In order to qualify for a mortgage, you need to show your lender that you have a down payment and access to funds for closing. This money needs to come from documentable sources prior to moving it from your bank account to your escrow account. Unfortunately, a lot of people don’t do this, which can end up creating unnecessary challenges during the underwriting process.
Lenders are going to require at least 60 days of asset documentation from each source that your money comes from. This is required because your mortgage lender will need to verify that the money promised does exist and is eligible for use.
Let’s say you’ve put your money into escrow and, as requested, are doing your best to document the movement of money from the account going to escrow. This entails providing a bank statement specifically showing the money leaving your account and the money being accepted by escrow through an EMD (earnest money deposit).
If you can’t get a bank statement, though — say it’s the middle of the month and new statements are not out yet — the next best thing is to get a bank printout confirming the transaction and confirming the amount of money remaining in the account. (There are literally dozens of other things you also should be thinking about during the home buying process. Here are 50 ways you can get ready for buying your home.)
How a Bank Printout Can Help You Close
The bank printout must show the date of the transaction and the current timestamp of the printout, confirming that the money has been moved prior to the printout date. If the bank printout does not have this information, it will automatically halt the closing process of your loan and delay your loan contingency removal or extend your close of escrow date.
This method can be used for both your down payment and funds for cash to close. This is to provide authenticity for your account and to show clearly on paper that the account is yours and the money is yours to use. Banks and lenders require this information to be clear cut and “in your face.” Never assume that “common sense” will be enough.
Documents & Other Items You’ll Want to Avoid
Providing any of the following items in lieu of the bank printout will not work:
A bank statement with someone else’s name on it
Bank statement in trust
Pictures of bank statements taken from a smartphone or snapshot application
Bank printout with no timestamp and date
In addition, the bank printout and timestamp must show the remaining balance that is left in your account. For example, if you had $130,000 in assets and your down payment from this account was $50,000, your account statement should now show $80,000 remaining.
If you are looking to purchase a home, talk to a seasoned loan professional who can walk you through properly documenting the money required to buy your home. Also, take a few minutes to check your credit scores so you’ll know going in what kinds of terms you’re eligible for. You can get your two free credit scores, updated every 14 days, at Credit.com.
The 30% rule, which says not to spend more than 30% of your income on housing, is a good place to start, but it’s not always the best gauge of how much should you spend on housing. You don’t want to base your entire financial situation on it — especially since it’s not exactly clear what that 30% includes.
What Is the 30% Rule?
The 30% rule has been around since the 1930s, according to the Census Bureau. Back then, policymakers were trying to make housing affordable. They came up with the idea that you could spend about 30% of your income on housing and still have enough left for other expenses.
Over time, those numbers started to get used in home loans as well. A rough sketch of what you could afford, in terms of monthly payment, could be obtained by estimating 30% of your income.
Is the 30% Rule Right for You?
When deciding on your own 30% rule, it’s probably a good idea to base it on your take-home pay, rather than your gross income. Let’s say you bring home $3,500 a month. According to the 30% rule, that means you shouldn’t spend more than $1,050 on your housing payment.
Some folks like to use their gross income for this calculation, but that can get you into trouble in the long run. If you base what you spend on housing on an amount that you might not be bringing home, that can stress your budget.
Think about it: If your pre-tax pay is $3,800 a month, that lifts your max housing payment to $1,140. That’s $90 more per month. But the reality is that you are bringing home $300 less than your gross income. Trying to come up with another $90 a month could put a strain on your budget.
Don’t Forget About Extra Costs
You can use a mortgage calculator to figure out how much you should spend on housing. However, such calculators typically just include principal and interest. This doesn’t take into account other monthly homeownership costs.
If you’re thinking of buying an expensive house, don’t forget about other costs like insurance and taxes.
Experts suggest that you base your 30% figure on all your monthly payment costs, not just the principal and interest.
What Percentage of Income Should Be Spent on Housing?
But it goes beyond that for some homebuyers. When looking into buying a home or an affordable place to rent, don’t just base your estimates on your monthly payment. You should also include estimated utility costs and an estimate for maintenance and repairs.
HouseLogic suggests you budget between 1% and 3% of your home’s purchase price annually for repairs and maintenance. I like the idea of budgeting 2%. So, on a $200,000 home, that means you can expect to pay $4,000 for repairs and maintenance — about $333.33 per month.
Once you start adding in all the other aspects of homeownership, suddenly that 30% rule is less cut-and-dry. If you’re more conservative, adding up all the monthly costs of homeownership and keeping it all under 30% makes sense.
You’re less likely to overspend that way. But it might mean a smaller, less expensive home.
Consider the 28/36 Qualifying Ratio
Instead of relying on the 30% rule to answer the question, “How much should I spend on a house?”, consider using the 28/36 qualifying ratio.
According to Re/Max, many lenders use the 28/36 rule to figure out whether your finances can handle your home purchase. The 28 refers to the percentage of your gross monthly income that should be spent on your monthly housing cost. The 36 refers to the percentage of income that goes toward all your debt payments, including your mortgage.
So, if you make $3,800 in take-home pay, your monthly payment should be no more than $1,064. But, things get stickier when you calculate the 36% part of the ratio. Your total debt payments shouldn’t exceed $1,368. That leaves you about $304 for payments of other debts.
Let’s say your credit card and auto loan payments total $500. That means you’re going to have to adjust your expectations for what you can expect to pay for a mortgage. In fact, if your lender insists on the 36 part of the ratio, you have $196 less you can spend on your mortgage payment. And that might mean a less expensive house.
When figuring out what percentage of income you should spend on housing, base the calculations on your take-home pay. Even though Re/Max says many lenders use your gross pay for the 28/36 qualifying ratio, this way you’ll play it safe.
How Much Should I Spend on a House?
Everyone has to answer the “How much should I spend on a house?” question for themselves. However, the biggest reason to ditch the 30% rule is that you might not be comfortable with it.
Are you really comfortable spending 30% of your income each month on your housing? When you consider your other payment obligations, does it makes sense for you to spend so much on housing?
If you aren’t sure about the 30% rule, use your own rule. You might be more comfortable with 25% on all of your housing costs. Or perhaps you modify the rule. Maybe you spend 20% on mortgage and interest and keep your total housing costs to 25% or 28%.
No matter what you decide, the important thing is to be responsible with your finances. Only spend what you feel comfortable with on housing or rent.
Millennials in Ohio are getting the most affordable mortgages, with Toledo, Akron, Lakewood and Dayton claiming four of the top 10 cities with the lowest average mortgage amounts for the age group, according to LendingTree. California, however, is on the opposite end of the spectrum, with four of the 10 cities with the highest average mortgage amounts: San Francisco, San Jose, Los Angeles and San Diego.
If you’re considering buying a new home — regardless of where you live or how old you are — it’s important to shore up your credit before applying for a mortgage. That’s because it’s going to play a major role in whether you can actually get a mortgage and what kind of rates you’ll end up paying. You can view two of your credit scores, updated every 14 days, for free on Credit.com. You’ll want to clean up your credit if necessary and make sure there aren’t any errors weighing down your scores. If you spot them, here’s how to address any errors that you may find.
Now, without further ado, here are the top 25 cities where millennials are buying homes.
With the beginning of spring and more interest-rate hikes coming up, a lot of people are wondering if it’s time to make the jump from renter to homeowner. Of course, making such a move involves much more than browsing real estate listings and cobbling together enough for a down payment.
One of the most important things a first-time homebuyer can do is prepare their budget for this big financial event. We asked our partners and money-savers extraordinaire at Clark.com to share some of their best budgeting tips for people looking to buy a home this year. Here are Clark.com Managing Editor Alex Sadler’s responses, edited for length.
What Tweaks Should People Make to Their Budgets in Preparation for Buying a Home?
First of all, there’s a whole lot more that goes into buying a home than many people realize. I’m actually going through the process right now, and believe me, it ain’t like walking into a leasing office and signing up for an apartment.
When you’re preparing your finances for buying a house, here are a few steps you need to take first.
Get your credit in shape: The higher your credit score, the better deal you’ll get on a mortgage. The goal is to get approved for the lowest interest rate possible, so before you apply, make sure your credit is in good shape. [Editor’s note: If you’re not sure where your credit stands, we’ve got you covered. You can get your free credit report snapshot on Credit.com, and it’s updated every 14 days.]
Have enough saved for a down payment – and then some: A good amount to shoot for is 20% of the purchase price. If you put down less money, you still may be able to get a loan, but it’ll come with higher monthly payments. Plus, typically when you put down any less than 20%, you’ll need to have private mortgage insurance, which is another monthly bill to prepare for.
Prepare for other upfront costs: Home inspection (a few hundred dollars), closing costs (estimate between 2% to 5% of purchase price) and extra cash. Some lenders may require you to have some cash in the bank after the purchase is complete, maybe two to six months’ worth of mortgage payments.
In terms of your monthly budget once you’re in the house, a good rule of thumb is to spend no more than 25% of your income on housing – including mortgage payments, private mortgage insurance (PMI, if you need it), property taxes, homeowners insurance — all the monthly bills specifically tied to the house.
What Are Things Renters Don’t Have to Budget for but Homeowners Do?
Buying a house is exciting, but you need to go ahead and prepare yourself for unexpected expenses — that’s just the reality of owning a home. No more calling the landlord or leasing office to come fix something. Whether it’s a broken light bulb or a busted HVAC, the cost of that repair is coming out your pocket. Basically, you should overestimate how much money you’ll need to cover all of your expenses each month.
Give yourself a cushion to fall back on — cash savings you can dip into to pay for an unexpected repair or to cover your bills in case you lose your job or can’t work for a period of time for whatever reason.
A few other costs that come with owning a home: property taxes, homeowners insurance, disaster insurance required for homes in certain areas, higher bills (utilities, heating, air conditioning), maintenance — any and everything is your responsibility.
The bigger the house, the more expensive every single bill will be. Keeping up with regular maintenance is crucial in order to avoid bigger, more expensive repairs down the road
What Are Tips for Transitioning Your Budget From That of a Renter’s to a Homeowner’s?
Come up with a monthly budget to cover all of your expenses as a homeowner, and start living on that amount now. It will force you to save the money that you won’t have the luxury of spending once you own that house. Send it directly into savings so you don’t give yourself a chance to spend it.
How Can Homebuyers Make Sure They’re Not Biting Off More Than They Can Chew?
Just because you can qualify for a bigger house doesn’t mean you should buy one. The financial risks are extremely serious.
No one plans for unexpected setbacks like job loss, emergencies, medical issues — and if you aren’t prepared financially, one big unexpected event can be devastating not only to your short-term financial health but also your long-term finances. If you can’t pay the mortgage payments, the lender is coming after your house. If you have nothing to save each month, you’re giving up retirement savings and everything else that comes with being financially independent.
Bottom line: Buy less house than you can afford. And even on a less serious scale, you don’t want to live in a house that you can’t afford to furnish, or you can’t afford to take vacations because you have nothing left to spend or save each month.
Ben Franklin said, “nothing is certain except for death and taxes.” And every year around this time we’re reminded of the unfortunate truth of his words. But let’s look at things positively: If taxes are inevitable, so are tax breaks.
Pluses and minuses of taxes can be compared to home ownership — the joys ebb and flow. On one hand, it feels great to be one rung higher on the American Dream ladder. But the increased responsibility and costly home repairs can be a mood killer. Sure, it’s a blast hosting a dinner party or building a dynamite basement bar for football games. But the monthly mortgage fees and property taxes add up quickly.
Luckily, there’s a silver lining that appears every February. The IRS gives us a list of individual tax breaks that make owning a home more affordable. The fine print on deductions can get pretty lengthy, so we’ve filtered out the jargon and summarized the most common tax breaks for homeowners.
9. Mortgage Interest
Mortgage interest is anything you pay on a loan for your home. If you own a home (or second home), you can usually deduct the interest you pay on your mortgage. Examples of these loans could be:
Mortgage loan deductions are not applicable for any third, fourth or any home beyond your second. Also, there are limits to these deductions — $1 million to be exact — or $500,000 if married but filing separately.
8. Property Taxes
Property tax, or real estate tax, is one of the most common and straightforward tax breaks for homeowners. Whether you live in Hawaii with a real estate tax rate of .27% or New Jersey with an astronomically high rate of 2.35%, you can deduct the property taxes you paid for the year. Simply include this on IRS Form 1040. Bear in mind this applies solely to properties for personal use, not rental or business properties.
Want to know whether it’s worth it to claim this deduction every year? One personal finance site calculated that on a $179,000 home (the average price of a home in 2015) you could pay as little as $487 in annual taxes in Hawaii or $4,189 in New Jersey. That’s a good chunk of change for a deduction.
7. First-Time Homebuyers
Uncle Sam allows first-time homebuyers to bend the IRA rules to help you fulfill your home-owning dreams. In fact, you can withdraw up to $10,000 from your traditional or Roth IRA without penalty to help with the purchase of your new home. The only stipulation is the money withdrawn must be used toward buying, building or rebuilding the home, or for settlement costs within 120 days.
Even better, the IRS’ definition of “first-time homebuyer” is more broad than you might think. You qualify if you or your spouse did not own a home at any time during the past two years.
6. Selling Your Home
If you’ve sold a home and moved to another location, you qualify for several new deductions. Taxpayers can keep up to $250,000 ($500,000 if married but filing separately) in capital gains, courtesy of Uncle Sam.
To deduct moving expenses relating to your sale, you must meet three criteria:
You moved at least 50 miles from your old home or job location.
The move date must relate closely to the start of your new position.
You meet certain time test requirements in the new position.
Time tests vary for those who are self-employed, but the minimum time worked must be at least 39 weeks during the first 12 months. Expenses, such as lodging, transportation and storage are all tax deductible if you meet these qualifications.
It’s also worth noting that members of the armed forces are not subject to these time parameters if your move relates to a military order.
5. Owning a Second Property
Thinking about purchasing a vacation home or income property? If you use your second home for personal use, deductions, such as mortgage interest, property taxes and home office are still applicable.
If the second property generates rental income, the rules are a bit different depending on how often you use it as the homeowner. You can deduct rental expenses, such as insurance premiums and fees paid to property managers, only if your personal use was more than 14 days or 10% of the total days rented.
4. Home Improvement Updates
Did you remodel the kitchen or install a new HVAC system this year? Keep track of capital improvements, or improvements that increase your home’s value, as they come in handy when you sell the home. If your home sells for more than you paid for it, that extra money can be considered taxable income at capital gains rates (note the $250,000 or $500,000 exclusion).
But before you go all Bob the Builder on your home, know that general home repairs are those deemed necessary for your home to stay in good condition. So no, you can’t deduct the cost of fixing a leak or patching a roof.
3. Energy Credits
Speaking of updates, the government also likes to reward taxpayers who make energy-efficient improvements to their homes. In fact, the IRS offers a credit of 30% for taxpayer expenditures that include solar hot-water heaters, wind energy and geothermal heat pumps. Think of it as saving the planet and padding your wallet at the same time.
2. A Home Office
These days, freelancing and working remotely are more than just a pipe dream for some Americans. Luckily, the IRS lets you deduct certain expenses related to your in-home business, including rent, utilities and repairs.
Not every home office is eligible, though. Your home office must be your primary workspace, and the spot must not serve dual a purpose in your home; it can’t also be a guest room.
After deciding on eligibility, choose either the simplified or regular method to determine your deductions. Rather than painstakingly recording and calculating your expenditures, try simplifying things by using a standard deduction of $5 per square foot of home used for business (with a maximum of 300 square feet).
1. Home Equity Loans
Similar to the mortgage interest breaks discussed earlier, homeowners can also receive a tax break on home equity loan interest. Did you take out a loan to consolidate debt, make home repairs or buy a car? Maybe you needed a better solution to pay your college tuition. As long as that debt, the car or your schooling is less than $100,000, you’re good to go. Note that this deduction only applies to first and second homes.
The waters can get murky when diving into the nitty-gritty of homeowner tax deductions. If you find yourself lost in the sea of IRS stipulations, consider contacting a tax professional who will ensure accurate filing and the biggest return. Whether you file on your own or hire a pro, make sure it gets done correctly. Appreciating a big tax return feels a whole lot sweeter when sitting on the back porch of your own home rather than in the audit hot seat.
Sometime in my mid-twenties, I decided I wanted to stay in the Maryland area and buy a home.
I could afford a mortgage around $1,500 per month based on my expenses—mostly student loan payments—and salary. If I found the perfect home, I could stretch to afford around $1,750 per month.
As I searched for my future home, I played a financial game with myself. I’d soon be saddled with a $1,500 mortgage, so why not spend like I had one already? Why not pay a “pretend mortgage” before my real one so I had a better idea of what it would feel like?
When I was looking for a home, I was sharing a two-bedroom apartment with a friend and paying $600 a month, plus utilities. It was a steep jump to go from $600 to $1,500 a month, so playing this game was important.
I could maintain one of my key money ratios, paying less than 30% of my salary to housing. But I still needed to know how it felt. It’s one thing to see it in an app and another to feel it.
How ‘Playing House’ Worked for Me
Every month, I paid my $600 for rent and set aside $900 in savings. As you’d expect, I didn’t just transfer money from one account to the other, because who has $900 sitting around? If I did, I wouldn’t need to play house!
I had to make adjustments. I contacted my human resources representative to reduce my 401K contributions so I’d have more in my paycheck. I had to adjust my other savings goals as well because I wouldn’t be saving as aggressively.
I also started going out to dinner and bars less often. Instead of going out for drinks a few times a week, I limited myself to two nights, on the weekends.
Making those trade-offs became easier — and easier to explain to friends without having to deal with grumbling, because I was making a clear choice. I was cutting some social time because I wanted to buy a house. I wasn’t saving money for the sake of it. I had a very good reason: to buy a house.
The housing search took about 18 months and I played house for only 12 of them, so I had an extra $10,000 or so saved up in my mortgage account. I took that money and put it toward the down payment.
The house ended up having a mortgage that was a little less than $1,500, and after living with the mortgage payment for a year and a half, I had no trouble adjusting to it.
If you’re thinking about buying a home or making a similar large purchase, consider playing house first.
Most people will say you need to have excellent credit and a big down payment in order to secure a large mortgage. The reality is that while having a big chunk of cash to put down on a house is nice, it is not always an absolute requirement. Here’s what you should know if you are looking to take on a large mortgage.
Can I Get a Large Mortgage With a Low Down Payment?
It depends on where you live and how large we’re talking. Any Federal Housing Administration or FHA loan up to the maximum county loan limit can qualify for only 3.5% equity in down payment. Bonus: Back in December 2016, the FHA approved higher loan limits beginning in January 2017 for many counties across the country.
Another program known for having low down payment requirements are VA loans. VA loans are available to veterans, active duty service members, National Guard members and reservists who meet the requirements of the Department of Veterans Affairs and have acquired a Certificate of Eligibility from the VA or their lending office. VA loans will also go up to the maximum county loan limit and can even go up to or over $1 million in home values.
The idea that you need a big down payment in order to secure a larger mortgage is simply not true. FHA loans do require mortgage insurance premiums, and VA loans have a guarantee fee, which will increase your closing costs. However, your down payment will remain minimal.
What’s a Jumbo Mortgage?
Jumbo loans exceed the maximum county loan limits and are not bought and sold every day to Fannie Mae and Freddie Mac. That said, jumbo loans do require significantly higher credit scores, typically 700 or above, and at least 10% equity in down payment. Keep in mind that any loan with less than 20% equity in the property will be subject to private mortgage insurance. (Not sure where your credit stands? You can view two of your credit scores, with updates every 14 days, for free on Credit.com.)
Jumbo mortgage requirements are particularly relevant for those looking to buy a home in high-cost areas. For example, in California’s Sonoma, Marin, San Francisco, and Alameda counties, the maximum loan limit ranges anywhere from $595,000 to $729,500, but there are home that easily go for well over that.
How Can I Put Together a Down Payment?
Acceptable sources of down payment funds can include:
Gift funds from a relative
Selling of personal property that can be documented and supported by third-party value pricing (i.e. Kelly Blue Book for a car sale)
Withdrawals from retirement funds
Remember, you cannot use your income as a form of assets. Banks want to see that you have the ability to save money up on your own. For example, you cannot use money from your paycheck that you deposited five minutes ago as a down payment because the funds are not considered “seasoned.” In order for these funds to be considered, they must have been in your accounts for at least 60 days to show the money was “saved.”
As always, if you are looking to buy a house, be sure to do some research beforehand. Figure out how much cash you really have by working with a lender and seeing what you qualify for now. Be sure, too, to carefully research how much house you can actually afford — and what a comfortable monthly mortgage payment would be. Also, work with that lender to develop a savings plan so you can qualify for your first mortgage or improve your current mortgage and financial situation.
In 2005, Randy Moss, then a wide receiver for the Minnesota Vikings, pretended to moon Packers fans after scoring a touchdown. The NFL fined him $10,000. Asked by a reporter how he would pay, Moss responded succinctly: “Straight cash, homey.”
While cash purchases have dropped since the housing market bottomed out in 2012, many areas are still dominated by buyers taking the Moss approach when buying a home. According to data published by ATTOM Data Solutions (formerly RealtyTrac), at least 45% of the sales made in 17 metro areas were conducted using cash in 2016.
Cash sales are common in Florida, where retirees use the proceeds from sales in their home markets to buy retirement properties. But in other places, the prevalence of cash sales is driven largely by institutional investors, which ATTOM defines as any entity that buys at least 10 properties in a year, said Daren Blomquist, senior vice president for the property data company. In Binghamton, New York, where nearly 70% of home sales in 2016 were made in cash, the rise of such purchases over the past three years mirrors a rise in institutional investor sales.
The following are the 17 metro areas where cash sales were most common in 2016. (A note about the data: Some states are not required to disclose property sale information publicly, so there’s no cash-sale data for Alaska, Indiana, Louisiana, Missouri, New Mexico, Texas or Utah. Percentage denotes portion of total home sales that were made in cash.)
Cape Coral-Fort Myers, Florida: 45%
Huntington-Ashland, West Virginia, Kentucky, Ohio: 45.7%
Trenton, New Jersey: 46%
North Port-Sarasota-Bradenton, Florida: 47.2%
Fort Smith, Arkansas, Oklahoma: 47.6%
Ocala, Florida: 47.7%
Urban Honolulu, Hawaii: 47.7%
Atlantic City-Hammonton, New Jersey: 48.3%
Reading, Pennsylvania: 48.4%
Miami-Fort Lauderdale-West Palm Beach, Florida: 48.8%
Raleigh, North Carolina: 50.1%
Naples-Immokalee-Marco Island, Florida: 52.4%
Montgomery, Alabama: 52.5%
Macon, Georgia: 52.5%
Syracuse, New York: 58.4%
Buffalo-Cheektowaga-Niagara Falls, New York: 63.6%
Binghamton, New York: 69.4%
Who’s Got All That Cash?
Institutional investors — mostly big banks — gobbled up lots of houses after the recession in big markets like Phoenix and Atlanta, but smaller copycats, operating in smaller markets, adopted the practice in recent years. These mid-tier investors usually seek homes priced around $150,000 or less, Blomquist said.
“They’re looking typically for starter homes they can rent out to people who would otherwise be first-time home buyers,” he said.
Recently, a number of web-based companies that allow individuals to buy, rehabilitate and rent properties remotely have sprung up, Blomquist said. These companies, like, for example, HomeUnion, Investability and Roofstock, typically pay cash for properties as well.
Institutional buyers can squeeze out regular folks looking to buy homes for themselves, but there’s good news for these people. Blomquist expects the practice to become less prevalent as banks become more willing to finance purchases. A drop in distressed sales, which in many states must be conducted in cash, should also contribute to a decline in cash purchases.
In order to buy a home, you need to have a balance of good credit, manageable debt, stable income, and sufficient savings. Maintaining a balance between these four categories is challenging enough on its own, never mind coming up with enough cash to close on your potential new home.
If you’re worried about the credit part, you can see what you can potentially do to improve by viewing your free credit report summary, updated every 14 days, on Credit.com. And, if cash flow is your issue, here are some ways you can find extra money for a down payment.
1. Move in With Family
Having a nearby family member that will let you move in for a little while is a great way to save money on rent. It’s nice to live alone, but saving that $2,500 per month is a financial home run. In exchange for a little less privacy, you can start saving big money in a shorter amount of time than you would have by continuing to pay $2,500 per month. This can yield huge dividends for you in the future and could be the means of collecting the down payment for your new home.
2. Retirement Funds
Did you know that some retirement accounts let you draw from your reserves early in order to pay for your first home? Every retirement account is different, so it is a good idea to contact your human resources department to review your 401K, or a bank/financial adviser to review the terms of withdrawal from your investment account. In most cases, if it is a first home (i.e., you have not owned a home in the last three years), you can borrow from yourself to finance your down payment or cash to close. There can be tax penalties for withdrawing early, so be sure to review your terms.
3. Cash-Out Refinance
If you already own a home, it might be worth considering a cash-out refinance on your current home in order to pay for another one. Fannie Mae and Freddie Mac have recently taken kindly to this approach by changing the equity position in a departure residence to purchase a new primary home. Completing a cash-out refinance on your current home to purchase another is a form of leveraged debt and will allow you to purchase with a stronger offer. Just be sure this makes sense for your finances before you apply.
4. Sell a Home
In a similar scenario, by already owning a home with equity, you can sell your home in order to buy another one. For example, if you have $150,000 of equity in your current home, you can sell and use that equity as a down payment to acquire another. The challenging aspect of this is that these scenarios are contingent upon one house selling. If the buyer backs out of the deal, your ability to secure the house you are in contract for will be at risk.
This method should be approached with caution and only with a real estate agent who can walk you through the ins and outs. Education is key to a successful dual transaction like this.
5. Sell Personal Property
As much as we like our things, it is nice to have a roof over our heads we can call our own. If you have any toys or big-ticket items like a boat, motorcycle or novelty, those can be sold to generate cash for buying a home. In order to use these funds, you need to keep all documentation while selling the item. If you do not have supporting documentation, the cash cannot be used.
If you are looking to see what it takes to buy a home, we recommend talking to an experienced licensed mortgage professional. If you do not have the necessary means to acquire cash quickly or efficiently, talk to your mortgage professional about programs that require little to no down payments or lenders who have down payment assistance available. And, of course, be sure to determine how much home you can comfortably afford (more on how to do that here).
Spring will very soon have sprung — which means “For Sale” signs will be in full bloom — and if you’re hoping to buy a home this year, get ready for a competitive market. Thanks to the Federal Reserve’s continuing rate hike teases and some economic improvements, you can expect to run into plenty of other people while looking at prospective properties.
Fortunately, there are steps you can take now to help make sure your offer on a new home is as competitive as this year’s hot market. Here are 50 ways soon-to-be house hunters can get ready for the homebuying season.
1. Make a Wish List
“You’ll waste a lot of time if you don’t know what you want,” Brian Davis, director of education for Spark Rental, says. “Know how many bedrooms you need, which amenities are must-have, and which are desired but not mandatory. Most of all, know your price range and stick to it.”
2. Consult Your Co-Buyer
If you’re purchasing the home with a loved one “make sure you both are on the same page,” Patrick Gobin, associate broker with District Realty Team at New York Living Solutions, says. “Conflicting opinions makes the process very difficult. Example: One person wants a ranch and one person wants a two-story house.”
3. Determine Your Debt-to-Income Ratio (DTI)
Here’s how. Remember, a DTI (how much you make vs. how much debt you’re already paying off each month) over 50% or more will severely limit your ability to borrow.
4. Check Your Credit Score
Because it’s going to play a major role in whether you can actually get a mortgage and what rate you’ll pay. You can view two of your credit scores, updated every 14 days, for free on Credit.com. (P.S. If you have a co-buyer who’ll be on the mortgage, they’ll want to check their credit, too.)
5. Pull Your Credit Reports
There may be a few things you can do to clean up your credit before you apply for a mortgage. Plus, you’ll want to make sure there aren’t any errors weighing your scores down. Speaking of which …
A 20% down payment is considered ideal, since any amount below that will have you paying for private mortgage insurance (PMI). There are programs out there that help homeowners get a mortgage with much less down, which brings us to …
10. Know Your Loan Programs
Most homebuyers have two options: a conventional home loan bought and sold by Fannie Mae and Freddie Mac or an FHA loan insured by the Federal Housing Administration. Veterans can also consider VA loans, which notably feature a 0% down payment.
11. Research Rates
Your interest rate is going to play a big role in determining your monthly payment, so be sure you know what current rate ranges are being offered — and what you’re likely to qualify for, based on your credit.
12. Prepare for Property Taxes
Yup, you’ll have to pay the government each year for your land — and you’ll want to get an estimate of how much money you’re likely to owe, since it will seriously affect your housing budget. You can find a full explainer on property taxes here.
13. Account for Closing Costs
They generally run between 3% and 5% of your purchase price, depending on location and other factors.
14. Feed Your Emergency Fund
Because buying a home is going to put a serious drain on your bank accounts and you don’t want to be down to your last dollar. Experts generally recommend you have at least six to 12 months of income as backup reserves.
15. Figure Out How Much Home You Can Afford
This will be affected by your DTI, credit scores, prospective interest rate, down payment, property taxes and whether you’ll be paying for private mortgage insurance, among other things. (More tips here for how to get a rough estimate on how much home you can comfortably buy.)
16. File Your Taxes
Your mortgage lender is going to ask for at least two years’ worth of tax returns, so it’s a good idea to shore up with Uncle Sam — and print out or download your returns from two prior years.
17. Pick a Neighborhood
“Location is one of the most important factors when finding a home,” David Lewis, owner of full-service real estate agency The Lewis Group, says. “It’s also the only one that you can’t change. Knowing what areas you’d like to live in prepares you to make the jump when it is time to move forward with an offer.”
18. Study the Market …
You’ll want to know what you’re in for: What’s the median home price in the area you’re looking to live? Are you in a buyer’s or seller’s market? Are solid homes going for more or less than list price?
19. … & the Process
Oh, if only the homebuying process were so simple. Unfortunately, there are a whole lot of steps between finding a home and closing on it. Get familiar with all the major steps: pre-approval, home inspection, home appraisal, title search, closing, etc.
20. Hit the Open Houses
A little window-shopping can do a house hunter good. Visit some open houses ahead of your formal search to get an idea of list prices in your preferred area(s) — and whether your list of “wants” is realistic with your budget.
21. Get a Pair of Flip-Flops…
…or some other kind of easily removed shoes, because most homeowners or listing agents are going to ask you to leave your kicks at the front door.
22. Search for Schools
“If you have kids, carefully examine the school choices and districts available to you,” William Mayben, CEO of consulting firm Wm Mayben and Associates and former division president for National Public Builders, says. There are sites online that can help you pinpoint school ratings, crime rates, etc.
23. Calculate Your Potential Commute
The length of your commute can seriously impact the enjoyment of your home. How much time are you realistically willing to spend in the car, on the bus or on a train?
24. Find a Realtor
You don’t have to use one, but there are certainly benefits to enlisting the services of a reputable Realtor or agent. Case in point: They can give you insights into the current market and walk you through the homebuying process. Bonus: The seller pays their commission.
25. Consider a Specialist
“If buyers are looking for ranches in the Stoney Gardens neighborhood, they should find a realtor who specializes in (drum roll please…) ranches in the Stoney Gardens neighborhood,” Davis says. “The best Realtors know a specific segment of the market inside and out, and can help borrowers who want that specific market segment.”
26. Vet Mortgage Lenders
Similarly, you’ll want to research reputable mortgage lenders or brokers in your area to determine who you’re comfortable doing business with.
27. Request Recommendations
For Realtors, mortgage lenders and other members of the homebuying team you’ll need to onboard.
28. Get Pre-Approved
Once your credit is as good as it’s going to get and you’re ready to start your search, be sure toget pre-approved for a mortgage. That’ll signal to a seller and/or Realtor you’re a serious buyer worthy of their consideration.
Just be sure to do so in a 30- to 45-day window, since that’s how long most credit scoring models will group applications for like-financing (in this case, mortgages) as one inquiry.
30. Ready Your Bank Statements
Because your lender is going to ask for them. Note: You’ll probably be expected to turn over brokerage or retirement account statements for at least the last two or three months as well.
31. Request Your Pay Stubs
Most of us direct deposit, but your lender is going to ask for at least two months worth of pay stubs. So, if you’ve been setting and forgetting, now’s the time to track down where to access your paycheck details.
32. Think About What Other Paperwork You’ll Need
Getting some gift money? You’ll have to document it.Just got a new job? Be prepared to turn over more employment verification. Ask your mortgage lender for a full list of all the major paperwork needed to get your loan fully approved.
33. Find an Attorney …
Some states mandate a real estate attorney prepare your purchase contract — and, even if yours doesn’t, it can be a good idea to bring one on board. Be sure to research reputable real estate attorneys in your area and get an idea of what they’ll charge you.
34. … & an Inspector
Yes, the bank is going to do the appraisal, but the buyer is responsible for the home inspection. You’ll need to find a certified, licensed professional and cover their bill.
35. Learn What to Look for …
It’s not just about your wants and needs. When viewing a potential home, you’ll want to, among other things, check out the furnace, hot water heater, roof, plumbing, windows, insulation, HVAC systems, basement, closets and that old shed all the way at the other end of the yard.
36. … & What to Ask
Per our partner Realtor.com, you’ll want to ask about the home’s sales history, any renovations the seller has done, monthly maintenance and utility costs and other things.
37. Brush Up on Your (Offer) Letter Writing Skills …
Because in some markets you’ll want to write one to the seller when you make your bid. And, yes, while price is most important, a solid offer letter can be the difference between getting or losing out on your dream home. Good offer letters are generally personal, specific and positive.
38 … & Your Negotiation Tactics
They’ll certainly come in handy.
39. Keep Those Credit Cards on Ice …
Big changes to your debt levels can damage your DTI and your credit score — and your lender will check up on those items before closing. That’s why you’ll want to be extra careful about what you’re putting on your plastic.
40. … & Cool the Credit Inquiries
Those can also ding your score and jeopardize your mortgage. So, sure, that Home Depot credit card could come in handy — but it’s a good idea to wait at least until after you close to take the retailer up on their offer (and then be sure your finances can handle it).
41. Determine Your DIY IQ
“Assess your abilities as a handyman or handywoman,” Gobin says. “Buying a fixer-upper can be very expensive if you can’t even change a light bulb.”
42. Get a Work Estimate
If you are looking at a fixer-upper or find a home that has all your major needs, minus one (say it’s missing hardwood floors), research what a particular project is likely to cost you. That’ll help you establish the true cost of the prospective home.
43. Think About Resale Value
Even if you’re looking for your forever home, because, well, life happens. That’s why it’s good to at least consider what you’d have to sell the home for in order to recoup what you’re offering to pay. (Remember, too, when you go to sell, you’ll be the one paying a Realtor’s commission.)
44. Scout it All Out
“Visit your target house during different times of day,” Mayben says. “Pay attention to neighbors’ dogs, traffic, parking, the neighborhood feel and culture. Where are parks, shopping, bike or hike trails, coffee shops, etc.?” Asking neighbors about noise and other possible pain points can also pay off.
45. Map Out Your Move …
Research moving companies — and the costs associated with them — to assess whether your cash reserves are adequate.
46. … But Hold Off on the Home Furnishings
Especially if you’re planning to put those on a credit card. The last thing you want is those big balances throwing a monkey wrench into your credit — and your closing date.
47. Start Staging Your Current Home
“If you have to sell in order to buy, start working on that end of the deal,” Mayben says. “Maximizing the sell price maximizes the replacement price. Declutter your home for sale. Sell, donate, or otherwise get rid of things you don’t need. Develop a clear sense of your house value.”
48. Get Ready to Compromise …
“Keep in mind the perfect home doesn’t exist unless you build it yourself,” Gobin says.
49. … & Be Disappointed
Because you may not get the first, second or even third home you bid on. “Multiple offers are very common these days,” Dorothy Mazeau, sales representative at Royal LePage RCR Realty, says. “You may be competing with one, two, or even twenty other buyers. Houses frequently sell for thousands over their list price.”
50. Stay the Course
Still, don’t get discouraged and/or recklessly ramp up your budget. “Know what you can afford and stick to it,” Mazeau says.