a reader's question about how to help your bid come out on top when several offers are on the table.
Mortgage shopping 101
Before you get in the car with a real-estate agent, you need to know that you have the financial firepower to make a deal. How much are banks willing to lend you, and what will it cost you?
If you figure this out ahead of time, you'll have a better idea of the homes you should look at. You'll also feel more confident about making an offer, says Erin Lantz, director of Zillow Mortgage Marketplace.
"A lot of people think about mortgage shopping at the very last minute," Lantz says. Then they don't have time to choose a lender that they're comfortable with or that gives them the best deal. "Do your shopping upfront."
Especially if you're a first-time buyer, here's where you should start:
Find out how attractive you are to banks. We've said this time and time again: The best place to start is by pulling a copy of your credit report.
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Once a year, consumers can request a free copy of their credit report from AnnualCreditReport.com, which gathers its information from the three major credit-reporting companies: Equifax, TransUnion and Experian. For $9, you can get a copy of your credit score, which is how lenders will judge you.
Talk to different lenders. Once you have your credit report and score in hand, see what a handful of lenders will offer you. Don't just take one person's advice, Lantz says. Shop around.
Try reaching out to several different types of lenders, including a credit union, a national bank and a regional lender or mortgage broker about which you hear good things.
You can also shop for loans online. Just keep in mind that many of these websites make money by generating leads for lenders. While many initially screen the lenders on their sites and occasionally "mystery shop" their services, they aren't monitoring all transactions to ensure the lenders are offering you superior service or deals. They also can't recommend one lender over another.
Read these sites' frequently asked questions thoroughly so you know what to expect. Be prepared to receive as many as 20 quotes from lenders once you submit a loan request.
You can keep track of the rates and fees from different banks on the Federal Reserve Board's mortgage worksheet (PDF).
Make sure you understand the different types of loans, from fixed-rate loans of 15 or 30 years to variable-rate loans, in which the rate changes after a certain time. Given that interest rates are at or near historic lows, experts say, it may be best to lock in the longest term you can.
Obtain all cost information. This is where it gets a little tricky. Not only do you want to find out what interest rates banks are prepared to offer you, but you also want to find out about all of the related fees.
Expect appraisal and application fees, as well as third-party closing costs such as title and escrow fees. Space for these fees is included on the Federal Reserve's mortgage worksheet.
Educate yourself about private mortgage insurance, as well. If you're not paying 20% of the purchase price as down payment, your lender will require this additional monthly cost to help cover its costs should you default on your loan.
Ask each lender to break out the interest rate, PMI and all other fees, including estimates on those from third parties, on a worksheet. "Show that to another lender and ask them to beat it." Lantz says. And know that many of these fees are negotiable.
- On our blog, 'Listed': Mortgage rates hit record low as mixed home-sale data emerges
Get preapproved for a loan. Once you have narrowed down your lending choices, get preapproved. This is different from being prequalified, which just means lenders have taken a quick look at your income and credit score and decided that you look like an acceptable risk.
You want to be preapproved so you that when you make an offer, you have a document in hand that says your loan will be funded, as long as the property appraises as expected. Typically, you lock in a mortgage rate for a certain time, ranging from 45 to 90 days. When you think you're within three months of buying a home, make sure you get this letter.
Now you're ready to go home shopping.
Existing-home sales rose 3.4% to 4.62 million in April, from 4.47 million in March. At this pace, sales are 10% higher than they were in April 2011, according to the National Association of Realtors.
The U.S. median existing-home price jumped 10.1% to $177,400 in April from a year ago. Price increases were reported in March and April — a good sign.
"It is no longer just the investors who are taking advantage of high affordability conditions," says Lawrence Yun, the NAR's chief economist. "A return of normal homebuying for [owner] occupancy is helping home sales across all price points, and now the recovery appears to be extending to home prices."
FNC's national Residential Price Index, which excludes foreclosures, showed a 0.5% increase in March from February, the first increase since July 2011.
Home-value gains will be modest this year, for sure. Yun expects them to cap at 1% to 2%. However stronger spikes in prices are expected in 2013.
A reader asks …
In some parts of the country, the recovery is under way and competition is heating up for prime properties. Reader Kristin Randall wrote to Buying Advice expressing frustration after she and her husband lost several bids, despite offering as much as $10,000 over asking price.
"We need some advice on how to win the bid," she says. "We need to get into a house fast."
Jerry Martin, a broker with Re/Max Northwest Realtors in Seattle, one of the tightest and most competitive markets right now, says there are strategies that buyers such as Randall should take to help push their bids over the top.
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First, he says, understand what you're up against. Cash offers provide the most certainty that a seller can close and close quickly — in as little as a week, in some cases. If you're up against a cash offer, you're probably at a disadvantage.
If you face other financed offers, however, you have more room to negotiate. And it's not all about price. Martin's tips:
- Have your buyers agent find out the sellers' motivation. Do they need to be out of the house quickly? Could you close the deal in two weeks? That might land you the house.
- Make sure your bids are realistic. Have your agent do an analysis on the properties, including recent comparable sales, before you bid.
- Consider an escalation clause in your offer. This would allow you to offer a set amount, such as $1,000 more than the highest offer, up to a maximum. That might get the buyer's attention, provided your maximum is high enough.
- Limit your conditions and contingencies. Although Martin says he would never advise against getting a home inspection on a purchase, you could ask for an inspection before you make your offer and limit the amount of repairs or price discounts you request from the seller, so long as only minor problems are found.
- Up the ante. If there are many bids but not much more room to bid up the price and still have the property appraise as expected, Martin says you could offer to pay the difference between the highest bid and appraised price in cash.
- Lastly, be patient. In many markets, the supply of homes is increasing as prices slowly begin to tick up, so you will probably have more to bid on. "There are buyers I've seen that have lost out on five, six, seven offers or more," Martin says. "Be aggressive. But don't buy into the frenzy." Or you might regret it.
Questions? Comments? Do you have a question about buying or a suggestion for a future topic in this column? Submit either in the comments section below or on Facebook, or email firstname.lastname@example.org. Brief questions have the best chance of being selected.
A Realtor here. I have lost over 10 properties that I am bidding on for myself to multiple offers, and I am a cash buyer going significantly over asking price for most of them.
Here is why - if they are a foreclosure the banks do not know that they are not seeing all the offers - the list agent, or the list agents friend from another company submits their own offer, and not the highest and best to the bank. Unfortunatly turning them in to the board of Realtors does nothing - those people simple do not care as long as they get their checks every week.
If it is a private "regular" Seller, they also are not seeing the highest offer, or the list agent in a big company sells it "in house" and the Seller never finds out that it was not opened up to ALL agents - they are fed some BS that they were able to sell it fast, when in fact the Seller could have gotten more.
Most foreclosures now are required a 15 day waiting period for owner occupied to bid on them - an Obama regime requirement. This in effect is holding back prices for everyone. Couple that along with unrealistically low apraisals and yes, we might never get out of this hole - at least as long as the dems are running the show and prices down.
I just bid on another over the weekend, only to have the list agent mark it sold - by them, and the bank never saw my offer which I heard was 20K more. So I lose, the neighbors lose value etc. etc.
All banks should have online bidding not tied to the list agent. All Sellers should refuse dual agency, so they at least have some assurance that they will see ALL the offers. Get this idiot president out that knows nothing about the housing crisis, and is just making it worse. Then we will recover.
There are millions of houses all around the Country with millions more in the shadow inventory.
You had better hurry or there won't be a chance for you to overpay for a house that will be going down in price for years to come.
And when interest rates go up, house prices will go down further, so hurry to get sucked in by the National ASSociation of Realtors.
WHAT IS THIS OBSESSION WITH MAKING THE COST OF LIVING HIGHER?