When you wish to get a mortgage to purchase a home, you need to start by narrowing down on a suitable lender. You may choose to get prequalified for a loan as this gives you an indication of how much a lender is willing to lend to you. To show a seller that you are genuinely interested in making a purchase, a preapproval will hold you in good stead. Once you’ve narrowed down on a house and signed a sales contract, a mortgage commitment letter follows.

What is a Mortgage Commitment Letter?

A mortgage commitment letter indicates that your lender has approved your application for a loan, provided you meet some conditions. Once you sign the document, it comes into effect. This letter helps because it indicates to a seller that you are ready to put money on the table. Lenders issue these letters only after completing the underwriting process.

What’s in a Mortgage Commitment Letter?

The letter includes your contact information as well as that of your lender, and the address of the property you wish to purchase.  You may expect your mortgage commitment letter to highlight the type of loan, the loan amount, the interest rate, the loan term, as well as the expiration date of the commitment.

Your lender will also include other terms and conditions linked to the mortgage in this letter. For instance, if your lender requires that you have an escrow account, you will find a mention of the same in the letter.

Prequalification to Preapproval to Commitment

You need to follow a fairly conventional approach when getting a mortgage, wherein you get approval from your lender at three different stages.

Prequalification

Getting prequalified for a mortgage happens during the early stages of your home buying journey. This step gives you an indication of how much you can afford to borrow and how much your mortgage provider is willing to lend. However, prequalification comes with no guaranty that the lender will give you a loan.

This process is fairly straightforward. You are required to provide basic information surrounding your income, expenses, assets, and debts. Your lender might pull up your credit report during this stage to review your creditworthiness and verify the information you provide.

Most lenders don’t charge any fees for prequalification. Depending on the lender you select, you might be able to complete the process online or over the phone. If you qualify, you may receive your prequalification letter within a day or two.

Preapproval

Most people suggest getting a preapproval as it indicates that you are serious about buying a home, and also that you’re eligible for a mortgage. This is because you get a preapproval only after completing a formal application, where a lender delves deeper into your past and existing finances.

Getting preapproved requires that you provide bank, asset, and credit statements, as well as your Wage and Tax Statement (W-2). If the lender has not checked your credit report yet, it will at this stage. All this information helps the lender arrive at a decision and also helps it determine the loan’s terms and conditions.

Commitment

With preapproval out of the way, you can narrow down on the house you wish to purchase. After making an offer and signing a sales contract, you can ask your lender for a mortgage commitment letter. Your application then goes through an underwriting process. Your lender will also ensure that there are no additional liens attached to the property and that it is not subject to any dispute.

Upon successful completion of the underwriting process and the home’s appraisal, your lender will issue a letter of commitment. This indicates that the lender has approved your application as well as the property in question.

The Role of an Appraisal

While your income and creditworthiness play important roles in your ability to get the final approval for your mortgage, so does a satisfactory appraisal of the home you wish to purchase. The lender bases the amount of your loan on a percentage of the home’s appraised value.  This percentage is expressed in a ratio referred to as “Loan-to-Value” or “LTV.” This is because lenders wish to safeguard their interests, in case of borrowers end up defaulting on their loans.

Consider this example. A lender pre-approves your application for a $200,000 mortgage and agrees to lend up to 90% LTV. However, the appraisal returns a value of only $160,000. As result, the loan amount your lender will approve in the mortgage commitment letter will not exceed $144,000.

Types of Commitment Letters

There are two types of mortgage commitment letters. One is referred to as conditional whereas the other one is final/firm.

Conditional Commitment

More often than not, lenders issue conditional commitment letters. These imply that lenders agree to provide mortgages, as long as applicants meet predetermined conditions within a stipulated timeframe. Conditions may vary from one lender to another, and some of the most common ones include:

• Signing a purchase agreement
• Availability of funds for the down payment and closing costs
• No significant change in an applicant’s income or creditworthiness
• Submitting all required documents
• Successful inspection of the home
• Submitting proof of homeowner’s insurance
• Verifying proof of title
• Getting final underwriting approval

Details you may expect to find in a conditional mortgage commitment letter include:

• Your lender’s name and contact details
• Your name and contact details
• A statement of commitment
• The type of loan
• The loan amount
• The conditions you need to meet for the approval to hold ground
• The time period for which the commitment is valid

Final/Firm Commitment

Your lender will issue a final/firm mortgage commitment letter once you meet all required conditions.  These letters tend to include the following information:

• Your lender’s name and contact details
• Your name and contact details
• A statement of commitment
• The type of loan
• The loan amount
• Duration of the loan
• Interest rate
• Date of commitment and its expiry date
• The expiry date of the rate lock

Importance of Getting a Mortgage Commitment Letter

Getting a mortgage commitment letter is not a necessary part of purchasing a home because you may move forward with just a preapproval. However, getting a commitment letter ensures that you will get the required money to pay for your home’s purchase in time. Besides, this can make a significant difference in competitive markets, giving you a distinct edge over other prospective buyers who don’t have commitment letters.

Sellers view commitment letters with favor because they know there won’t be any surprises with buyers’ financing from the time of signing the sales contract to closing on the property.

How Do You Get a Commitment Letter?

Getting a mortgage commitment letter requires going through a complete underwriting review that will look into every aspect of your financial situation. Most lenders follow these steps.

• Loan application. You need to complete a mortgage application by providing varied information surrounding your finances.
• Loan processing. You provide all required supporting documents to your loan officer. This process involves verifying your identity, as well as going through your employment history, bank statements, pay stubs, W-2s, and details about your existing assets and debts.
• Underwriting. The loan officer collates all the information and documentation and passes it on to an underwriting team. An underwriter then goes through your file to look for accuracy, completeness, errors, and discrepancies. This is typically a time-consuming process as it requires re-verification.
• Conditions. It is common for underwriters to include conditions in commitment letters. For instance, just about every conditional commitment letter requires a property appraisal. You might also need to provide additional documents surrounding your finances or opt for title commitment.

The Commitment Letter’s Expiry

All mortgage commitment letters come with expiry dates. While the usual duration of commitment is 30 days, it can vary from one lender to another. If the commitment letter expires before you go through the closing, you might have to get a new commitment letter by resubmitting your documents and going through the underwriting process again.

Upon the letter’s expiry, the lender is no longer obligated to provide a mortgage according to the previously stated conditions. While going past the expiry date of the commitment letter can result in delays, there could be a change in the interest rate and other terms as well.

You Have a Commitment Letter – Now What?

Once you receive a mortgage commitment letter, go through it carefully and determine if it is a conditional or a final commitment. If it’s conditional, look at all the conditions you need to fulfill in order to get the mortgage and determine if they’re in line with your expectations. If you receive a firm commitment letter, you may shift your focus to dealing with the closing.

Conditions that are beyond your control include ones related to a home’s appraisal. Bear in mind that lenders are very wary of lending money that might be more than a home’s value, which is why they are meticulous about the process. Since the appraisal goes through underwriting review, a lender can even offer a mortgage amount that is lower than a home’s appraised value. If you find such a clause in your commitment letter, speak with your lender to understand why, when, and how it might enforce the override.

Ideally, your purchase offer should come with a firm commitment letter.  If not, you need to determine what you can do to get one at the earliest.

Are Commitment Letters Set in Stone?

Whether or not a commitment letter is legally binding depends on the language that your lender uses in the letter. If you’re unsure or concerned about this aspect after going through your letter, you may consider seeking legal advice from a real estate attorney.

While a commitment letter is similar to a pledge that a lender will provide a mortgage to a borrower, it becomes final only after the borrower meets all the conditions listed in the letter. As a borrower, you are under no obligation to take the loan until you sign the closing documents and your lender funds your mortgage.

Getting Started

If you plan to purchase a home by getting a mortgage, narrowing down on a suitable lender should be among your first priorities. After selecting a suitable mortgage provider, consider getting a preapproval even if your lender prequalifies your application. This is because preapproval involves going through your application more carefully, and gives you a better indication of how much you might be able to borrow.

Choosing a mortgage provider requires that you compare your alternatives across different parameters. These include:

• Interest rates on offer
• All loan-related fees
• Flexibility in terms and conditions
• Customer support

Identify Your Options

Since you can get different types of mortgages, take time to determine which might work best for you.

• Interest. A fixed-rate mortgage comes with an interest rate that remains the same for the entire loan term. The interest rate of an adjustable-rate mortgage (ARM) tends to remain fixed for the first three to five years and then changes monthly or annually based on existing market rates.
• Loan terms. The most common loan terms are 15 years, 20 years, and 30 years. Typically, lower the loan term, lower the interest.
• No down payment loans. Depending on whether you qualify, you may get a no down payment loan through the U.S.Department of Agriculture or the U.S. Department of Veteran Affairs.

Conclusion

A mortgage commitment letter brings with it peace of mind in knowing that your lender will disburse your loan as long as you meet the required conditions. This letter can come in handy in any competitive market, where multiple buyers are vying for the same property.

Remember that you cannot get a commitment letter in a hurry because your lender wants to take all possible measures to safeguard its interest. As a result, once you decide to buy a home, getting in touch with a lender should be the next logical step.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

Once you’ve saved money for a down payment, narrowed down on a house you wish to buy, and received approval for a mortgage, having to deal with closing costs might catch you by surprise. This is because these closing costs can amount to be a tidy sum. No matter whether you wish to purchase a home or get your mortgage refinanced, you will need to pay closing costs.

How Closing Costs Work

Closing costs may vary depending on the state in which you reside, the type of mortgage you get, and your mortgage provider. Typically, on a home purchase, they range from 2% to 6% of a home’s selling price. For example, if you buy a house for $150,000, closing costs may vary between $3,000 and $9,000.

Closing costs are typically categorized into property-related fees and mortgage-related fees. While the former relate to expenses incurred by lenders in evaluating properties, the latter refer to costs involved in processing your mortgage application.

Closing Disclosures and Loan Estimates

The law requires lenders to provide Loan Estimates within three business days of receiving mortgage applications. In addition to other important information related to your mortgage, it also indicates estimated closing costs. While these are not exact numbers, they give you a fair indication of what you might expect to pay.

You should receive a Closing Disclosure form from your lender three days before the date of the actual closing. This includes the originally estimated costs as well as the final costs. If you notice a significant discrepancy between the two, consider contacting your real estate agent or lender sooner rather than later.

Disparity in Closing Costs Across the U.S.

Data released by ClosingCorp in March 2021 highlights how average closing costs for purchase mortgages in 2020 varied across the U.S.

• The national average closing costs for single-family properties stood at $6,087, including taxes (a 5.9% year-on-year increase); and $3,470, excluding taxes (a 3.9% year-on-year increase).
• District of Columbia was the state with the highest average closing costs, including taxes ($29,329), followed by Delaware ($17,727) and New York ($13,261).
• District of Columbia was the state with the highest average closing costs, excluding taxes ($6,250), followed by Hawaii ($5,599) and New York ($5,571).
• Counties with the highest average closing costs, including taxes are New York (NY), Kings (NY), District of Columbia, Queens (NY), and Bronx (NY).
• Counties with the highest average closing costs, excluding taxes are New York (NY), San Francisco (CA), Nassau (NY), San Mateo (NY), and Marin (CA).

Who is Responsible for Paying Closing Costs?

At the closing table, buyers, as well as sellers, have financial obligations to settle. Local and state rules tend to have a bearing on just how much they need to pay during closing. While a buyer is typically required to pay loan-related costs, a seller needs to pay commissions owed to real estate agents and other fees related to transferring title to the property.

In case you’re refinancing your existing mortgage, you alone are responsible for all closing costs. According to an official statement released by the Mortgage Bankers Association, people refinancing their Fannie Mae and Freddie Mac mortgages will now be burdened by a 0.5% adverse market fee.

Why You Need to Pay Closing Costs

Real estate transactions are not particularly straightforward and tend to involve multiple stakeholders. Various states across the country require more than basic home inspections where you hire inspectors on your own, and this hold true for some types of mortgages as well. In addition, you also need to pay for different services right from when you apply for a loan to its final closing.

Common Closing Costs

Below are some of the most common closing costs that will find mentioned in the Closing Disclosure form provided by your lender.

• Application fee. You might need to pay mortgage application fees depending on the lender you select. While some lenders require that you pay this fee when you apply for a mortgage, some others include it in closing costs.
• Appraisal fee. Typically paid by buyers, you might get a seller to pay this fee through negotiation. Often required by lenders, appraisals give them the ability to determine if the selling prices of homes are in line with the fair market values in the area. Average appraisal fees across the U.S. stand at $375to $450.
• Attorney fee. You or the seller might pay attorney fees for preparing, reviewing, and recording all official documents. Using the services of attorneys to handle real estate transactions is not a legal requirement in all states. Attorneys often charge by the hour.
• Courier fee. Typically fairly nominal, you might need to pay this fee if your lender has to send documents to you via courier.
• Credit report fee. Not all lenders charge this fee. Ones who do usually charge $15 to $30– the cost incurred in pulling your reports from the three main credit reporting bureaus.
• Escrow deposit. Depending on your lender, you might need to pay a deposit that covers two months of payments toward mortgage insurance and property tax.
• Flood determination and monitoring fee. You might need to pay this location-specific fee when your lender requires a certified flood inspector to establish if the home you wish to purchase is in a flood zone. This fee also covers ongoing inspection to monitor any change in a home’s flood status.
• HOA transfer fee. When you buy a townhouse, a condominium, or a home in a planned development, you will need to become a member of its homeowners’ association (HOA). Make sure the home is in good financial standing by checking the HOA’s records. You might need to pay an HOA transfer fee to cover for costs involved in transfer of ownership.
• Homeowners insurance. Several lenders require that buyers pay homeowners insurance premiums for the first year in advance, at the time of closing.
• Lender’s title insurance. This fee paid to title companies safeguards lenders in scenarios where initial title searches do not show existing liens or ownership disputes.
• Lead-based paint inspection fee. If you plan to purchase a home built prior to 1979, you might need to pay this fee to get a certified inspection. The national average cost for lead paint inspection stands at a little over $300.
• Loan origination fee. Not all lenders charge this fee. Ones who do, do so to cover administrative costs involved in processing your application. Ones who don’t tend to quote higher interest rates to cover those same costs. When charged, this is around 0.5% to 1% of the loan amount.
• Owner’s title insurance. This optional coverage safeguards you in case you end in an ownership dispute after your purchase. The cost of getting owner’s title insurance is around 0.5% to 1% of the purchase price.
• Pest inspection fee. Pest inspections are mandatory in some regions as well as with some government-backed mortgages. The average pest inspection fee is around $100. However, it may vary from $50 to $300.
• Private mortgage insurance (PMI). You need to pay for PMI if you end up putting less than 20% toward your down payment. Your lender might require that you pay the first month’s premium at closing.
• Property tax. Prepare to pay pro-rated property taxes that would apply from closing’s date to the end of the ongoing tax year.
• Rate lock fee. This fee, when charged by lenders, gives you the ability to lock an offered rate for a predetermined time period – which can be from preapproval to closing. Some lenders provide this service for free. Others may charge 0.25% to 0.5% of the loan amount.
• Recording fee. You might need to pay this fee to your city or county clerk’s recording office in order to officially process public land records. This may set you back by around $125.
• Survey fee. You will need to pay this fee if your purchase involves using the services of a surveying company. This is done to confirm the boundaries of a property. Survey fees usually range from $300 to $500. However, you might have to pay more if a property is very big or has an unusual perimeter.
• Title search fee. Title companies charge this fee to look for ownership discrepancies by going through public records. The process also verifies if the property has any outstanding liens. Title search fees vary between $200 and $400.
• Transfer tax. You might need to pay a transfer of title tax based on the region in which you purchase a property.
• Underwriting fee. Your lender will charge this fee to cover for costs incurred in the evaluation and approval of your application. This process involves verifying your employment and financial information. You might need to pay up to $800 as underwriting fees.

VA, USDA, and FHA Loans

If you get a United States Department of Veterans Affair (VA) loan, you need to pay a loan funding fee, which is a percentage of the amount you borrow. The fee varies depending on an applicant’s military service classification. This fee does not apply for some service members.

Getting a United States Department of Agriculture (USDA) loan requires that you pay an upfront guarantee fee of 1% of the loan amount. This is in addition to the 0.35% annual fee.

People who get Federal Housing Administration (FHA) loans need to pay an upfront mortgage insurance premium (UPMIP). It stands at 1.75% of the loan amount. You may pay this at closing to choose to roll it into your mortgage. An annual insurance premium of 0.45% to 1.05% also applies.

How Do Points Work?

Points refer to optional upfront payments that borrowers make to lenders with the aim of reducing their interest rates. One discount point amounts to 1% of the amount you borrow. When mortgage rates are low – as is currently the case – paying for discounts points might not be in your best interest.

Can You Avoid Paying Closing Costs?

If you plan to get a mortgage to purchase a home or to refinance an existing mortgage, you will have to pay closing costs of different types. However, while there is nothing you can do about costs surrounding paying taxes, you may try to lower some expenses during closing.

If you’re a first-time buyer, know that you negotiate with the seller to include closing costs into the sales price. Consider this – a seller wants $150,000 for a home, and the purchaser’s closing costs amount to around $5,000. By making an offer of $155,000, you can get a credit to cover the closing costs. This way, while the seller stills gets the money that is rightfully due, you get to lower out-of-pocket expenses at closing.  As a buyer, you may even try to negotiate a credit on closing costs with your lender in lieu of a slightly higher interest rate.

Prospective homebuyers who are unable to afford closing costs may consider seeking homebuyer assistance through loan programs or grants provided by local and state government bodies as well as their employers.

Conclusion

Getting in touch with a lender and speaking with a loan officeris the first thing you should do when trying to determine all the costs you might incur when buying a home. That is one of the main reasons why most experts suggest getting preapproved before beginning your search for a home. Given that different factors go into determining how much you might need to pay as closing costs, you need to be as specific about your requirements as soon as possible with your mortgage provider.

It is fairly common for buyers to underestimate closing costs, which is why it is best to get an indication in advance. Doing so also helps you budget for these costs accordingly. While most buyers prepare themselves to account for the actual cost of their homes, many end up dipping into their savings to cover closing costs. Fortunately, reducing the overall cost of your mortgage, as well as its closing costs, is possible if you pay your cards right.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

Additional resources:
https://www.investopedia.com/terms/o/origination-fee.asp
https://www.zillow.com/mortgage-learning/when-to-lock-mortgage-rate/
https://wallethub.com/answers/hl/how-much-does-a-land-survey-cost-273/
https://www.investopedia.com/mortgage/mortgage-guide/closing-costs/

Just when the country was getting ready for its spring home selling season in 2020, the COVID-19 pandemic struck and put a spanner in schemes of many things. While the real estate market has experienced considerable twists and turns since then, it seems poised at a relatively good juncture for now.

According to recent data released by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, sales of new residential homes across the country stood at a seasonally adjusted annual rate of 775,000 in February 2021, up over 8% from 716,000 in February 2020.

Why Is the Spring of 2021 a Good Time to Sell?

Now that we’ve crossed the one-year mark of living with the COVID-19 pandemic, it is fair to expect people to get about with the plans they’d previously put on hold. In the real estate sector, this means that sellers who’ve been waiting on the sidelines will start reviving their plans, as will buyers who’ve put their plans on hold. This also applies to people who’ve wanted to downsize – by selling their existing homes and buying smaller ones.

Interest Rates to Remain Low

One of the main factors that drove the housing market in 2020 was historically low interest rates on mortgages. People who wish to purchase homes in 2021 can take heart in knowing that most experts expect interest rates to remain low through 2021 too. Consider this – the average interest rate for a 30-year fixed-rate mortgage stood at 3.13% on 8 April, 2021, down 0.20% from a year before. The drop was close to 0.5% for a 5/1-year adjustable rate mortgage.

Possibility of a Larger Inventory

A low inventory in most parts of the country over the last year has led the housing sector to predominantly become a sellers’ market. Buyers continue to scramble for opportunities, and bidding wars have become rather commonplace in most major markets. With the vaccination drive gathering considerable momentum, there is hope that the housing market might return to normal soon.

As a result, many homeowners who wish to sell their homes and were reluctant until now might decide to put their homes on the market before it gets flooded with more inventory. However, it does not appear that the housing market will cool off in the immediate future.

Multiple Offers to Stay

Given the existing shortage of inventory, sellers may expect to keep getting multiple offers, at least in the months to follow. Even though more homes are making it to the market, catching up with the growing demand is bound to take some time. This is especially true of homes with large outdoor spaces in booming suburban markets, because there is an increase in demand for such homes owing itself to the new work from home lifestyle.

Spring Brings Buyers in Droves

If you are to look at statistics surrounding home sales in the country based on seasonality, you will notice that spring is the busiest period. Data released by the National Realtors Association (NAR) suggests that sales-related activities increase by around 35% in February and March. However, historically, the greatest number of sales take place in May, June, July, and August.

One reason why spring finds favor with buyers is that they want to take a month or two to settle down in their new homes before the beginning of a new school year. Another reason is that the days are longer, and the weather is more conducive to stepping out and looking at homes.

Tips to Increase Your Home’s Presale Appeal

Sure, now is a good time to sell a home, all the more so because of a shortage of supply. While home sales have risen steadily over the last few years, it is important that you do not get complacent about the process. Remember that most buyers tend to know how to spot possible shortcomings and have relatively high expectations. Besides, you can expect buyers to carry out research about buying homes during the spring prior to beginning their search.

From a seller’s perspective, you need to do the best you can do to up your home’s value. However, it is equally important that you don’t go overboard, or there’s a risk that you may realize a poor return on investment (ROI).

1. Let There Be Light

Spring brings with it plenty of light, which you need to take advantage of by opening your home’s windows. Besides, it’s not just light, but the freshness in the air that also permeates through into your home. Other than making homes feel more aesthetic, an abundance of light also helps make rooms look bigger. If your home, or any particular room, does not have enough windows, use additional ceiling or floor lights to brighten up relatively dark corners.

If you’re thinking about adding a skylight to increase light in any particular indoor space, you might want  think again. This is because while some prospective buyers would appreciate the additional light and energy saving during colder months, others could view them as a source of leaks, water damage, and unwanted heat during the summer.

2. Give the Exterior a Makeover

Just about every professional associated with the housing sector can vouch for the importance of improving a home’s curb appeal before putting it on the market. According to a study released in the Journal of Real Estate Finance and Economics, homes with great curb appeal fetched 7% more money than comparable homes with poor curb appeal. The number rose to 14% in slow markets, where buyers are typically particular with the features.

For the uninitiated, curb appeal refers to how attractive a house looks when viewed from outside or a short distance. Fortunately, getting your house to look good from the outside is not as hard as one might imagine.

• The yard. Among the first things that catch the attention of prospective buyers is the home’s yard. With winter behind us, it’s normal for yards to appear littered and messy. If your yard is bereft of flowers and other types of foliage, now is a good time to start.  Plants with colorful flowers around the perimeter of the yard can work wonders in reflecting the vibrancy that comes with spring.  Make sure the shrubbery is neatly trimmed and keep weeding your yard at regular intervals.
• The driveway. Not many people need to reseal or completely redo their driveways when selling their homes. However, your driveway should not reflect poorly on your home. For instance, a driveway that is full of cracks or weeds will not seem appealing to a prospective buyer. Power washing your driveway provides an easy means to get rid of seemingly hard to remove oil stains. You may also use a power washer to clean your yard’s siding.
• The roof. Ignoring the condition of your home’s roof is never a good idea, all the more so when you plan to sell. This is because an old or damaged roof never makes a good impression. In addition, buyers generally wish to avoid making significant expenses after purchasing homes. Depending on the condition of your home’s roof, consider if it requires a replacement or merely minor repairs.
• The front door. Not quite in, but almost there, your front door serves as an indication of what one might expect inside. As a result, make sure that it is newly painted and completely functional. Depending on the importance of your door’s existing condition, you might consider getting a new one too. A front door that you need to open with a struggle or one that creaks every time you open or close it is likely to create a poor impression.  Keep the surrounding areas clean as well.
• A porch or a patio. If your home has a porch or a patio, make sure it’s in good shape because spring is perfect for spending time under the sun. If a walkway leads up to it, add some colorful plants along the way.

3. Look for Pending Repairs

How well a house is maintained has a direct bearing on its selling price. When homebuyers come across several pending repairs in your home – on their own or through a professional home inspector – they might be inclined to look elsewhere or make a lower offer. Before putting your house on the market, make sure the following are up to the mark:

• Foundation and structure
• HVAC system
• Electrical systems (including wiring)
• Plumbing
• Appliances
• Chimneys

While you’re at it, check for dampness, mold, and mildew in bathrooms and the basement as well.

4. Say Goodbye to Clutter

A cluttered home can be quite a turnoff for a prospective buyer. However, it’s only natural for clutter to creep in after you’ve spent a considerable time living in the same home. When de-cluttering your home, it is important that you focus on one space at a time. You might be surprised to see just how much you can get in order. If you end up with a lot of items you no longer need, you may consider selling them online or having a garage sale.

5. Personalization No More

Try to remove just about anything that personalizes your home. This is because if there’s an overt display of personalization, prospective buyers might find it hard to imagine how they could use the space. While this does not mean that your home should not be inviting, you need to strike a balance between neutral and warm. Areas that typically need your attention include personal effects, wall hangings, and collections.

6. Add Color

Once you have de-cluttered and depersonalized, think about creating a lively atmosphere for prospective buyers. If you plan to repaint interior walls, stick with neutral hues that find mass appeal. You may also add color inside your house by using indoor plants as well as accessories such as pillows, cushions, rugs, and simple artwork.

7. Think Hard

Before you get on the path to improve your home’s appeal, pay due attention to these aspects.

• Your reason for making changes. Determine if you wish to sell your home for more money or simply make it ready for showing to prospective buyers. Seriously reconsider making major renovations as they might not result in the desired ROI. If you feel your home is in good condition, you might not have to do much.
• Your budget. Come up with a budget and then determine just what it allows you to do. Make a list of all the changes you would like to make and prioritize them based on your budget. Having a budget ensures that you keep your costs in check.
• The neighborhood’s style. The changes you undertake should ideally be in line with the general style of your neighborhood. For instance, if none of the homes in the vicinity have swimming pools, adding one in your home might limit the number of prospective buyers. This is because you would then price your home higher than the average price of otherwise comparable homes in the neighborhood. Something seemingly as trivial as having picket fences in a lane of houses filled with tall hedges might not work well either.
• Permissions. If you plan to make extensive or structural changes, you might need to get permissions from your homeowner’s association (HOA) and/or the local zoning board.

Conclusion

Given the lackluster supply and a significant rise in demand, the Spring of 2021 appears to be a great time for selling your home. However, getting it sale ready is crucial if you hope you get a good deal. Making sure your home is prepped in the right manner can help increase its appeal as well as value, although it’s important that you don’t go overboard with your spending.

With there being no major respite from the spread of COVID-19, it is safe to assume that many prospective buyers will choose to conduct virtual home tours. Therefore, it’s important that you give them this alternative.  Some buyers might be in a hurry to close deals, especially toward the end of spring. If you can provide flexibility in this respect, you may gain some concessions from the buyer’s side as well.

When the U.S. Government signed the Blue Water Navy Vietnam Veterans Act into law in 2019, the Department of Veteran Affairs (VA) lifted previously applicable lending caps. This ensures that eligible borrowers may apply for VA loans in all regions, irrespective of the loan amount. Depending on your circumstances, getting a no down payment VA loan might work well for you. However, it is best that you learn how these loans work before making a decision.

What Is a VA Loan?

While private lenders provide VA loans, they are backed by the Department of Veteran Affairs. This is its way of helping active duty service members, veterans, and survivors become homeowners.  Created in 1944 as part of the Servicemen’s Readjustment Act or the GI Bill of Rights, VA loans have been popular since.

Since VA loans are government-backed – meaning that the government will repay all or part of your loan in case you default or face foreclosure – they are relatively easier to attain when compared to conventional loans. VA loans require no down payment, but you need to pay a loan funding fee. According to recent data, the Department of Veteran Affairs backed over 1,246,000 home purchase and refinance loans in 2020.

Benefits of Getting a VA Loan

Getting a VA loan comes with various benefits.

• No down payment. Unlike conventional loans where you need to pay at least 20% as a down payment, you may get a VA loan without making any down payment. In 2018, over 75% of all VA-backed loans came with no down payments.
• No limit on the loan amount. While there is no limit on how much you may borrow through a VA loan, there is a limit to the liability that the VA takes. As of 2019, this stands at a maximum of 25% of the loan amount, minus the amount of the entitlement you’ve previously used.
• No PMI. When you don’t come up with the required 20% down payment for conventional loans, you are required to get private mortgage insurance (PMI). For a $200,000 loan, this can add over $160 to your monthly repayment. Since VA loans are government-backed, you don’t have to pay extra for PMI.
• No credit score requirement. The Department of Veteran Affairs does not require a minimum credit score to issue its Certificate of Eligibility (COE). However, most lenders still require that borrowers have credit scores of 620 and higher. Not having any credit history at all might also make lenders wary about lending to you.
• Not just for first-time buyers. As long as you successfully repay your VA loan, you may apply for another.
• No prepayment penalty. You don’t have to worry about additional charges or fines if you decide to pay our loan off ahead of schedule.
• Foreclosure assistance. In the unfortunate event that VA loan holders face potential foreclosure, they can get the Department’s loan specialists to negotiate with their lenders for better terms.

Are You Eligible for a VA Loan?

If you are on active duty or have served in the U.S. Military, you might qualify for a VA loan. The Department extends this benefit to members of the Army, Air Force, Navy, Coast Guard, Marine Corps, and National Guards. To apply for a VA loan, you need to get a Certificate of Eligibility from the VA. You are required to use the home you purchase as your primary residence.

Minimum Active Duty

Eligibility requires that you meet the minimum active-duty service requirement depending on when you served. For instance, if you are a veteran who served on active duty for 90 days during wartime, or over 180 consecutive days during peacetime, you are eligible to receive the COE. If you enlisted any time after September 7, 1980, you need to have served at least two years. It is also important that you have not been discharged dishonorably. National Guards needs to have served for at least six years to qualify.

Spouses

Surviving spouses of service members who were prisoners of war or went missing in action might qualify, provided they do not remarry. Spouses of veterans who passed away from service-related reasons while in active duty, and who remarried after December 16, 2003, or after turning 57 years old might also be eligible.

Foreclosure and Bankruptcy

Foreclosure and bankruptcy don’t have a long-lasting effect on your ability to get a VA loan. For instance, you may apply for a VA loan any time after two years from the date of a foreclosure or bankruptcy ruling.

Types of VA Loans

Depending on whether you qualify, you may get a VA loan to purchase a home or refinance an existing mortgage.

• Home purchase. You may qualify for a VA loan if you wish to purchase a house that will serve as your primary residence. Depending on the state in which you live, you might benefit by getting property tax reductions meant for military borrowers.
• You may consider refinancing your existing VA mortgage to bring down its interest rate. Alternatively, you may use the VA Interest Rate Reduction Refinancing Loan (IRRRL) to switch from an adjustable-rate mortgage to a fixed-rate mortgage.

Are There Any Drawbacks?

Getting a VA loan might seem great, but knowing just what might go wrong down the line is in your best interest.

• The zero down payment pitfall. Getting on the homeownership path without making a down payment might seem great. However, you need to account for the monthly repayments, as well as the extra interest you’ll end up paying throughout the course of the loan. Besides, if there’s a negative shift in the housing market, you might end up owing more than your house than it is actually worth. This means taking a financial hit if you wish to sell your home or having to wait for the market to revive again.
• Loan funding fees. While you don’t have to attain PMI, you still need to pay a VA loan funding fee, which may vary from 1.25% to 3.3% of the borrowed amount. If you get a $250,000 loan, this fee could be between $3,125 and $8,250. This fee is typically added to the value of the balance of the loan and increases your monthly repayment. In some cases, you might have to pay a loan origination fee charged by your lender.
• Not available for all property types. Getting a VA loan for new construction is possible, although building sites, plans, and builders need to be VA-approved. Approval requires three inspections, and builders need to provide at least one-year guarantees. Getting a VA loan for Co-Ops and vacant lands is not possible.
• Not for investment purposes. You cannot use proceeds from a VA loan to invest in real estate. You must use the home you purchase as your primary residence. Refinancing using a VA loan works in the same manner, meaning that you must live in the house that contains the mortgage you wish to refinance.

Steps Involved in Buying a Home Using a VA Loan

Buying a home using a VA loan requires that you follow various steps.

Determine Affordability

Create a budget after accounting for your household expenses in order to determine how much you can afford to pay toward your mortgage each month. If you think you’re falling short, establish if you can eliminate some non-essential items from your lifestyle. While creating a budget is not necessary, it gives you the means to make a well-informed decision.

Select a Lender

Compare different VA loan providers based upon parameters such as interest rates, fees, flexibility in terms, and customer service. Remember that the best mortgage provider might vary based on individual requirements. According to the Consumer Financial Protection Bureau (CFPB), not comparing mortgage providers can cost average homebuyers around $300 per year throughout the course of their loans.

Get Preapproval

Getting preapproved for your VA loan gives you a clear indication of how much your lender is willing to lend to you. It gives real estate agents and sellers an indication that you are serious about buying a home, and not just testing waters. Getting a preapproval might also work in your favor at the negotiation table, especially if you’re up against a buyer who does not have preapproval.

This step requires lenders to check your eligibility, determine your creditworthiness, and establish how much you may afford to borrow.

Find a Reliable Realtor

More often than not, home buyers do not have to pay real estate agents, as sellers are typically responsible for paying both agents’ commissions. While not all homebuyers employ the services of realtors, doing so might work in your favor.

Real estate agents tend to have local knowledge and can assist you with your search for the right home.  They can help you at the negotiation table and can guide you through all the paperwork that follows. They can also answer any questions you might have about the home buying process. Finding a good real estate agent can be simple, provided you know what questions to ask.

Narrow Down On a House

This step can be fun, although finding the right home might take some time depending on the area you wish to explore. Bear in mind that homeownership and repaying a mortgage is usually a long-drawn affair. This requires steering clear of homes that you feel you might wish to sell in a few years. It is best to highlight your requirements at the onset and then look for homes accordingly.

Opt for a Home Inspection

This step is optional. However, it makes sense to get a professional inspection if you plan to purchase an old home. A professional home inspector will identify all types of major and minor defects, safety issues, as well as other existing and potential problems. This step gives you an indication of how much you might need to spend to get the house in order again.

Bear in mind that an appraisal is not the same as an inspection, and it does not delve deep into a home’s condition. It is the responsibility of a VA lender to arrange for an appraisal, as this helps establish its fair market value.

Make Your Offer

Consider taking advice from your real estate agent when the time comes to make an offer. This is because your agent should have the experience and the knowledge to try and get the best possible outcome for you. Your agent can carry out a comparative market analysis to determine if the home’s asking price is over the top.

Your agent can also guide you in adding contingency clauses. For example, if you have not inspected the house yet, a contingency clause that hinges on a successful inspection can safeguard your interests. Other contingency clauses can make the contract of sale subject to the approval of your mortgage and/or the home’s independent appraisal.

Pay a Deposit

Homebuyers are usually required to pay deposits along with their offers. This tends to vary from 0.5% to 2% of the home’s selling price. Once you make a deposit, the buyer is required to take the home off the market. If you fail to go through with the purchase, you might have to forfeit the deposit amount partially or in totality, unless a contingency clause covers your reason for backing out of the deal.

Finalize Your Loan

Give your lender a signed copy of the purchase document. You might need to provide additional documentation during the underwriting stage. If approved, go through the closing disclosure carefully and sign the final paperwork. It can then take your lender up to a week to disburse the funds.

Conclusion

If you qualify for a VA loan, you may get on the path to homeownership without making a down payment. However, while getting a VA loan comes with various benefits, you need to take a look at possible downsides as well. If you are unsure about how well a VA loan might work for you, consider seeking assistance from a qualified professional.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

While the United States Department of Veterans Affairs (VA) acts as a guarantor for these loans, it does not issue them. Instead, its sets the framework surrounding aspects such as eligibility and requirements under which lenders may offer VA loans.

Data released by the National Realtors Association suggests that close to 90% of homebuyers in 2019 used the services of real estate agents. When you’re buying a home, there’s a good chance you’ll need to use the services of one as well.

Selecting the right real estate agent plays an important role in the home buying process. This is because a good agent can help make the entire experience smooth and hassle-free. On the flip side, someone who is not good might add to your woes, mentally and financially. Fortunately, finding a good realtor is not as difficult as some might make it seem. You simply need to ask prospective real estate agents the right questions and pay close attention to their answers. With that taken care of, you’re so much closer to buying a home.

Here are questions you should ask potential realtors so you may select the one who works best for you.

1. What sets you apart from your competition?

Real estate agents come with different skill sets, personalities, and work ethics. Start by asking them what sets them apart from others in their field.  If there is little more than a number talk at this stage, you might have reason to be wary. After all, you don’t need a salesperson but someone who will be able to guide you through the home buying process, and look for homes based on your specific requirements.  Some agents leverage technology when trying to find the best possible deals for their clients. Good agents also remain updated about any changes made to local zoning or tax laws.

Not all real estate agents have the same qualifications and certifications, which is why you need to ask prospective agents about the ones they hold.

• Realtor. A member of the National Association of Realtors
• Accredited Buyer Representative (ABR). Completed specific training in representing buyers
• Accredited Seller Representative (SRS). Completed specific training in representing sellers
• Seniors Real Estate Specialist (SRES). Agents over 50 years of age who have completed training in helping buyers and/or sellers
• Certified Residential Specialist (CRS). The highest credential awarded to residential agents and brokers

In addition, while a real estate broker is someone who usually heads a firm, a real estate agent typically works under a broker.

2. Are you a full-time real estate agent?

If the answer to this question is no, it’s best that you look at your next alternative. Availability is a crucial aspect when it comes to working with an agent, and you ideally need to work with someone who you may contact as and when the need arises. This is because time can be of the essence when making an offer, especially in hot markets.

3. How will we contact each other and will I receive updates?

Your agent should be comfortable with whichever means of communication you prefer, be it over the phone, via text messages, or via email. Ask if you will have the option of submitting your offer electronically, where you can complete all the required documentation online. You also need to set expectations about receiving updates, as there are instances of homebuyers complaining that their agents don’t update them as often as they would like.

4. Do you have experience in the desired neighborhood?

Several housing markets across the U.S. have micro-markets, where features of specific neighborhoods work as driving forces, and trends vary accordingly. In any such area, it is important to look at unique aspects such as development plans, schools, and even building restrictions. With an agent who has the required local knowledge and experience, making an informed decision becomes considerably simpler. Besides, when an agent is well-versed with an area, he/she will know the kind of value you can get, and will also be able to recommend local services after you eventually shift base.

5. Do you work just with buyers or with sellers as well?

Several agents specialize in working either with buyers or sellers. Looking for an agent who has experience with both aspects might work well for you. This is because your agent will also have experience in working with sellers, and can offer valuable insight from that perspective.  If you plan to sell an existing home and buy a new one, you might be able to use the same agent’s services for both.

6. How many clients have you assisted?

The answer to this question gives you an indication of an agent’s experience – and it’s way better than asking how long an agent has been in business. After all, what good is an agent who’s been in this field for over a decade and helped just 10 people in buying homes? Asking how many clients an agent is currently working with gives you an indication of how much time he/she might be able to devote to you.

7. Do you have references and can I look at reviews of previous clients?

Selecting a real estate agent is similar to hiring a new employee in the sense that you want to narrow down the best possible candidate. As a result, just as you would go through references of probable employees, you need to with your real estate agent as well. If an agent is hesitant to, or cannot provide a list of references, think of it as a big red flag.

In the world of fake online reviews, discerning ones that are real from ones that are not can be challenging. This is the case with online testimonials as well. To get around this roadblock, simply ask to talk to some of the agent’s previous clients personally. Checking different social media platforms to see what previous clients have to say can also give you some indication about whether or not to go with any particular agent.

8. Do I need to sign a contract and will canceling it attracts a penalty?

Real estate agents commonly ask buyers to sign agreements that stay in effect for a predetermined period. You should try to steer clear of agreements that you can’t get out of without paying penalties. An agreement that gives an agent an easy way out but does not confer the same privilege on you is also best avoided. Some agents are known to charge termination fees in place of out-of-pocket expenses.

Bear in mind that buyers don’t have to pay agent fees in the U.S. The seller’s agent receives a fee from the seller, which is split equally with the buyer’s agent.  The percentage might vary based on the market and the agent, although it’s typically around 6%.

9. What if I’m not happy with how things are progressing?

Your agent should give you the freedom to select another agent if you’re not happy with his/her services. By asking this question, you get an indication of what might happen if to choose to opt-out of a contract. If you feel you’re unhappy with an agent’s work, you should make it known immediately. Your further course of action would depend on how your agent responds.

10. Do you have experience with short sales and foreclosures?

You would benefit by asking this question even if buying a distressed property is not on your mind. This is because buying foreclosed homes or those involved in short sales is typically more complicated. Real estate agents who are experienced in dealing with banks and closing complex deals tend to have strong organization and negotiation skills, which will come in handy during your journey of becoming a homeowner.

11. How much time would you take to show me a home I like?

Homes in hot markets can sell very quickly – even within a few days of being put on sale. In any such scenario, you need to move fast, and the first step would be to view the home. Ask your agent how quickly he/she can arrange for a viewing and how much notice you need to provide. Ensuring that your schedules align can save you heartache later.

12. Will you be a part of the home inspection process?

If an agent isn’t going to attend a home inspection or plans to delegate the task to someone else, you might want to look for a different alternative. Agents should ideally attend all home inspections as this is the best time to communicate with home inspectors and clarify all possible doubts about the property in question.

13. How do you typically negotiate?

Unless you consider yourself a master negotiator, this aspect is best left to your real estate agent. This is why your agent needs to have strong negotiating skills. No matter whether it’s buying a home or selling one, an agent needs to approach the process with a win-win attitude. Since a win-win situation would vary depending on different buyers and sellers, agents need to analyze each situation based on its merits before determining what to do next.

14. Can you recommend other service providers?

When buying a home, you will need to use the services of different types of professionals, so it makes sense to ask your agent for suggestions. While you will need to contact a mortgage provider at some point, you will also need to use the services of an appraiser, a home inspector, and a real estate lawyer. Along the line, recommendations for moving companies and contractors might also come in handy.

It is important that you find out just why you’re agent has chosen the people or businesses in question, be it attorneys or lenders. Instances of agents receiving commissions or gifts from lenders are not unheard of and might warrant your attention. Some agents, on the other hand, simply give their clients tips on how to choose mortgage providers based on their requirements.

15. Do I need to get preapproved?

While some agents might say that you don’t need to get preapproved for a mortgage to look at homes, most feel that it is best that you do. Getting preapproved gives you an indication of how much you can afford. Your real estate agent uses this information and shows you houses accordingly. Without preapproval and no real indication of how much money you might qualify to borrow, your estate agent may end up wasting considerable time in showing you homes that you can’t even afford.

Getting preapproved also works well on another level. The process gives you insight into different types of loans, different types of interest rates, as well as how loan terms and conditions might vary.

16. What other home-buying guidance can you provide?

If you’re a first-time homebuyer, you need to work with an agent who can guide you through the entire process, from the time you apply for preapproval until the time of closing, and maybe, even till you move into your new home. Your agent should be able to tell you how open houses work, what home inspections entail, what to do when making an offer, and just what happens after closing the deal. Also, your agent needs to steer you clear of home buying mistakes that you need to void.

Conclusion

Finding a good estate agent might seem like a daunting task, given the large number of options from which you get to choose. You can start by getting recommendations from family and friends. In this case, you need to ensure that you do not make your decision based purely on emotion. Ideally, you need to select an agent who has experience in working with clients who’ve had similar requirements. For instance, your requirements as a first-time home buyer would be different from someone who is looking at downsizing.

Make sure you ask prospective agents all the questions mentioned on this page, as well as any others that you might have. While experience and knowledge are crucial, you must select an agent you can trust and one who makes you feel comfortable.

Mortgage rates in the United States have continued to remain low in recent times, and the trend is expected to carry on in 2021. As a result, this is a good time to consider buying a home. However, getting a mortgage to purchase a home is easier said than done, and requires that you pay attention to some crucial aspects.

Data shows that sales of new single-family homes in the U.S. dropped by 3.5% from August to September 2020, although sales in August accounted for a 14-year high of 994,000 units. Besides, sales of homes have remained promising on account of low-interest rates as well as a rise in demand from people who are moving out of large cities because of the COVID-19 crisis.

Challenges that prospective homebuyers might face in 2021 include:

• Rising credit score requirements
• Larger down payment requirements
• Pausing or slowing down of mortgage issuances by some lenders
• Sellers taking their homes off the market

Fortunately, buying a home in 2021 can be simplified if you know what you look for and what to avoid.

Determine if Buying is Right for You

If you plan to move from renting to homeownership, start by determining if this is what you want. If you’re thinking about buying a home as an investment, don’t overestimate your return on investment (ROI).  Also, bear in mind that real estate does not appreciate at all times. Putting all your money toward your home is never encouraged by financial experts. Consequently, you should ideally look at your first home purchase as your right to housing, as opposed to viewing it as an investment.

Some of the pros of buying a home include:

• It is more affordable than renting over time.
• You get to build equity.
• You get tax breaks.
• You get more flexibility in making changes to your home.
• You get a sense of stability.

Some of the cons of homeownership include:

• You have to make a down payment.
• Relocating at a later date can be a challenge.
• Your home’s value might depreciate with time.
• You might risk facing foreclosure if you experience financial hardship.
• You will need to spend money on ongoing maintenance as well as repairs and renovations.

Check and Fix Your Credit Score

No matter whether you are buying a home for the first time or are an existing homeowner, the interest rate that applies to your new mortgage depends on your credit score. People with credit scores over 750 tend to get the best mortgage rates. You may expect to get a good deal if your score is between 700 and 750. With a score that is below 700, you will either get a less than the desired rate or will need to pay a higher than usual down payment. While a credit score of around 620 is the lowest that most lenders accept, some might go as low as 580. Checking your credit score online is simple and takes little time.

Set a Budget

Setting a budget and sticking to it finds a mention in most lists of home buying tips for first-time buyers. Start by asking yourself just how much you can afford. The general rule of thumb suggests that your budget should not exceed three times your annual income.  For example, if you make $130,000 per year, you should ideally limit your budget to $390,000. When setting up your budget, you also need to account for all ongoing costs linked to homeownership. These include your repayments, property taxes, insurance, and maintenance costs. If you plan to have a smooth financial transition into being a homeowner, setting a budget and sticking to it is paramount.

Select the Right Lender

There is more to selecting a mortgage provider than going with the one that offers the lowest interest rates. In some cases, the fees you end up paying through the course of the loan might offset any interest rate advantage you think you have. Flexibility in terms surrounding repayment frequency and making extra payments needs your attention. The reputation of a lender and its customer service levels also play in role in making the right decision.

 Select a Suitable Type of Loan

Next in line with tips for buying a home is to determine which kind of mortgage works best for you. For instance, an adjustable-rate mortgage (ARM) might work well for you if you plan to move in ten years or less. If you are in it for the long haul, a fixed rate alternative might serve as a better bet. Then, you also get to choose from VA loans, reverse mortgages, 203K rehab loans, and jumbo loans. Since selecting the right kind of loan might seem daunting, consider simplifying the process by speaking with a mortgage expert.

 Get Preapproved

Among the most popular home buying tips for first-time buyers is to get a mortgage preapproval. Once you get preapproved, you know just how much money you qualify to borrow. This gives you the means to look for homes that match your budget. Incidentally, you might be eligible to borrow as much as three times your gross annual income. Besides, the process of getting preapproved might be easier than you think. All you need to do to get started is contact your mortgage provider or loan officer.

Think About the Down Payment

Depending on your credit score, the least you need to set aside as a down payment for a Federal Housing Administration (FHA) insured loan is 3.5% or 10%. If you qualify for a Fannie Mae Home Ready Loan, you may put down as little as 3%. However, no matter which kind of loan you get, you will also need to account for closing costs. If you wish to build equity in your new house soon, making a larger than required down payment will hold you in good stead.

By making a down payment of 20% or more, you indicate to the seller that you are serious about making the purchase. Going forward, it also reduces the total amount you end up paying as interest.

Buying a home without making a down payment is possible. However, this depends on whether you meet the required eligibility criteria. Zero down payment loans come in the form of USDA loans and VA loans. If you end up getting a no down payment mortgage, you will, in all likelihood, have to pay for mortgage insurance.

Work With a Reliable Real Estate Agent

There are scores of home listings you cannot find online, which is why working with a real estate agent makes sense. What also helps is that buyers don’t have to pay agent fees in almost all situations. These fees are typically paid by sellers. A seller usually pays around six percent of a home’s selling price as commission, and this is split between the seller’s and buyer’s agents.

When selecting an agent, look for one who has local experience as well as the knowledge that is required to make the process as seamless for you as possible. A good real estate agent is one who:

• Is easy to contact
• Helps you find need-based listings
• Assists you in finding a home inspector
• Partakes in the home inspection process
• Has good negotiation skills
• Communicates with the seller’s agent and your attorney
• Addresses requests for repairs
• Finalizes the closing

Pay Attention to Season-Based Competition

The time of the year you plan to buy a house tends to have an effect on the competition you face from other prospective homebuyers. Spring and early fall account for the two busiest periods in real estate sales.  This is because several buyers wish to move during warm weather, and settle in place before the beginning of a new school year.

Many sellers list their homes during these periods to make the most of increased demand. However, while there is an increase in inventory during these months, you also tend to face more competition.

Buyers tend to thin out during the colder months, which results in reduced competition. This can also lead to better deals because sellers who haven’t managed to sell their homes in earlier months become more open to negotiation.

Bear in mind, though, that this aspect can vary based on different regions and properties, as well as an owner’s reason for selling.

 Consider the Time Factor

Experts often suggest that buyers should make quick decisions, especially in markets that have high competition. Making a quick decision in this case does not mean a few hours or days. However, when a market is awash with completion, waiting for even a week to make an offer might be too late. If a home you’re interested in has other prospective buyers, making an offer quickly might be the order of the day.

The flip side is that many sellers pulled their homes off the market when the COVID-19 pandemic struck in March and April of 2020. Many of these homes would, in all likelihood, get relisted again in the coming months. As a result, exercising a little patience might give you access to more homes from which to choose.

Make a Reasonable Offer

Once you’ve narrowed down on a house you wish to buy, you need to make an offer. Your real estate agent can help you with this, by carrying out a comparative market analysis. This step gives you an indication of whether the asking price of a home is in line with other comparable homes in the area and helps you arrive at a suitable offer price.

The offer you make may include one or more contingency clauses. One can surround the independently appraised value of the home in comparison to its asking price. Another can involve a successful home inspection. Some offers also have contingencies that depend on buyers’ mortgages being fully approved. A drawback with including too many contingency clauses in your offer is that they might act as a deterrent from a seller’s perspective.

Making an offer usually requires placing a deposit, which can be 0.5% to 2% of a home’s selling price. This indicates that you are serious about your offer. Upon accepting the deposit, a buyer takes the property off the market. If you opt out of the deal for any reason other than those listed as contingencies, you stand to lose all or part of the deposit amount.

Your real estate agent can assist you in getting all the required paperwork in order. Your offer is then submitted to the seller’s agent.

Carry Out a Home Inspection

Home inspections give buyers the ability to identify minor and major issues with homes before closing. It is not without reason that offers include contingency clauses surrounding home inspections. This contingency clause gives buyers the ability to back out of their offers without paying penalties if home inspections reveal significant defects.

The home inspector you hire should carry out a thorough inspection of the house you wish to purchase, and make note of the following:

• All minor and major defects as well as safety issues
• Items that need to be serviced, repaired, or replaced
• Items that make the cut as of now but need close monitoring

 A good home inspector should give you an indication about the routine maintenance you may look forward to, which can be important if you’re a first-time homebuyer. In case a home’s condition is not up to the mark, you may ask the seller to address the same or provide credits toward repair costs at closing. Once you buy a home, you may use the home inspection report to prioritize repairs and upgrades.

 Get the Final Mortgage Approval

Having made your offer, and with the home’s inspection out of the way, you need to get your mortgage’s final approval from your lender. Your lender evaluates the property, and if it’s okay with the selling price, it approves the property. Your lender will want proof of home insurance at this stage. You may also expect close scrutiny of your financial records before the final approval.

Close the Deal

Closing on the sale/purchase is the last step. This typically involves a meeting with the seller or a seller’s representative, your real estate agent, the lender’s representative, and in some instances, a closing agent. This final step involves paperwork surrounding approving the purchase and transferring the title, as well as paying the seller. Closing costs can be up to two percent of a home’s selling price.

If you can follow these tips for buying a home in 2021, consider yourself to be on the way to becoming a successful homeowner. Fortunately, professional assistance that can guide you in finding the right kind of home loan is always close at hand.

When buying a home, it is important to identify the differences between primary residences, second homes, and investment properties. This is because the classification that your new home falls under has a bearing on mortgage requirements as well as property taxes. When you apply for a new mortgage, how you wish to use the property you plan to purchase will be among the first few questions you need to answer.

What is a Primary Residence?

A primary residence is a home in which you live most of the time. From a lender’s perspective, a residence qualifies as a primary home if it meets these criteria.

• You move into the home within 60 days from closing.
• You live in the home for the most part of the year.
• Your workplace is located within a reasonable distance of the home.

Getting a mortgage for a primary residence is typically easier than getting a mortgage for other types of occupancy. In addition, borrowers can also benefit by getting lower mortgage rates. This is mainly because lenders view mortgages for primary homes as safer bets since such homeowners are more inclined to keep up with their repayments.

If you plan to refinance your primary residence’s mortgage down the line, your lender will require that you prove your residence by providing documentary evidence.

What is Secondary Home?

Quite like the name implies, a secondary home is a home where you plan to live occasionally. The older population makes up for a significant chunk of homebuyers in this category, often because they have paid off their primary home mortgages.  A lender would view a property as a secondary home if:

• It is a single-unit dwelling.
• You have exclusive control over the home.
• You reside in it for some time during the year.
• The home is not subject to any kind of property management, timeshare, or rental agreement.
• It is suitable for occupancy throughout the year.

Lenders might require that your secondary home be some distance from your primary residence, with a 50-mile distance being a fairly common requirement. In case the distance is lesser, your lender might view your new purchase as an investment property, subjecting you to stricter eligibility criteria and higher interest rates.

When it comes to taxation purposes, a property can qualify as a secondary home if you have not rented it out for 180 days or more through a year, and have spent some time there yourself too.

What is an Investment Property?

Simply put, an investment property is one through which you plan to generate income. While you may choose to rent out an investment property, you also have the option of making it your own residence. However, in this case, any other property that you rent out (your primary home, for instance) would be viewed as an investment property. Commercial properties can also fall under this segment.

A lender would typically view a home as an investment property if:

• You rent or lease it out.
• You plan to flip the property and make a profit.

If you’ve told you a lender that you plan to lease or rent the home you wish to purchase, you will need to provide a lease/rent agreement to confirm that the property has a tenant.

From the taxation point of view, investment properties are ones that are used solely for the purpose of generating income. Homes that are rented out for 180 days or more in a year usually fall under this category.

How Do Mortgages for These Types of Properties Differ?

The type of mortgage you may qualify for has a bearing on the occupancy status of the house you wish to purchase.

Alternatives for Financing

If the home you wish to buy will serve as your primary residence, you may apply for a conventional loan, FHA loan, a USDA loan, or a VA loan depending on the type for which you qualify. When it comes to getting financing for a second home or an investment property, while you can think about getting a conventional loan, you have other options as well. These include getting a cash-out refinance or a home equity line of credit (HELOC) on your existing home. Hard money loans are usually viewed as last resorts because they come with higher costs and lower loan-to-value (LTV) ratios.

Mortgage Interest Rates

Lenders make available their most competitive interest rates for mortgages taken out on primary residences. The rates that lenders advertise are ones that you may expect when taking a mortgage for a primary home.

Interest rates for mortgages on second homes can be up to 0.5% higher than rates for primary homes because lenders view the former as higher risk bets.  The perceived risk is even higher for investment properties. As result, you might end up paying up to 1% more as an interest toward a mortgage for an investment property when compared to a mortgage for a comparable primary residence.

Down Payment

Depending on the type of loan you get for a primary residence, you might need to pay 0% to 20% of the home’s selling price as a down payment.  With a loan for a second home, you would typically need to pay at least 10% as a down payment. For investment properties, expect to pay at least 20% to 25% as a down payment.  Lenders would also require LTV ratios to be 70% or lower. If you wish to refinance an existing mortgage to fund your second home or investment property purchase, lenders would look for at least 25% equity.

Requirements for Qualifying

Between the three, meeting qualifying requirements for a primary residence mortgage is usually the easiest. These include having a steady source of income, a fair to good credit score, and a debt-to-income ratio that falls within permissible guidelines.

When it comes to getting a loan for a second home, your lender will want to establish that you have adequate money to cover your existing mortgage’s repayments, your day-to-day-expenses, as well as payments toward the new mortgage. It is not uncommon for lenders to require that borrowers have enough cash reserve to make repayments toward both mortgages for at least six months.

Qualification requirements for investment properties are largely similar to those for second homes. However, lenders might also require borrowers to show some experience related to property management. If your lender permits, applying the rental income you anticipate toward your debt-to-income ratio might work well for you. In this case, you can get up to 75% of the expected rental income to count toward the income requirement.  However, this would come with extra paperwork. You might have to go through a specialized appraisal that highlights comparable rent prices as well.

What Happens If You Claim an Investment Property to Be Your Second Home?

Misrepresenting the occupancy status of a home you purchase is against the law. However, this does not stop some homeowners from classifying investment properties they purchase as their second homes.

Bear in mind that intentionally misrepresenting how you plan to use the property so you benefit through relaxed mortgage requirements is viewed as occupancy fraud. Fines in such cases can be rather steep. You may also be subject to prosecution and might have to serve jail time if convicted.

Lenders pay due attention to this aspect, and they can use different methods to verify the occupancy status of homes for which they provide mortgages. Physical verifications were fairly common until not long ago. Some lenders still rely on random home visits to verify just who lives in any given home. In addition, lenders now make use of technology for verification. Data analysis plays an important role, where data from your tax information, credit bureau files, and utility bills help establish whether your actual address is different from the one you provide in a mortgage application.

Another drawback of lying about a home’s occupancy status is that it can make you a defaulter on your mortgage. If your lender finds out about any such misrepresentation, you might be required to repay the entire loan immediately. If you cannot, you risk facing foreclosure, and this could result in you having to forfeit your home.  In extremely complicated cases, lenders have even been known to inform the Federal Bureau of Investigation (FBI).

There can be situations that are not fraudulent which may involve a primary residence turning into a second home or an investment property.  This may happen if you relocate to a different neighborhood or a different city and end up buying a new home to use as your primary residence. In this case, you need to inform the mortgage provider of your old home about the change in the situation.

Tax Benefits

*For informational purposes only. Please consult with your tax advisor.

No matter whether you are a first-time homeowner or buying your second or third home, you can claim deductions toward interest payments, property tax, and insurance payments.

With an investment property, you need to include the rental income in your total taxable income. Deducting expenses that you incur in the property’s maintenance from your taxable income is a possibility.

If you rent out a second home for less than 14 days per year, you don’t need to include the same in your taxable income. You would need to include the rental income in your taxable income if you rent out the property for more than 14 days through a year. In addition, you typically cannot seek deductions toward maintenance and renting costs with second homes.

Homeowners need to be aware of the change in the deduction limit on mortgage interest that came about owing to the 2017 Tax Cuts and Jobs Act (TCJA). Before the act was passed, homeowners were allowed to claim deduction on interest paid for up to $1 million in mortgage debt. As of now, the limit stands at interest paid on up to $750,000 in principal amount. The limit is expected to roll back to $1 million after 2025. Existing homeowners who got their mortgages before December 15, 2017, are still subject to the old regulation.

Can You Reclassify a Second Home as an Investment Property?

There are instances when homeowners think about turning their second homes into rental properties after the purchase. Changing the occupancy status of a home within the first year might not be the best way forward, as you may then be subject to an occupancy fraud-related investigation. However, lenders can’t do much if borrowers choose to go down this path after repaying their mortgages for a few years.

Homeowners who wish to reclassify second homes as investment properties need to file their taxes accordingly while informing the IRS about their new rental income. They also need to update the occupancy status of their homes if they plan to refinance their existing mortgages.

Reclassifying a Second Home or an Investment Property as a Primary Residence

While you can move into a second home or an investment property and use it as your primary residence, there is more to it than that. Given the tax benefits that come with primary residences, it is best to keep the IRS informed.

Homeowners who wish to make investment properties their primary residences should check if they qualify for a 1031 exchange. This gives owners of investment properties the ability to use proceeds from the sale of one rental property to purchase another. By doing this, homeowners can reduce the amount of money they pay toward depreciation rapture and capital gains taxes.

Conclusion

When you think about applying for a mortgage, expect your lender to ask what type of property you wish to purchase. Getting a mortgage for a primary residence is typically the easiest, and these mortgages tend to come with the best interest rates. If you plan to buy a second home or an investment property, it is normal to face more stringent eligibility criteria. In case you’re not sure about the classification of your desired purchase, speaking with a loan officer might be in your best interest.

DISCLAIMER:

CONSULT WITH YOUR TAX ADVISOR. 30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.

Data suggests that there is a significant increase in the number of American homeowners who are downsizing their homes. Statistics released by the National Association of Realtors highlight that in 2017, more than 10% of home buyers between 45 and 64 years of age were downsizing. According to a Zillow Group Housing Trends Report, more than 45% of homeowners in the given age group did the same.

Moving to a new and smaller home can be a daunting and time-consuming process. In addition, while it works well for some, it does not for others. This requires that you consider various aspects before making a decision.

The Benefits of Downsizing

Downsizing comes with multiple benefits, and here’s what you might expect.

• This is among the top reasons for downsizing. If your existing home is mortgage-free, you might be able to buy a new home and still have some reserve money. If it’s not, you may look forward to reduced monthly payments with your new mortgage. Downsizing can lead to reduced property tax, insurance costs, as well as maintenance costs. It can also result in lower utility bills.
• Reduced clutter. Downsizing gives you a great opportunity to eliminate things you don’t really need or use. You might be surprised to find out just how many of your existing possessions actually end up making it your new home, simply because they provide little to no value.
• Easier to maintain. A smaller space reduces the time and energy you put toward maintenance, be it day-to-day or long-term. With less time spent on everyday upkeep, homeowners have more free time on their hands.

Possible Disadvantages of Downsizing

While moving to a smaller home comes with benefits, you also need to be aware of possible drawbacks that you might have to face.

• No spare room. A spare room comes in handy when you have to deal with someone who wishes to sleep over after a late night, or when you have out-of-town guests. When you downsize, you can say goodbye to your spare room. However, you’ll still have the couch in your living room.
• Fewer belongings. You will, in all likelihood, give away, throw, donate, or sell a number of your possessions before you shift into a smaller home. Some people might have a hard time dealing with this aspect, especially when it comes to items that could not make it because of lack of space or ones that have emotional value.
• Space restrictions. People who are used to living in large homes might feel cramped for space in smaller homes. In addition, fewer rooms might result in reduced privacy.
• Changes in social life. This essentially depends on the locality of the new home. If it’s in the same neighborhood as the existing one, there shouldn’t be too many changes. However, relocating to a new area might require adapting to big changes. For example, how quickly would you be able to make few friends?

If your only reason to downsize is to reduce your home loan expenses, other ways to go about the process might need your attention. For instance, you could consider switching from making monthly repayments to bi-weekly repayments. Refinancing your existing home loan might also work in your favor, given that interest rates are now at all-time lows.

How to Go About the Process?

Once you’ve decided that you wish to move into a smaller home, you will need to pay attention to several aspects. Streamlining the process ensures that you minimize the possibility of encountering problems along the way.

Plan for the Long-Term

Do not make a spur-of-the-moment decision when you plan to downsize. Take into account any extra space you might need, be it for working from home or having your grandkids over. Only you can determine just how much space you might need down the road.

Think About Hidden Costs

Buying a smaller home might lead to lower mortgage payments. However, you need to consider other costs as well. For instance, does your existing home need repairs? If so, how much might you need to spend to make it market-ready? In addition, will your existing furniture and appliances fit into your new home, or will you have to budget for new purchases? You also need to take into account the actual cost of moving as well as possibly higher property taxes and housing association fees.

Focus on Functionality

You obviously cannot take everything from your existing home to your new home when downsizing.  When deciding what to take and what not to, your main focus should be functionality.

• Decide on big items first. Scan every room in your house and identify all the big items. Among other things, these include all your large appliances such as dishwashers, refrigerators, and TVs. Does the new home have any of these? If not, will the ones you have fit well into the new space? Will the cost of moving a heavy item outweigh the cost of making a new purchase?
• Donate, sell, or throw away. Create separate spaces for items you wish to take with you, as well as for ones you will give away, donate, sell, or simply throw in the trash. Items you can consider giving away may include family heirlooms and possessions that carry sentimental value. This way, you know they’ll be taken care of well. Consider selling items of value you no longer need, as this gives you some extra cash. Donate items that aren’t valuable and you no longer need but still serve their purpose. Salvation Army gives you easy means to schedule a free pickup from your home for most types of items. Anything that does not make it to these three piles should head to the trash.
• Check storage and infrequently used spaces. Over time, various items get to spaces in homes that are rarely entered or used. When you start to clear out your existing home, begin by checking your attic, basement, closets, spare rooms, bathroom cabinets, and storage units in the kitchen. What you end up finding will include items you can sell, items that bring about fond memories, and just plain junk. Place them in the relevant piles you create.
• Furniture comes next. Moving into a new home does not imply that you revamp your furniture completely. Identify pieces of furniture that will fit comfortably in your new home, and also serve a purpose. Make sure that the doors and passageways of your new home are big enough to move the existing furniture you plan to take. The furniture that’s left goes into the give, donate, sell, or throw piles. With furniture you wish to donate, the Furniture Bank Network can work well in finding households in need that cannot afford to buy new furniture.
• Check all other spaces. This step requires that you go through each room with a fine-toothcomb, one by one. With the kitchen, you’ll probably find more items you wish to take than leave behind. This is because most of the things in kitchens tend to find frequent use. However, keep space restraints in mind when thinking about taking appliances, unnecessarily large utensils, and crockery/silverware that can do with replacement. When you move to the other rooms, such as your living room or bedrooms, make de-cluttering your main aim. Each time sentimentality creeps in, remind yourself of the all-important functionality.

In case you end up with a significant number of items you wish to hang on to but don’t have the required space in your new home, you might consider renting a storage unit.

Should You Buy or Sell First?

Generally, it’s a good idea to sell an existing home before buying a new one. This way, you don’t have to worry about your emotions getting the better of you. However, buying before selling might be the order of the day in some markets. This is an aspect that you need to discuss with your real estate agent in detail.

Buying First

Buying first makes sense in case you’re looking for a home in a market where sales are happening quickly. In such a scenario, you should be able to buy with cash or have a preapproval for a mortgage. You might also consider buying first in slow markets where sellers might be more willing to accommodate your requirements. For instance, you could make a conditional offer that links to the sale of your existing home.

In case you plan to rent your existing home, you can expect most lenders to consider 75% of the rent amount as income, provided there’s a signed lease in place.

Selling First

A conditional offer linked to the sale of your existing home might not work, especially if a seller has multiple offers. Most real estate agents suggest selling first mainly because they view this as a safer bet in terms of not losing out on commission.

Once you agree to vacate your home in a given time period, you might feel pressed to settle for a home that is not up to your liking. If a seller knows you’re in a hurry to make a purchase, negotiating for a better price becomes even harder.

If you’re selling first, make sure you negotiate terms that would offset problems you might face with your impending purchase. For instance, you can ask the buyer for more time until closing, which could be 90 days as opposed to the usual 60 days.

Alternatively, you can ask the buyer to consider renting the home to you for a short-term after the closing, which could be a month or two.  In this case, you should ideally offer a reasonable security deposit, as well as rent that covers the monthly cost of the new owner’s mortgage. If this is possible, both parties need to determine if their homeowner’s insurance companies provide suitable cover during temporary rent-backs.

Do You Need Two Real Estate Agents?

If you’re wondering whether you need to use the services of a real estate agent in the first place, know that while you need to pay a commission, it takes a lot of guesswork out of the process.

It’s not uncommon for people who wish to downsize to wonder if they need two real estate agents – one to buy and another to sell. To some degree, this depends on the localities of your existing and new home. For instance, out-of-area agents are not appreciated by local agents in some places.

Go through home pricing and comparable sales. This way, if an agent has contacts in your area, and your home is easy to price, the actual location of the agent doesn’t really matter. Besides, if you get an agent to handle both transactions, you might even be able to negotiate on commission.

A Checklist for Downsizing

Before making your decision to downsize, consider these points.

• Are you happy about your plan to downsize, or might you feel better if there’s another solution such as refinancing your existing mortgage?
• If you’re happy with the idea of moving, determine where you wish to live. Do you want to live in the same neighborhood, move away from the city, or find a home by the sea?
• Look at homes that really appeal to you and check if they fit in your affordability bracket. This gives you an indication of whether you might have to compromise on your needs.
• If you have an existing mortgage, would you want to pay it off completely before the sale?
• How comfortable would you be in getting rid of some of your possessions, be it selling things or simply giving them away?
• While you’ve purchased a home in the past, are you aware of all the possible home buying mistakes you need to avoid?

Conclusion

A number of people manage to downsize to smaller homes with success. The trick, in a way, is to find the right balance between what you really need and what you can do without.  While the process might seem intimidating at first, following some simple guidelines can ensure that you come out on top. If you need assistance at any step of the way, professional help is typically easy to find.  This includes finding a suitable lender, should you need a new mortgage.

DISCLAIMER:

30-YEAR FIXED-RATE MORTGAGE:  THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.