Rising mortgage rates can be a barrier for prospective homebuyers, but seller-paid rate buydowns may help to close the deal.
If you play your cards right, you could take advantage of a lowered interest rate offered as a concession.
At a time when mortgage rates have increased sharply, home shoppers may be able to lock in better terms with a rewarding seller concession: interest-rate buydowns.
A seller-paid rate buydown can typically help buyers save more money on monthly mortgage payments than if they negotiated a lower purchase price. It can also be cheaper for the seller to pay for discount points than to reduce the home price.
Buyers received a record share of seller concessions – such as mortgage-rate buydowns – during the fourth quarter of 2022, according to Redfin, a real estate brokerage. And while rate buydowns can be a thrifty way to close the deal, they do come with their risks. Here's what you need to know about seller-paid rate buydowns, so you can decide if this strategy can help you buy or sell a home this year.
How Seller-Paid Mortgage-Rate Buydowns Work
A seller-paid rate buydown is when the seller offers concessions that reduce the buyer's mortgage interest rate, either for the duration of the loan or just for the first few years. This can happen in one of two ways: The seller contributes to the buyer's closing costs, or the seller pays for a temporary rate buydown.
Option 1: The Seller Offers Money Toward Closing Costs
With a permanent rate buydown, the seller pays a portion of the buyer's closing costs that are used toward buying mortgage discount points. Each point reduces the rate by about 0.25 percentage point, depending on the lender, and costs 1% of the loan amount. So if you buy a $500,000 home with a 20% down payment, your mortgage amount would be $400,000, and each point would cost $4,000.
Here's how mortgage points might impact your monthly principal and interest payment and lifetime loan costs in this example on a 30-year mortgage using our mortgage calculator:
MORTGAGE INTEREST RATE
MONTHLY PRINCIPAL AND INTEREST PAYMENT
SAVINGS OVER 30 YEARS
Of course, many homeowners won't adhere to the entire payment schedule of a 30-year fixed-rate mortgage. Some of them will sell or refinance their home well before then, while others will make extra principal payments to get out of debt faster. So when it comes to rate buydowns, consider your long-term plan and find the break-even point – that is, how long it would take you to save enough money to outweigh the money spent on buying points.
One last caveat: Depending on the type of mortgage you borrow, there are limits on how much the seller can pay toward your closing costs. For Federal Housing Administration and U.S. Department of Agriculture loans, the seller can contribute up to 6% of the total loan amount, while the cap is 4% for VA loans. With conventional loans, the cap varies based on the size of the down payment.
Option 2: The Seller Pays for a Temporary Rate Buydown
Another option that's gaining popularity is the temporary rate buydown, which lowers the buyer's mortgage rate for the first few years of the loan. The cost of a temporary buydown is equal to the amount that the buyer would save over the reduced-interest period, which essentially makes it a way for the seller to prepay interest on the buyer's behalf. Here are a few common types of seller-paid rate buydowns and examples of how they stack up to the discount point model above:
With a 1-0 buydown, the mortgage rate and monthly payments are lower for the first year of the loan, rising for the second year of the loan and onward.
With a 2-1 buydown, the mortgage rate and monthly payments are reduced for the first year of the loan and rise in the second year, reaching the terminal rate in the third year.
With a 3-2-1 buydown, the mortgage rate and monthly payments are lower for the first year of the loan, rising in the second and third years, before reaching the terminal rate in the fourth year.
Temporary rate buydowns may be a better option for buyers who plan on selling or refinancing their home within a few years, while permanent buydowns can be a good choice for those who are buying their forever home. It also depends on how much money the seller is willing to contribute in buying down the mortgage rate. And before agreeing to this type of buydown, be sure that you can afford the final monthly payments once the buydown period expires.
The Benefit of Seller-Paid Rate Buydowns
Often, a mortgage-rate buydown is mutually beneficial for the buyer and the seller. It can be cheaper for the seller to help pay for discount points rather than to budge on the purchase price – and it can also save the buyer more money on monthly mortgage payments and over the life of the loan. See an example of how a rate buydown compares with a price reduction in the table below:
PRICE REDUCTION OF $25K
SELLER-PAID DISCOUNT POINTS
2-1 RATE BUYDOWN
Down Payment Amount (20%)
4.5% in first year, 5.5% in second year, 6.5% in third year and beyond
Cost to Seller
Monthly Principal & Interest Payment
$2,027 in first year, $2,271 in second year, $2,528 in third year and beyond
Lifetime Interest Paid by Buyer
In the example above, the homebuyers would be able to save an additional $67 on their monthly payment and pay nearly $45,000 less in interest over the life of the loan if the sellers paid for discount points than if they reduced the purchase price. And the sellers would save $13,000 by buying down the rate instead of dropping the price.
In the case of a temporary rate buydown, the buyers can benefit by saving on interest in the short term but will pay more interest over the course of a 30-year mortgage. The monthly payments will be lower for the first two years of the loan, while rising to the nondiscounted rate for the remainder of the term.
The Risk of Seller-Paid Rate Buydowns
Despite the financial benefits, rate buydowns may not be the best way to get seller concessions. The money a seller would pay toward discount points may be better used toward other closing costs or home repairs instead. Additionally, the current volatility in mortgage rates puts those who buy down their rate in a "dangerous spot," says Taylor Marr, deputy chief economist at Redfin.
"You're placing a bet that rates aren't going to fall dramatically," Marr says.
If rates are on a downward trend – and they're expected to drop in 2023 – it may pay off to negotiate a lower purchase price and refinance to a reduced rate down the line. That way, you have a smaller loan amount and the opportunity to lock in a lower rate when market conditions are in your favor.
You may also decide to wait until rates do fall to buy a home, although that can also be a gamble. It's not advisable to try to time the housing market, since no one knows for certain where rates and home prices are headed.
Alternative Seller Concessions to Consider
Rate buydowns can be a good tool to bridge the affordability gap when mortgage rates are high, but they're not your only bargaining chip. Besides asking for a seller-paid rate buydown, there are several other types of seller concessions that are worth exploring:
When making a decision about rate buydowns, think about what you want out of a home (and your mortgage). If getting a low rate is a top priority, then a seller-paid buydown can help you achieve that. But if you plan on refinancing to a lower rate, then mortgage discount points may not be worthwhile – although a temporary rate buydown can still help you save money in the near term. Be sure to discuss your options with your real estate agent when putting together a competitive offer.
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1. Understand what percentage of your income should go toward your mortgage
To calculate how much you can afford to pay for a mortgage each month, start by adding up your gross annual income from all sources, including salary, wages, tips, and commissions. If you have a spouse or partner whose income will also contribute to the mortgage, make sure to include that as well. Divide the total by 12 to get your monthly income and use that figure as the basis for your mortgage calculations.
Once you’ve determined your monthly income, it’s time to follow the 28/36 rule. According to this rule, you should not allocate more than 28% of your monthly income to housing and no more than 36% to all outstanding debts, including your mortgage. By staying within these parameters, you will have sufficient funds for groceries, fuel, holidays, and saving for your future.
Example: Let’s say you and your spouse are looking to buy a house in Anaheim and have a combined monthly income of $6,000. Applying the 28/36 rule, you wouldn’t want to spend more than $1,680 on house related expenses ($6,000 x .28) and $2,160 on total debt ($6,000 x .36).
2. Use an affordability calculator to calculate how much house you can afford
By inputting information such as your location, annual income, down payment savings, and current monthly expenses, our home affordability calculator can provide you with an overview of what kind of house you can afford to purchase.
Adding advanced filters such as monthly homeowners’ insurance, mortgage interest rate, private mortgage insurance (when applicable), loan type, and the property tax rate can further refine your calculations. The more data you enter, the closer you will be to finding out the ideal amount of house you can afford.
3. Consider current mortgage rates
The mortgage interest rate is the amount charged by a lender in exchange for loaning money to a buyer. It is expressed as a yearly percentage of the total loan amount but is calculated into the monthly mortgage payment.
The mortgage rate offered is a major factor in determining if you can afford to buy a home. It is important to note that even a small difference in the rate, such as one basis point (one-hundredth of a percentage point), could mean the difference between a home being affordable or unaffordable. Be sure to shop around and speak to numerous lenders to find the best rate.
4. Factor in additional costs of homebuying
It’s not all about your home’s purchase price. Below are the common costs associated with buying a house.
The largest initial expense is the down payment. When purchasing a home, a down payment is the cash you put towards the purchase price. Among the various loans available, you can find down payment requirements ranging from 3-20% of the home’s purchase price. If your down payment is less than 20%, you will likely need to pay private mortgage insurance (PMI). This insurance is to protect the lender in the event of you defaulting on your mortgage payments. The cost of PMI is between 0.5% and 1% of your annual mortgage, and this amount is added to your monthly payment.
Remember to include closing costs. Closing costs typically consist of lender and escrow fees, insurance, and taxes—all of which are necessary to finalize the sale of the home and make it legally yours. Expect to pay between 3-6% of the home’s total purchase price for closing costs. If you are purchasing a $500,000 home in Austin, for example, you can expect to pay somewhere in the range of $15,000–$30,000 in closing costs. These costs are due with your down payment when you close on the home.
5. Remember, being a homeowner comes with recurring expenses
When closing day is over, your responsibilities are not finished. Make sure to allocate enough funds in your budget to cover your monthly home expenses. Additionally, it is wise to save some money to make repairs and updates to your house in the future.
Utilities. If you have been renting in the past, you may not be familiar with the cost of utilities when owning a home. It can be difficult to estimate these expenses since some landlords cover sewer, water, and garbage in the rent. As the new homeowner, you should plan to pay for these utilities on top of your mortgage, as well as for internet, cable TV, natural gas, and electricity.
Property taxes and insurance. When purchasing a home, at closing, you will be expected to pay an initial part of the property taxes and homeowners insurance. However, you will need to keep up with them as long as you own the house. Property taxes and homeowners' insurance can vary depending on the worth of your home, its locality, and any changes that may arise annually.
Home maintenance and emergency repairs. As a homeowner, it is your responsibility to take action when something breaks down or is damaged. This could be due to a malfunctioning major appliance, a plumbing leak, a broken air conditioning system, or a storm causing damage like ripped off roof shingles or uprooted trees. Additionally, it is important to set aside money for tasks that need to be done periodically, like cleaning out gutters, carpets, and pressure-washing the deck. For a comprehensive list of home maintenance tasks, consult a home maintenance checklist.
How much should you spend on a house: the bottom line
Many factors influence how much you should spend on a house, and the answer is personal. However, becoming aware of the basic costs can help you determine if this is an opportune time to buy and even save you money when purchasing your new home.
This phrase describes home buyers who’ve purchased property they can’t easily afford—and are now paying the price, as it were.
“If you can’t spend your income the way you want to because so much of it is going to housing expenses, you’re house poor,” says Debra Neiman, a financial planner at Neiman & Associates Financial Services in Arlington, MA.
Translation: If you’re eating rice and beans every night just so you can pay your mortgage, you probably qualify.
As a general rule of thumb, financial advisers tell people to pay no more than 30% of their pretax income on housing—so if you make $5,000 per month, you should spend no more than $1,500 on your mortgage, property tax, and other housing costs. By that benchmark, according to the State of the Nation’s Housing 2017 Report from the Joint Center for Housing Studies of Harvard University, nearly 40 million households are house poor in the U.S.
So, now that you know what it means to be house poor, you’ll want to take some steps to avoid buying a house that’s outside your pay range.
How much mortgage can you afford?
When you’re buying a house, it’s crucial to consider carefully what size mortgage you can afford. One of the most basic equations you can use to figure this out is your debt-to-income, or DTI, ratio.
The DTI ratio is essentially a way for you (and lenders) to compare how much money you make with how much you owe—and how a house can fit into that picture. While mortgage lenders typically advise borrowers to keep their DTI ratio below 36%, Neiman suggests keeping it under 30%.
“If you buy at the top of your price range, you could be putting yourself at risk of becoming house poor,” she says. You can use realtor.com®’s home affordability calculator to see how much home you can afford while still remaining below your target level.
Nonetheless, the DTI ratio isn’t the only factor that mortgage lenders use when determining whether you’ll get pre-approved for a home loan. Your down payment and credit score are also important criteria.
How much it costs to buy a house
In addition to your principal mortgage payment, property taxes, and homeowners insurance, there are a number of lesser-known housing expenses that prospective home buyers overlook. These hidden homeownership costs include general maintenance, repairs, utilities, renovations, and household goods such as laundry detergent and toilet paper. How much you should budget for these expenses will depend largely on where you live.
You also need to have enough cash to cover closing costs, which typically total 2% to 7% of the home’s purchase price. You can get an estimate from your mortgage lender of what your closing costs will be before making an offer on a property or plug your numbers into a closing costs calculator.
Why you need an emergency fund
Neiman laments that many home buyers don’t plan for unexpected life events that can damage their finances and, in turn, put themselves at risk of becoming house poor. For instance, what if you lose your job or have a medical emergency? Would you have enough cash to weather the storm while continuing to make your mortgage payments?
This is where the vital, yet often forgotten, emergency fund comes into play. Also known as a rainy day fund, an emergency fund should be a reserve of cash in a liquid account that’s large enough to cover at least three to six months’ worth of living expenses in the event you (or your spouse) lose your job. You can use an emergency fund calculator to see what kind of a financial cushion you want to have before buying a house.
A word of caution: While it’s wise to map out what your finances will look like five to 10 years from now, you still want to plan for the house you can afford today—not what you can afford a few years when your next salary increase kicks in.
How does home buying fit in with your other financial goals?
Before plunking down a huge chunk of your savings on a house, consider your other financial objectives. How will your mortgage payments affect your ability to save for retirement? If you’re a parent, will homeownership costs prevent you from co-signing for a college loan for your kid? Can you still pay off your credit card debt while juggling monthly mortgage payments? The last thing you want to do is stretch yourself so thin that you have to sacrifice other important financial goals.
Activity in 2022 ended at the slowest pace in 27 years.
The last week of the calendar year is usually a slow time for the mortgage industry, but 2022 was something else. It represented the lowest level of activity in 27 years.
“With mortgage rates still well above 6% and the threat of a recession looming, mortgage applications continued to decline over the past two weeks to the lowest level since 1996,” Joel Kan, Mortgage Bankers Association‘s vice president and deputy chief economist, said in a statement.
Mortgage applications decreased 13.2% on a seasonally adjusted basis from two weeks earlier, according to data from the MBA for the week ending December 30. (The results include adjustments to account for the holidays.)
That’s because costs for borrowers were higher, reflecting the mortgage market’s response to the Federal Reserve‘s tightening monetary policy. The MBA estimates the 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 6.58% for the week ending December 30 from 6.42% in the previous week. For jumbo loans (greater than $647,200), rates remained at 6.12%.
Consequently, lenders and loan officers have started 2023 at a low point, hoping a recovery will come in the second half of the year.
“On one hand, the third quarter gross domestic product was revised upward twice, the job market remains on solid footing, inflation has been moderating, and consumer confidence hit the highest point in eight months,” said Realtor.com’s senior economist George Ratiu.
“On the other hand, corporate executives are feeling more bearish on account of borrowing costs going higher, with the perceived risk of recession rising. Concerns about the business outlook could prompt more company leaders to freeze hiring or resort to broader layoffs in 2023.”
Cash-outs are getting harder
The MBA data shows that refi applications decreased 16.3% for the week ending December 30 compared to two weeks ago.
“Refinance applications remain less than a third of the market and are 87% lower than a year ago as rates remained close to double what they were in 2021,” Kan said. “Mortgage rates are lower than October 2022 highs but would have to decline substantially to generate additional refinance activity.”
The expectation is that refis will go down even further this year. Under new rules, cash-out refis, which many lenders still relied upon in 2022, will be more expensive and harder to get in 2023.
In October, the Federal Housing Finance Agency (FHFA) announced it will implement targeted increases to the upfront fees for most cash-out refinance loans. The implementation, beginning February 1, 2023, intends to “minimize market and pipeline disruption,” the agency said.
In addition, Freddie Mac said in December that when proceeds of a cash-out refinance are used to pay off a first lien mortgage, it must be seasoned for at least 12 months, starting on March 7. It means a borrower has to wait 12 months to get new cash out after buying a house, getting a rate-and-term, or getting a cash-out refi.
“Cash outs are more expensive. Cash outs are harder to do,” United Wholesale Mortgage‘s CEO, Mat Ishbia, said in a recorded video. “At the same time, equity in homes is the highest it’s been out there. On average, $92,000 of equity per homeowner in America.”
Ishbia said he expects Fannie Mae to follow Freddie Mac’s footsteps.
Who wants a mortgage these days?
The MBA data also shows that the purchase applications decreased 12.2% for the week ending December 31, compared to two weeks earlier, and was 42% lower than the same week one year ago.
“Even as home-price growth slows in many parts of the country, elevated mortgage rates continue to put a strain on affordability and are keeping prospective homebuyers out of the market,” Kan said.
Ratiu added that for the buyer of a median-priced home, today’s mortgage rate translates into a monthly payment of about $2,100—without taxes or insurance—a 63% increase from 2021.
“Looking toward 2023, we can expect financial market volatility to continue until investors have more clarity about the economy’s direction,” Ratiu said.
“With the Fed committed to monetary tightening until inflation is decidedly moving toward 2%, borrowing costs will remain elevated, keeping housing affordability at the top of the year’s list of challenges.”
Mortgage servicers are often the first to communicate with struggling homeowners about options available to them to avoid foreclosure. In today’s market, many homeowners, including those potentially facing foreclosure, have sufficient equity in their homes that a traditional sale could be a better alternative to foreclosure. Servicers can remind homeowners that a traditional sale might be one option to avoid foreclosure. Servicers can (and, in many circumstances, are required to) refer homeowners to a HUD-approved housing counseling agency to discuss their options. And servicers may want to suggest homeowners contact a real estate agent if the distressed homeowner is considering selling their home.
Foreclosures are relatively low but still affecting thousands
As a result of the ongoing pandemic, many homeowners are facing foreclosure, especially those who were delinquent at the start of the pandemic and who therefore may be at heightened risk. Although foreclosure starts are relatively low compared to pre-pandemic levels, according to Black Knight’s mortgage data, November 2022 saw an increase of 23,400 foreclosure starts, which represented two consecutive months of increases.
Figure 1: Loans in Foreclosure and New Foreclosures Started
Source: Mortgage Bankers Association National Delinquency Survey from Q3 2022
Foreclosures can be expensive for homeowners
The foreclosure process can be expensive for homeowners and affects wealth accumulation, which is further impacted by the costs of the foreclosure process. A homeowner’s average cost from a completed foreclosure was approximately $12,500 (in 2021 dollars, after adjusting for inflation), as noted in the Mortgage Servicing COVID-19 Final Rule. The costs and fees associated with foreclosure can reduce the proceeds a homeowner may get from selling their home. Generally, these fees include late charges, title fees, property maintenance charges, and legal fees associated with the mortgage servicer’s foreclosure attorney.
Foreclosure damages a consumer’s credit and stays on their credit report for seven years. Given that, homeowners may end up paying higher interest rates on future home purchases and on other products they buy with credit, even if those credit products are not related to owning a home.
Selling the home may be a better alternative to foreclosure and can make financial sense for homeowners with equity
Given rising rents, it may make economic sense for many struggling homeowners who are delinquent or could be at risk of delinquency to remain in their home, if possible. A payment deferral, standalone partial claim, or loan modification is often the preferred option. However, if these or other home-retention options are unaffordable for a homeowner, a traditional sale is one strategy to help them avoid foreclosure.
Many struggling homeowners have accumulated equity
Black Knight reports that the share of total equity on mortgaged properties is sizable, and 81 percent of homeowners in active foreclosure had at least 10 percent equity in their home as of Q3 2022.
Figure 2: Home Equity on Mortgaged Properties
Source: Black Knight’s Mortgage Monitoring Report, September 2022 * Black Knight defines “Tappable Equity” as the share of equity that could be withdrawn while still maintaining an 80 percent or lower loan-to-value ratio.
Customer service representatives, real estate professionals, and housing counselors can help in the traditional sale process
Servicers are reminded that Regulation X requires servicers to reach out to delinquent borrowers promptly to discuss available loss mitigation options. Servicers may, in those conversations, in addition to reviewing other available options, discuss the possibility of a traditional sale with the homeowner. A traditional sale may benefit a homeowner compared to the short-term and long-term effects of foreclosure when a loan modification or short-term loss mitigation option is not available.
There are resources services can use to help homeowners understand the option of a traditional sale for homeowners who may otherwise be at risk of losing their home to foreclosure. For example, Appendix MS-4(B) to Regulation X contains sample language that can be used to inform homeowners of the option to sell their home.
Often, the mortgage servicer’s phone representatives are the first line of communication with homeowners. For this reason, servicers are encouraged to provide information and training to representatives, so they are ready to have conversations with equity-positive homeowners facing foreclosure about the possible advantages of selling the home. Of course, conversations about selling the home cannot substitute for the Regulation X requirement that mortgage servicers present all available loss mitigation alternatives to borrowers.
To help homeowners who are considering a traditional sale, servicers can point out ways that homeowners can find current estimates of their home’s value. Online sites and local real estate professionals can provide free estimates of property values. Real estate professionals with firsthand experience and local knowledge can help homeowners understand the housing environment, housing supply shortages, and seasonal shifts in home sales. All of this can help inform a homeowner’s decision about when and if to put their home on the market.
Servicers can also direct homeowners to a housing counselor who can help them understand the implications of each foreclosure avoidance option. Servicers can provide the CFPB’s Find a Housing Counselor tool to homeowners.
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As boring as they sound, mortgages have a fascinating history.
Mortgages have been in the news for the past few years, particularly during the initial phase of the COVID-19 pandemic when interest rates dove beneath the 3% mark. Today, they're in the news again as interest rates rise and home sales slow.
While we keep one eye on the housing market, we thought it might be fun to take a peek at some of the weirdest, most interesting facts about mortgages.
1. Mortgages were not always available to everyday people
Today's mortgage looks quite different than an early-1900s mortgage. Back then, a home buyer had to make a 50% down payment and took out a mortgage with a five-year amortization period. In other words, buyers had only five years to pay the mortgage off in full. Making it tougher still, buyers made interest-only payments for those five years. At the end of those five years, the entire principal of the loan was due. The setup excluded most Americans from obtaining a mortgage.
The word "mortgage" comes from the old French phrase "mort gaige." Literally translated, mort gaige means death pledge. Once the mortgage is paid off, the loan dies.
If you're considering buying a house, take the first step by getting pre-approved here for free.
CNN found that 33% of those surveyed do not know what "annual percentage rate" means. Further, 33% also believe that mortgage lenders are required to charge all borrowers the same fees. The reality is, APR represents the total amount a borrower pays for a mortgage (including interest and fees). And regarding fees, a lender can charge whatever it wants to charge for services like home appraisals and credit checks.
When a Scottish homeowner pays off their mortgage, they sometimes paint the front door red as a way to celebrate their accomplishment
5. A (very) short, gilded age -- even without a mortgage
In the 1890s, deep in the heart of the "gilded age," the grandest addresses in the world were located on New York City's Fifth Avenue. The Astors, Vanderbilts, and Carnegies are just a few of the names who poured family wealth into building larger, more exquisite homes. A mere 30 years later, many Fifth Avenue homes were being torn down. At the time, it could cost up to $5 million a year to pay for mansion upkeep, taxes, and servants to keep the house running. In 1925, the Vanderbilt mansion was sold, demolished and replaced with a Bergdorf Goodman.
6. Most of us need a mortgage
Only 12% of home buyers pay cash for a home. The other 88% take out a mortgage.
7. Mortgage amounts vary
The amount of mortgage a home buyer can borrow varies by county. For example, in the U.S., the maximum is typically around 97% (although there are exceptions). In the United Kingdom, home buyers can take out a mortgage for as much as 110% of a home's value. In the Netherlands, a borrower can land a mortgage for 115% of a home's value.
8. The mortgage tax deduction is nothing new
Homeowners have been able to use mortgage interest as a tax deduction since 1894, when all types of interest were tax deductible. Today, mortgage interest is one of the few kinds of interest that can be deducted.
9. No, but thanks anyway
According to the New York Times, only about 50% of homeowners use the mortgage interest deduction at tax time.
10. Oh, that Pretty Boy Floyd
While it may be an urban legend, this last weird fact is rather fun to imagine. In 1933, bank robber Charles Arthur "Pretty Boy" Floyd stopped long enough whilst robbing banks to destroy mortgage documents, thereby freeing other "everyday folks" with a mortgage-free existence.
American mortgages change with the times. It will be interesting to see what the future holds for home loans.
Learn about the homebuying process and the steps it takes to buy a house
1. Check your credit report
The first step in researching how to buy a house is to check your credit report. Your credit score is important as it influences whether you qualify for a loan, the type of loan, and what interest rate you’ll receive. You might be wondering, what credit score is needed to buy a house? Different mortgage types (Conventional, FHA, VA, USDA, and Jumbo) have different credit score requirements, so it is important to have a credit report completed to identify which home loans you may qualify for. Generally speaking, a credit score of 620 is the minimum credit score for a conventional loan, although some lenders look for a score of 700 for new homebuyers. It is important to keep in mind that the lower your credit score, the higher your interest rate is likely to be. With a higher credit score, you’ll likely qualify for a lower interest rate. If you find that your credit score is lower than you anticipated, you can research how to increase your credit score quickly so you can start house shopping.
2. See how much you can afford
After you know you’ve checked your credit report, the next step in the homebuying process is to determine your budget. The fastest way to get a sense of how much you can afford is with an online mortgage calculator. A mortgage calculator will estimate your mortgage payment, including the principal and interest, taxes, insurance, HOA, and PMI. You can also find out how much you can afford with a home affordability calculator. Another important cost to factor into your budget is closing costs, which are typically 2%-5% of the purchase price. After you determine how much house you can afford, you should begin saving for a down payment. The down payment is usually 20% of the home’s final sale price, but if you decide to put less money down you may need to pay private mortgage insurance (PMI). Some mortgages for first time homebuyers may not require the full 20% down. In fact, there are little to no down payment home loans out there for those who qualify, such as the VA loan for those that served in the armed forces.
3. Get pre-approved
When researching how to buy a house, you will want to get a mortgage pre-approval. Getting pre-approved initiates the mortgage process with a lender and tells you how much you can borrow. It also allows you to move faster when you’re ready to make an offer. It is important to get quotes from multiple lenders, rather than choosing the first mortgage lender you come across or even your current bank. Different lenders offer different mortgage options and rates, so research is key in finding the best rate for your homebuying goals.
4. Find a real estate agent
Choosing the right real estate agent can be the key to finding the right home and getting the best deal. When determining how to choose a real estate agent, it is always important to do prior research and ask a variety of questions to find the best fit for your homebuying journey.
5. Search homes for sale
The next step when buying a house is to start browsing homes for sale in your area. It is important to use your wish list to inform your home search. That way, you’ll be able to narrow down your search to the specific price range, style of home, location and neighborhood, and other amenities when searching for homes on the MLS.
6. Attend open houses and take home tours
You'll then want to start attending in person or virtual open houses and home tours. These tours can help you identify the type of home you like, the layout you want, and the features you want or don’t want in your home. When you’re touring multiple homes, it’s easy to confuse the different features or concerns you have about one house with another you’ve seen, so take notes as you’re touring. Don’t forget to pick your agent’s brain and ask for their input.
7. Make an offer
Once you’ve found the house you’re looking for it’s time to work with your real estate agent to make an offer. Discuss your offer strategy with your agent: Is the home priced fairly? What will make your offer stand out? Your real estate agent will know what is best for the housing market conditions. They will take into consideration your budget and the asking price for comparable homes in your area when making an offer that will stand out to home sellers.
8. Prepare to negotiate
In understanding how to buy a house, know that you’ll likely receive a counter-offer and need to negotiate with the seller. Your agent will help you through the negotiation process and decide what the best option is: waiving contingencies, raising your earnest money or overall price, or changing the closing date. Expect that you may go back and forth with the seller before reaching an agreement on the offer.
9. Inspect the home
One of the most important steps to buying a house is a home inspection, which identifies existing structural, electrical, or plumbing issues with the home. You’ll want to hire a professional home inspector to conduct a thorough inspection of the home’s condition. They will test the operational status of all major systems – plumbing, electrical, heating, and cooling – and check the roof, the foundation, and the home’s exterior. If the inspection report indicates any major issues with the home, you can try to negotiate repairs or a lower price with the seller.
10. Get the keys
You’ve reached the final steps to buy a house. On your closing date the money has been exchanged and the title is now in your name. A title company or real estate attorney will close the transaction and you will typically get the keys after 5 p.m. on your close date. Depending on if your house is turnkey ready or not, there might be some maintenance and remodeling you want to complete before moving in. You’ll also want to think about hiring movers, buying new furniture and appliances, setting up your utilities, etc. You’ll pay for these after the house is yours but may want to factor them into your budget or create a separate post-move budget.
Down Payment and Closing Cost Assistance
When you buy a home, most of the cost is financed as part of your mortgage. But there are two expenses that you'll pay up front: the down payment and closing costs. The good news is that in most cases neither of these payments need to come from your savings. In fact, there are a number of ways you can find the money to pay these expenses.
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Down Payments and Closing Costs: What's the difference?
The down payment is the initial amount that you'll pay for a property. It's typically a percentage of the home's purchase price. While it's a myth that buyers need a 20% down payment to buy a home, most mortgages require some upfront investment. That could be as little as 3% of the purchase price.
Closing costs refer to a variety of fees and payments that are associated with processing and finalizing your home loan. Fees include things like recording fees, the appraisal, mortgage insurance, property taxes, and title insurance.
Both the down payment and closing costs are due at your home loan closing and can be some of the biggest hurdles homebuyers face. Fortunately, there's help.
Let's say you've found a home and have been approved for a mortgage, but these up-front costs seem overwhelming. Here are some sources to help you come up with the money:
Find down payment resources that work for you.
Learn how to identify and avoid scam artists who promise immediate relief from foreclosure.
Find the answers to common questions concerning your mortgage and the various options to avoid foreclosure.
Visit our glossary of key terms to increase your understanding of the foreclosure options available.
If you have a fixed-rate mortgage, your payment is the same amount every month and never changes no matter how much the interest rates fluctuate. While there’s some comfort to that, wouldn’t it be amazing to have a lower house payment when you’re trying to tighten the purse strings?
That’s where an adjustable-rate mortgage, or ARM, comes in.
It’s a home loan with a lower interest rate than a fixed-rate mortgage. So, what’s the catch? The ARM starter interest rate doesn’t last forever, and your payments could go up or down depending on the going rate.
Here’s what you need to know about ARMs and if you should convert to one to get a lower house payment.
If you're considering buying a house, take the first step by getting pre-approved here for free.
What exactly is an ARM?
An ARM is a home loan with an interest rate that can change periodically. There is usually a teaser rate in the loan’s initial period that’s lower than a fixed-rate mortgage. So initially, your monthly payments for an ARM are lower.
But once the teaser period ends, interest rates and your monthly payments can be higher—or lower—depending on the market index.
The most common ARMs are what’s known as 3/1, 5/1, 7/1, and 10/1. The first number represents how many years you’ll get a low introductory rate. The second number is how often the interest rate can change yearly.
However, the interest rates can go only so high because they are capped at a specific amount defined by the terms of your loan.
What an ARM payment looks like
Since the 5/1 ARM is the most popular, let’s use that as an example. If you start with a 5% rate on your ARM with a 2% cap, your total rate can go only as high as 7% after the initial fixed-rate period ends.
If that’s too much math to worry about, your lender can tell you the most you would have to pay with the different caps, so you’re never surprised.
And if you want some more math, here’s an example of the payments for an ARM vs. a 30-year fixed-rate mortgage on a $300,000 home.
ARMs sketchy past
You might remember that ARMs left a bad taste in everyone’s mouth due to the housing crash in the early 2000s that led to a foreclosure crisis.
Back then, a borrower’s income and asset verification were not verified by ARM lenders. So when the adjustment period kicked in, ushering in higher interest rates, some buyers couldn’t afford the spike in payments which led to mass foreclosures.
ARMs are vastly different now.
“Today’s ARMs are way more protected by underwriting guidelines and consumer protection laws,” says Mallory Miller, vice president of purchase lending for Lower.
The paperwork is now universal for each lender and easier for borrowers to understand. Plus, lenders are required to verify income and assets instead of taking the buyer’s word for it.
But there is still risk involved in ARMs. “You don’t know if the rate will go up or down when the adjustments period begins,” says Curtis Wood, founder and CEO of Bee, a mortgage app.
When it makes sense to switch to an ARM?
Converting a fixed-rate mortgage to an ARM can be a smart financial hack if you’ve crunched the numbers and determined that an ARM saves you money each month.
“With an ARM, there’s usually a lower rate and payment, generating newfound money in your monthly payment savings,” says Wood.
You could use the cash you save to pay down debt. Or you could make regular extra payments to pay down your mortgage.
Additionally, it might be a good time to switch to an ARM if you don’t plan on staying in your home much longer and can sell it before the rate adjusts higher. For example, if you want to downsize soon, the 5/1 ARM could be ideal.
What are the costs to refinance to an ARM?
Before deciding if an ARM is a good move for you, consider the cost of refinancing.
“There are typical refinance fees, such as origination, appraisal fees, relevant title fees, and closing costs,” says Miller. The costs are rolled into the new loan, so you don’t pay any money out of your pocket at closing.
To make sure you’ll be in the black, compare an ARM’s monthly payment savings to the potential closing costs to identify the break-even period. And have a plan for rates going back up.
And contrary to popular belief, it’s not necessarily easier to refinance with the company already serving your fixed-rate mortgage. So shop around for the best rates and terms.
The bottom line
If you plan to stay in your house and simply want to take advantage of the initial teaser rate of an ARM, you can usually refinance back to a predictable fixed-rate mortgage. Just keep in mind you are subject to whatever the going market rate is at the time, which could be higher than the fixed rate you have now.
And refinancing isn’t necessarily a sure thing. It might not be possible if your finances take a nose dive or the value of your home goes down.
On the flip side, you don’t have to go back to a standard fixed-rate mortgage. You can generally refinance to a new ARM to snag the low introductory rate again.
Lower house payments for three, five, or more years sure sound tempting these days. But just make sure you can live comfortably and afford higher monthly payments if the interest rates rise once the adjustment period begins.
The remodeling boom continues. Here are some popular house projects that handyman professionals are increasingly being called upon to help.
A handyman can help with a range of home remodeling projects. Derek Christian, owner of the Handyman Connection in Blue Ash, Ohio, offers some of the trends he’s noticing with remodels:
1. Airbnb-friendly spaces
“We are seeing a big trend toward consumers, especially younger first-time home buyers, creating a second rentable space in their home,” Christian says. These projects may include creating a second lavish owner’s suite, sometimes with its own separate entrance. Also, homeowners are looking to add accessory dwelling units as another rental possibility or turn a basement into a rental apartment, Christian notes.
2. Composite decks
These have been growing in popularity for several years. “With the price of wood tripling during the pandemic, composite decks went from being more expensive to now less expensive than traditional wood decks,” Christian says. “The price of plywood has come down since the pandemic, but we have not had a single request for a new wood deck since 2020.”
3. Lighting upgrades
“There are so many choices of dramatic accent lights now, from pendants to Edison bulbs and LEDs,” Christian says. “These enable all kinds of unique shapes. Consumers are adding dramatic accent lights throughout their home.”
4. Free-standing soaker tubs
“We’re getting more requests to add these in to replace the built-in tubs,” Christian says. Often, he says, the free-standing soaker tub will have a chandelier above it to help create a more luxurious, spa-like bathroom.
5. Smart-home tech
“The smart home is not here all the way yet, but we are seeing many smaller changes taking hold on that front,” Christian says. “Nearly every remodel we do comes with the request for at least a few sockets with built-in USB charging ports.” Also, in the bathroom for fan/light replacements, consumers increasingly are selecting ones with built-in LED lights that change color as well as have Bluetooth-enabled speakers.