If you are a first-time home buyer or maybe it’s been a while since you last purchased your home, this article will help inform you on the home-buying process and related costs.
Even if you have a good idea of how it normally works, you may find a golden nugget that will help you save in an area you were not aware.
Let’s go over how the process works traditionally when you are buying a new home and where to find savings.
1. Hire an experienced, trusted Real Estate Agent.
A good realtor will save you a lot of time, money and energy. While some first-time home buyers will try saving money by not using an agent, this will hurt more than help. An experienced realtor will be able to negotiate on your behalf and save you money in areas you didn’t know about.
They also have advertising budgets to get the word out to buyers. As the buyer, you normally don’t pay the realtor anyway- the seller does. Realtors get paid at the close of the sale on the house. Their compensation is 100% commission based and they don’t make anything until the house closes escrow.
The home seller typically pays the costs out of their home sale. In a situation where the buyer is helping cover the cost, it would generally be between 1% - 3% and the seller would cover 3% to 4% of the cost. Check with your agent on what is being worked out in the contract with the listing agent brokerage, as far as who is covering closing costs.
The realtor fee is a percentage of the sale price, commonly 6%. For example, if the home sells for $500,000, the realtors will get $30,000- split up between the broker and both the buyer’s agent and listing agent.
2. Have 20% saved for the down payment.
If you have less than a 20% down payment, you will be stuck paying Private Mortgage Insurance (PMI). This is insurance to cover the loan itself, so that if a borrower defaults on the loan, the lender is reimbursed for the funds lost. Here’s a list of reasons to avoid PMI. Your mortgage loan interest rate could potentially be lower also with a bigger down payment.
3. Get loan quotes from multiple lenders and do price comparisons.
Lenders will each have different interest rates, so it’s recommended that you get mortgage loan quotes from 3-4 different lenders. They also have different fees they charge, which you can see in their loan estimate; for example, loan application fee, loan origination fee, etc.
Find a couple lenders that you are comfortable with, and negotiate with them to see who is the best fit.
4. Increase your credit score.
Your loan will be cheaper, the higher your credit score is. The lender fees and interest rates are directly related to your credit score. Here are a few simple things you can do to get it higher before applying for a loan.
Pay down any credit card balances. It is recommended to keep your credit card balance at or below 15% of your spending limit. For example, if your spending limit is $10,000, your balance should be $1,500 and below.
Don’t apply for new loans or credit. When you open a new account, your credit score will take an initial drop for a couple months. Hold off on buying any new cars or getting any new credit cards if you plan on applying for a mortgage loan soon.