Category: Buying a Home

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What Is an FHA 203(k) Loan?

What Is an FHA 203(k) Loan

If you want to purchase and restore a fixer-upper, this loan might be the ideal choice.

These loans have more lenient down payment and credit score requirements than most conventional loans.

Key Takeaways

    • FHA 203(k) loans are a unique home loan option that allows you to borrow funds for both your home purchase and renovations.
    • Because FHA 203(k) loans are government-backed, they can be easier to qualify for than conventional loans.
    • These loans are designed for more significant costs like structural repairs or major remodels, rather than minor updates.

If you’re looking to buy a home that needs a lot of work, you might be able to get it for a discounted price. However, the short- and long-term repair costs could still end up breaking your budget.

That’s why a Federal Housing Administration 203(k) loan might be something to consider. It allows you to combine home purchase and renovation costs all in one loan. After completing the renovations, you’ll have created instant equity based on the increased value.

Although fewer lenders offer government-backed loans – because of the added oversight and paperwork – here is a look at how these loans operate and why it might be worth the extra legwork to find one.

How Does a 203(k) Loan Work?

The loans, which are officially called 203(k) Rehabilitation Mortgage Insurance, allow homebuyers to finance the cost of the purchase plus the renovations in one loan, or for homeowners to finance the rehabilitation of their current home.

The loans can be especially attractive to first-time homebuyers because the credit score and down payment requirements are more lenient than for most conventional loans. If you have a credit score of more than 580, you can finance up to 96.5% of the purchase and renovation. If your score is in between 500 and 579, your down payment would have to be at least 10%.

Also, if the home needs some work before the homebuyers can move in, the loan gives them a chance to “customize and personalize their home the way they want it,” says Brad Smith, senior vice president and director of renovation lending at CrossCountry Mortgage.

There are two types of 203(k) loans:

    • Limited. The loan allows up to $75,000 in financing for nonstructural repairs and upgrades, and there is no minimum amount you have to borrow. The money can be used toward property repairs or to prepare the home for sale. Examples of upgrades would include a kitchen remodel or new carpeting. You won’t be able to do a major renovation with this loan. The rehabilitation period for the limited program is nine months.
    • Standard. A wider range of remodeling options is possible with this loan, including structural repairs. It requires a minimum loan of $5,000 and must also involve a 203(k) consultant who will work with the lender and borrower. There is no specific dollar limit on the loan, but the combined home purchase and renovation loan cannot exceed the FHA mortgage limit for the area. The standard program has a longer rehabilitation period of 12 months.

Limited 203(k) Loan

Standard 203(k) Loan
Loan Limit $75,000 None
Type of Renovation Non-structural renovations Major renovations
Rehabilitation Period Nine months 12 months
Consultant Required No Yes

With a standard 203(k) loan, part of the loan goes to pay the home’s seller, and the rest is kept in an escrow account to pay for the repairs.

Who Qualifies For an FHA 203(k) Loan?

Qualifying for an FHA 203(k) loan is similar to getting any other mortgage, though it might be easier since it is a government-backed loan. Like other FHA loans, 203(k) loans have lower credit score and down payment requirements.

“FHA loans can be approved with credit scores as low as 500, but some lenders may have higher qualifications,” explains Will Doty, certified financial planner and executive advisor at Modern Wealth Management. Other factors, such as your debt-to-income ratio, will also be considered.

Even if you qualify for an FHA 203(k) loan based on your creditworthiness, you’ll have to follow specific criteria when it comes to the renovation projects you plan to use funds for and have a certified inspector review the property if you choose the standard option.

What Projects Can a 203(k) Loan Be Used For?

According to Mason Whitehead, branch manager with Churchill Mortgage, FHA 203(k) loans are best used for more extensive renovations rather than small updates.

“I typically only recommend these loans in cases where significant renovations/remodeling is needed because there are higher fees and rates involved,” Whitehead says. “So this is not a project you want to use if you just need to do some paint and carpet updates.”

The types of work that could be done with a 203(k) loan include:

    • Addressing health and safety issues
    • Putting on a new roof, gutters, and downspouts, or adding to them
    • Replacing floors
    • Making structural changes or reconstructing parts of the house
    • Allowing for better access for a person with a disability
    • Improving energy conservation
    • Landscape work
    • Home modernization and appearance improvements

“If the repairs are minor and not health/safety issues or things that an appraiser will notate as deferred maintenance, then I suggest you just save and budget for those repairs after you close on the house,” Whitehead adds.

How to Get a 203(k) Loan

If you’re interested in a 203(k) loan, your first step will be to find a lender who offers one. Not every lender offers FHA loans, or, if it does, the lender might not provide the 203(k) option.

Check the Department of Housing and Urban Development lender search, which will give you a list of all lenders who have offered a 203(k) in the last year.

You will work with the lender on the next few steps, as you review what needs to be renovated on the house and determine the size of the loan and scope of the project.

Conduct Inspections

Inspections are vital for homes purchased with a 203(k) loan because you have to identify the necessary health and safety upgrades as well as other updates that you would like to make. If you’re pursuing a standard 203(k) loan, you’ll need to bring on a HUD-certified consultant to ensure FHA standards are met. Consultants are optional for the limited program. For both programs, however, you can finance consultant fees in your mortgage.

“The ideal process is to include that HUD consultant to conduct the upfront inspection on the property to identify all the repair items,” Smith says.

A certified consultant’s duties include visiting the home, detailing the work that needs to be done, and performing inspections.

The inspection is key to itemizing all the home repairs needed because “you only have one chance to do it right,” Smith says. You can’t add money for additional repairs once the initial financing is done. If you have to reallocate project funds to pay for a health and safety issue identified once the renovation has started, it could take away funds for something else, such as a bathroom upgrade, he adds.

Get an Estimate and Hire a Contractor

Use the consultant’s report to get bids from contractors, Smith says. You’ll usually hire a general contractor who can work with as many subcontractors as needed to complete the work, or you can hire individual specialty contractors such as a roofer, plumber, and electrician.

“You need to hire somebody who understands the type of renovations you’re looking to do and has done those in the past,” says Ron Haynie, senior vice president of mortgage finance policy for the Independent Community Bankers of America.

Conduct an Appraisal

Once you have defined the scope of the renovations, the lender will hire an FHA-approved appraiser who will estimate the home value based on completion of all repairs and upgrades. The value will be either the property’s value before rehabilitation plus the cost of the renovation or 110% of the appraised value after the upgrade – whichever is less.

An appraisal that is much higher than the current value of the home indicates that the repairs will pay off for the homeowner. If you buy a home that needs a lot of work in a neighborhood that has excellent homes and make the necessary repairs, you can create some equity for yourself after closing, Smith says.

Once the value is set, the money reserved for the renovations is set up in the borrower’s name in a custodial bank, Smith says. Disbursements to the contractor are made as work is completed and inspected. The amount will also include a contingency reserve, which could be about 10%.

Set Aside Funds For Additional Problems

“When you go into it, you’re thinking one thing,” says Haynie. “As the project progresses, it will change, and you need to be prepared for that. That might mean you need to have more reserves on hand.”

If the work on the home is so extensive that you can’t live in it during renovations, you’ll be able to finance up to six months of mortgage payments so you won’t have to pay for your current home and the new one at the same time, Haynie says.

Refinancing With an FHA 203(k) Loan

FHA 203(k) loans can also be used to refinance your home and make renovations, in addition to new home purchases. The process is largely the same, with the same qualifications for limited or standard 203(k) loans.

Rather than some cash being used to pay the home’s seller, it will be used to pay your existing mortgage. The remainder is similarly kept in escrow to pay for repairs as they are completed.

Pros and Cons of 203(k) Loans

Pros

    • FHA loans, including 203(k) loans, are particularly attractive for first-time homebuyers thanks to their more relaxed credit score and down payment requirements.

    • FHA loans sometimes have lower closing costs than traditional mortgages.

    • FHA 203(k) loans allow you to access funds for repairs rather than have to take out an additional loan.

Cons

    • For most FHA-insured mortgages, you’ll need to pay a one-time upfront mortgage insurance premium and an annual insurance premium that’s collected in monthly installments.

    • An FHA 203(k) loan can only be used for a primary residence.

    • You must work with a HUD-certified inspector and FHA-approved appraiser during the renovation process.

Alternatives to an FHA 203(k) Loan

If you’re a first-time homebuyer, you might be caught up in visions of HGTV-like renovations for the home you plan to buy, but it could be overwhelming to move into your new home while dealing with a major reconstruction project.

“Anybody who does any kind of renovation in their home quickly realizes the project grows beyond what you thought it was going to be,” says Haynie. “When you start tearing down walls, you’re going to find all kinds of stuff that changes your original plan.”

One option some lenders would prefer to a 203(k) loan is a separate, dedicated construction loan to fund renovations. For example, community banks do a lot of construction lending and might keep the loan in their portfolio, which gives the borrower more flexibility, Haynie says.

A separate construction loan also allows the homeowner to avoid FHA rules – which include the payment of home mortgage insurance during the loan. Because you won’t need to start renovations right away, you’ll get time in the home to figure out what you really want to change.

A standard refinancing is another option for homeowners who want to pay for a major renovation, rather than a 203(k) refinance. A bank could arrange a cash-out refinance with the homeowners and help them manage the process of paying for the project, Haynie says.

Homeowners who don’t want to refinance could:

    • Tap home equity. Take out a home equity loan or get a home equity line of credit. If you have enough equity in your home, this could be an ideal option because of current low interest rates. The interest might also be tax-deductible.
    • Consider a personal loan. The interest rates are generally higher on unsecured personal loans than home equity loans, but it’s a good option if you don’t have enough home equity but can handle the monthly payments.

Whether you’re a prospective or current homeowner, you might find a major renovation to be too expensive. With many homeowners deciding to expand their current homes to get extra space for offices and other needs, the price for workers and materials is going up, Haynie says. The best option might be to buy a home that has everything you want already.

“Look at all your options,” says Haynie. “Ask yourself: ‘What is it I really need to get out of this renovation, and is it worth it?'”

Source: money.usnews.com  ~ By: Bob Musinski ~ Image: Canva Pro

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What Is Real Estate? A Definition And A Guide

What Is Real Estate? A Definition And A Guide

Interested in buying a home so you no longer have to send rent checks to your landlord each month? This thought isn’t surprising: real estate is attractive to both investors and those who want to swap renting for owning.

But while real estate is an attractive alternative or addition to stocks, bonds and mutual funds, it does come with risks and challenges.

Here’s a look at how real estate works, what makes it an attractive investment and the steps and research you need to take whether you’re buying a home for you and your family or making an investment to boost your bottom line.

Real Estate Definition

When you boil it down to the basics, real estate has a simple meaning. It’s a piece of land and the property – such as a house, office building, apartment, strip center or warehouse – that sits on it. These structures can be both above and under the ground. For instance, if you own a strip center with an underground parking lot, that parking lot would be part of your property.

Real Property Definition

If you’re buying real estate, you should also understand what the term real property means. Real property is the land and any structures affixed to it that are factored into the value of the property. For instance, if you own a home, its garage would be considered part of its real property. A movable picnic table in your backyard, though, wouldn’t. Real property also gives you the right to use your property, including selling it or leasing out space in it, as you wish.

Multiple types of real estate are available – whether you’re buying a home for yourself or to rent out to others. No matter what type of real estate you purchase, the hope is that it appreciates with time so that when you do sell, you earn a profit. Be careful, though: While real estate can be a sound investment over time, appreciation isn’t always guaranteed.

Residential Real Estate

As its name suggests, residential real estate is any type of real estate where people can live, including single-family homes, townhouses, condominiums and multifamily homes.

Many people purchase residential real estate as a place to live. But you can treat residential real estate as an investment, too. You might buy a single-family home, renovate it and then sell it for a higher price. You can also buy a single-family home and rent it to tenants, collecting monthly payments to pay off the mortgage.

Even if you buy residential real estate primarily as a place to live, your home might still turn out to be a solid investment if it’s worth more when you sell than when you purchased it.

Commercial Real Estate

Commercial real estate is any property that provides a business service and isn’t used as a living space. This kind of property includes everything from office buildings and shopping malls to restaurants, clothing stores, movie theaters, gyms and gas stations.

You can earn money by holding onto the commercial property until it increases in value, then selling for a profit. Or you can earn money by leasing space in your property to business tenants. For example, if you owned a retail strip center, you’d charge that pizza restaurant monthly rent to lease space in it. If you owned an office building, you’d charge companies to lease space in the building.

You can also use commercial real estate as a home base for your own business. You might own an office storefront if you run an insurance business, for example.

Land

You can also buy land, which can be defined as real estate that has no buildings or structures on it. If you purchase land, you can then develop or build whatever you want on it, as long as you follow the local zoning codes and regulations for that lot.

Industrial Real Estate

Industrial real estate is any structure or piece of land primarily used for manufacturing facilities, warehouses, distribution centers and factories. This type of real estate can be pricey, but it’s also valuable.

As people spend more time shopping online, and as they expect the products they buy to show up at their doors in less time, the demand for industrial real estate has only grown. This makes this property type especially valuable since the odds of it appreciating in value are high.

Make Your Offer Stand Out!

If you’re ready to buy real estate – whether as a primary residence or an investment – it’s important to understand the basics of how this business works from start to finish.

Development And Construction

New buildings – everything from homes and office buildings to apartment towers, distribution centers and shopping malls – get their start during the development and construction phase of real estate. This is when development companies, municipal officials, architects, contractors, engineers and builders work together to create a new real estate project.

If you want to buy a home, it’s usually easier to purchase one already built. Buying land and building a new home on the site, though, can leave you with a home that more closely meets your housing needs. After all, you can tell your architects and builders exactly what you want.

Working With Brokerages And Real Estate Agents

You can purchase or sell real estate on your own. But navigating this process – finding the right property, qualifying potential buyers, signing documents and handling negotiations – can be time-consuming and confusing. So, this is where real estate brokerages, real estate agents and REALTORSⓇ come in.

Real Estate Agents And REALTORS®

Real estate agents are professionals who work with both buyers and sellers. Real estate agents who are members of the National Association of REALTORSⓇ are known as REALTORSⓇ.

Real estate agents help market properties, handle the buyer and seller negotiations and make sure all the right paperwork is signed during a real estate transaction. They don’t do this for free; they usually get paid a percentage of a property’s sale.

Real Estate Brokers

All real estate agents must work under a real estate broker. A real estate broker holds a real estate license and has extensive knowledge of the real estate industry. The term “brokerage” and “broker” often get confused with one another, but a broker is a real estate professional, and a brokerage is a real estate firm.

Property Management

If you buy real estate as an investment, you might opt to pay for a property management service. As the name suggests, such services manage rental properties that you purchase but don’t live in. They handle everything from maintenance and rent collection to emergency calls from renters at 2 a.m.

Let’s say you own an apartment complex in another state. You might hire a property management company to handle the maintenance of that property. This company would hire a landscaping service, cleaning service and security service. Your property management company might also screen potential tenants, market units when they come up for rent, and handle evictions if tenants stop paying their monthly rent. If a renter’s furnace conks out, one of your property managers would take the call and send out a repair service.

Working With Mortgage Lenders

Few people can purchase real estate with cash. Most people will have to take out a mortgage loan. This is where mortgage lenders come in.

If you want to buy a single-family home for a primary residence but lack the cash to make this purchase, you’ll work with a mortgage lender. You’ll provide this lender with income-verifying documents such as your most recent paycheck stubs, bank account statements and tax returns. Your mortgage lender will also check your three-digit credit score and your three credit reports, all to make sure you can pay back the money you borrow.

If you’re approved for a loan, your lender will pay the sellers of the property you’re buying. You then pay back your lender every month with a mortgage payment. You’ll have to pay interest on these payments, which is how lenders make a profit.

Lenders don’t originate loans for free but charge a range of fees to close your mortgage loan. Fees vary, but you can expect to pay 3% – 6% of your home’s purchase price in closing costs. On a home costing $200,000, then, you may expect to pay $6,000 – $12,000 in closing costs.

Investing In Real Estate

Ready to tackle real estate investing? Be prepared to do your research.

The key to maximizing your real estate investment is to study your local market. If you want to purchase a single-family home, for instance, you should study housing market indicators such as the median sales price of homes in your neighborhood, how long it takes homes to sell and whether home values are on the rise.

The same is true if you want to invest in commercial real estate such as a warehouse, office building or strip mall. You’ll need to research how much other owners are charging tenants for rents, how much traffic pours through retail areas and how high the vacancy rates are for neighboring office buildings or strip centers.

The more research you do, the better your odds of investing in a property that’ll increase in value over time and bring in a steady stream of rental income.

Ways To Invest In Real Estate

Of course, you can employ different strategies for investing in real estate. Let’s take a look at a few:

House Flipping

When some investors purchase single-family homes for a low price, they then flip these properties and sell them for a higher price. The key is to purchase a home for a low enough price and avoid overspending on improvements so you make a solid profit when you sell.

Rental Properties

You can buy a rental property and rent out apartment buildings, single-family homes, condo buildings and commercial properties. Your monthly rent collections might cover part or all of your mortgage payment, offsetting the costs of holding onto real estate while you wait for its value to rise. If you collect enough rent, you might make a monthly profit without having to sell your investment.

REITs

Buying into REITs – real estate investment trusts – is an easier way to invest in real estate. REITs are companies that own real estate, both residential and commercial. When you buy into a REIT, you purchase a share of these properties. It’s like investing in mutual funds, but instead of stocks and bonds, you’re investing in real estate. You earn money from REITs through regular dividend payments and when the value of a REIT increases. If the value goes up, you’ll earn a profit when you sell.

Real Estate Crowdfunding

In real estate crowdfunding, investors pool their money and then use it to invest in REITs, giving people who might struggle to come up with enough money to invest on their own a chance to invest in real estate.

The Pros And Cons Of Real Estate Investing

It’s easy to look at the advantages of investing when a big payout could be waiting in the end. But before you make an investment, let’s take a look at both the advantages and disadvantages of real estate investing.

The Pros Of Investing In Real Estate

Investing in real estate has plenty of potential advantages. By investing, you can:

  • Expand your investment portfolio
  • Bring in passive income
  • Live in your real estate investment
  • Get tax breaks

The Cons Of Investing In Real Estate

While investing in real estate can prove profitable, it can also:

  • Be expensive to start
  • Require selling property to gain funds
  • Lack guaranteed profits

Real Estate FAQs

Keep reading below for answers to some frequently asked real estate questions.

What is a real estate broker?

As mentioned above, a real estate broker is essentially a step above a traditional real estate agent. They have additional education and have passed the broker license exam, allowing them to employ other real estate agents under their license.

How can I finance a real estate purchase?

Real estate is most often financed through a mortgage. There are many different types of mortgages and lenders, so if you’re thinking about purchasing real estate, be sure to research your options and find the ones that best fit your situation.

What is digital real estate?

Digital real estate is any website or other online asset. This internet property can be bought and sold similarly to traditional real estate.

The Bottom Line

Real estate involves many terms that are important to understand, and investing is one of them. Investing in real estate can be a smart financial move if you understand your market, are willing to take on the risks, and borrow only what you can afford to pay back.

Source: rocketmortgage.com ~ By: Dan Rafter ~ Image: Canva

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These Are the Tax Breaks You Can Get When You Buy a House

Tax Breaks You Can Get When You Buy a House

Buying a home is expensive, but these tax credits and deductions can help you recoup some costs.

Key Takeaways:

  • There are several tax breaks for homebuyers that can help make homeownership more affordable.
  • Tax credits apply to the tax owed, while tax deductions reduce taxable income.
  • Some tax benefits extend beyond the initial purchase of a home.

One of the biggest benefits of homeownership is tax breaks. If you’re a homeowner, tax credits and deductions could save you thousands of dollars per year. But are there tax credits for buying a house? And what about deductions?

To help you come next tax season, here are tax credits and deductions you can get when you buy a house, and additional tax breaks that come with homeownership.

Both tax credits and deductions can help a homeowner save money on their tax bill, but they work differently. “Both lower one’s taxes, but a credit applies to the tax owed, while a deduction applies to one’s income that is subject to tax,” says Asher Rubinstein, partner and tax, asset protection and trusts and estates attorney at Gallet Dreyer & Berkey in New York City. “In other words, it’s a matter of timing and when the tax discount is applied.”

There are also refundable and nonrefundable tax credits. According to the IRS, if your tax bill is less than the refundable credit, then you get the difference back in your refund.

Credits are typically much more valuable than deductions. “For example, someone with a $1,000 tax credit in the 20% tax bracket will see their tax bill reduced by $1,000. Someone with a $1,000 tax deduction will only see $200 in tax savings,” explains Eric Presogna, founder and CEO of One-Up Financial and a certified financial planner public accountant.

There are two types of deductions available to all taxpayers: standard deduction and itemized deduction. If you take the standard deduction, you reduce your taxable income by a set amount. For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. “There is no need for the taxpayer to keep records of individual tax deductions if the taxpayer takes the standard deduction,” Rubinstein says. Itemized deductions are individual tax deductions that could potentially add up to more than the standard deduction.

According to Presogna, homeowners should only take the standard deduction when they don’t have enough itemized deductions to exceed the standard. “With the SALT deduction (state, local, real estate taxes) currently limited to $10,000, a married couple would need more than $19,200 in mortgage interest, charitable donations and other qualifying deductions in order to warrant itemizing,” Presogna says.

The IRS has specific rules regarding how homebuyers qualify for certain tax credits. There are also credits that are only available to first-time buyers. You generally qualify as a first-time homebuyer if you’re purchasing your first home. However, you may still qualify if you’ve not owned a home for three years prior to the date of purchasing the new home for which the credit is claimed, according to the IRS. That home must be your principal residence.

One federal tax credit available to first-time buyers is through the Mortgage Credit Certificate (MCC) program. This program was designed to help lower-income families afford a home. The MCC program allows buyers to claim a dollar-for-dollar tax credit for a portion of the mortgage interest paid per year, up to $2,000. Eligible individuals must be first-time homebuyers, use the house as their primary residence and meet the program’s income and purchase price requirements.

There may also be tax credits available through your state. These buyer programs vary from state to state. You can research what may be available in your local area or look through the U.S. Department of Housing and Urban Development’s directory of local homebuying programs.

There are more tax deductions available to homebuyers and homeowners than there are tax credits, but Presogna says it depends on whether you itemize your deductions or take the standard deduction. Regarding homeownership, “If you have enough deductions to itemize, real estate taxes, home equity loan and mortgage interest are some of the larger deductible costs,” Presogna adds.

Keep in mind that not everything is deductible. According to Rubinstein, most costs associated with homeownership do not qualify for any tax benefits, including cosmetic upgrades, homeowners insurance and your mortgage principal, to name a few.

Here are several tax deductions buyers may qualify for after purchasing a home:

First-time homebuyer savings account (FHSA). Some states offer tax benefits to first-time homebuyers to open an FHSA. This is a specific type of savings account that helps first-time buyers save up to $15,000 or $30,000 per year for a down payment, closing costs and other expenses related to their home purchase. You can deduct the annual savings from your state-taxable income, but limits vary by state.

Mortgage interest deduction. This is a deduction for interest paid on mortgage debt, but you will need to itemize your deductions to qualify for this tax break. “Under current law, this applies to loans up to $750,000,” Rubinstein says.

Property tax deduction. Through 2025, taxpayers who itemize their tax deductions can claim a deduction on their federal tax return up to $10,000 each year for local property taxes paid, according to Rubinstein. “When the tax law changed in 2017, this was very controversial, because taxpayers previously had an unlimited deduction,” he says. “The $10,000 limit is significant for taxpayers in high-tax states like New York and California.”

Mortgage points deduction. Per IRS guidelines, mortgage points are fees paid to take out a mortgage. This also includes origination fees or discount points purchased in order to reduce the interest rate.

Home office deduction. “If you’re a business owner or self-employed and work from home, you may be entitled to a deduction for the portion of your home used for business,” Presogna says. However, Rubinstein warns that this is the most audited deduction due to the amount of taxpayers who try to claim this deduction. “The IRS has specific rules to follow. For instance, you can’t work from home for an employer. You have to use a dedicated room and you have to use it regularly. And there are square footage limitations,” Rubinstein explains.

Many tax benefits extend beyond the initial purchase of a home. The IRS offers some tax benefits for certain capital improvements, such as renovating your home office, making energy-efficient improvements or making changes due to a medical condition. If you take out a home equity loan to buy, build or improve your home, you could qualify for the home equity loan interest deduction. The IRS would classify the interest you pay on the borrowed funds as home acquisition debt, which may be deductible.

First-time homebuyers could also potentially qualify for a traditional or Roth IRA penalty waiver. If you meet IRS qualifications as a first-time buyer and take out $10,000 or less, you can use those funds toward a down payment without a 10% tax penalty if you close within 120 days. However, the actual withdrawal may still be considered taxable income.

One of the biggest tax breaks for a homeowner is the exclusion of capital gains when they sell their home. Capital gains are the profit from the sale of the home. For married couples, the first $500,000 in capital gains are not subject to tax. For individuals, the first $250,000 in capital gains are not subject to tax. “However, the home has to be used as one’s personal residence for two out of the last five years in order to get this tax break,” Rubinstein says.

Source: realestate.usnews.com ~ By Josephine Nesbit ~ Image: Canva Pro

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5 Things to Not Ignore At a Home Showing

Don't ignore these at an open house

There are common things you should look for at a showing, like dripping faucets, but the less obvious things are sometimes revealing as well.

Looking at homes can be overwhelming, especially if it’s your first try at buying a place of your own. Most homes have some flaw, small or large, and sometimes you can pick up on them during a showing or an open house. While most problems can be corrected with enough money, time, and patience, being aware of these items will make the process – and your ownership – a lot easier.

Here are five things real estate agents say you should never ignore at a showing:

1. Clutter

Sometimes, clutter is just the end result of a busy life or too many things and not enough places to put them, but sometimes it’s covering up things you should really know about.

“Even though clutter is usually just clutter, it could be hiding some things,” says Laura Carroll Duckworth, a real estate agent with Flat Fee Redefined, an agency brokered by eXp Realty LLC in Springfield, Missouri. “I had one where the seller refused to move a lot of their stuff for the inspection, and then it turned out there was termite damage behind it.”

Termites are bad enough, but they’re not the only bugs you may come across living in a cluttered home. They’re all going to require an exterminator at minimum, and the problem could be a lot worse than you imagine.

“I was showing a foreclosure and they didn’t do a trash out of the property,” says Tammy Nevin, real estate agent with First Weber Inc. in Tomah, Wisconsin. “There was debris and garbage everywhere. It looked like they just picked up and walked out. The stench was a combination of cigarettes and cats. As I was walking through and I looked closer, I noticed lots of little bugs jumping around – they were fleas. We ran out of there pretty quickly.”

2. Room Deodorizers

Homeowners often will use plug-in deodorizers or other air fresheners to make their home smell welcoming to a potential buyer. But if you smell something more than just the air freshener, it’s time to look a little closer.

“Some people have air fresheners and room sprays and the buyer might wonder, ‘Oh, what are they trying to cover up?’” says Duckworth. “Sometimes they’re not trying to cover up anything, they just want the house to smell good for the buyers. Other times, there are layers to that scent that might indicate problems with mold, rodents or insects.”

3. Area Rugs

While it might not occur to you that a seller could be hiding damage in plain sight, it’s not uncommon. Area rugs should always be considered suspicious until you’ve seen what’s underneath.

“One of my clients purchased a home about seven years ago and it had beautiful hand-scraped hardwood floors throughout,” says Neil Brooks, real estate agent with My Home Group in Scottsdale, Arizona, and an agent within the Veterans United Realty Network. “During the showing, the owner was there and took us on a tour. When shown the living room, he pointed out the area rug and mentioned that it was expensive and placed it there so their grandchildren could play comfortably. He added that he would leave it for my client because it fits nicely in the room.

“My client decided to purchase the home, and upon moving in, moved the carpet to buff the floors to find out that the rug covered a three-foot area where the previous owners’ dog chewed the floor down, exposing the slab.”

4. The Neighborhood

Most neighborhoods show well enough during the daytime when everyone is at work. It still pays to familiarize yourself with the neighborhood you’re considering, especially if a house is having trouble selling.

“One major red flag is not the house itself, it’s the neighbors,” says Bob Thompson, a real estate agent with American Homes Of Eastern VA, Inc., in Hampton Roads, Virginia. “I encourage all my buyers to do what I call the Friday night drive-by. Every neighborhood looks great at 3 p.m. on a Tuesday, but weekends are when you find out what people are really like. That’s important because no one wants to get stuck next to the loud drunk neighbors or racist neighbors.”

5. DIY Repairs

Homeowners often do home repairs, and to a high quality standard, because they care about their homes and want to take care of them to the best of their ability. But sometimes, no matter how hard someone may try, they might just not be cut out for DIY. When those repairs are obvious, it’s something to pay close attention to.

“When you can tell the homeowner did their own repair work on something and did a poor job on it, that’s important – what else did they attempt to repair?” says Thompson. “Also be sure to look at minor repairs on a rehabbed property. If they did poor work on the small things, did they do poor work on the big things?”

What if You Spot a Problem at the Showing?

A showing is just a chance to get to know a house that you might be interested in. It’s an opportunity to see all the home’s visible red flags and decide how much those things bother you. This is why it’s so important not to get too serious about a house right away, even if you think it’s your dream home.

“Try not to fall in love with a home initially, just date it until you have a thorough understanding of what you’re buying,” says Brooks. “It’s a Realtor’s duty to be the voice of reason and point out all of the potential issues and err on the side of caution in order to protect their client.”

Once you’ve identified the issues that may or may not be serious enough to fall out of love with a property, it’s time to put pencil to paper. Ignoring issues won’t solve them, but every problem related to a home can be fixed, if you go in with your eyes open.

“Every issue can be overcome with time, money, expertise or a combination of all three,” says Aimee Thayer-Garcia, broker-associate at Montalvo Homes & Estates in Santa Cruz, California. “Ignoring red flags at a showing can set buyer, seller, and their agents up for a challenging escrow. Every transaction has its own speed bumps – a huge part of the work as an agent for buyer clients is preparing for them and setting expectations.”

Source: realestate.usnews.com ~ By: Kristi Waterworth ~ Image: Canva Pro

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What do home inspectors look for? 6 key things

Home Inspection

When you’re under contract on a new house, it’s easy to fall in love with its potential. But before you linger on cloud nine too long, you’ll need the reality check of a home inspection. During a home inspection, a professionally trained inspector visually and physically evaluates the entire structure, from the foundation up to the roof, looking for potential defects, safety issues, environmental issues, or other red flags.

In particularly competitive markets, some buyers consider waiving the home inspection to make their offer stand out. But think very carefully before doing so: A house is most likely the largest purchase you’ll ever make. The last thing you want to do is invest a ton of money only to find out your new home needs extensive repairs or remediation. 

That’s why a home inspection is important: A good inspector can spot minor problems before they become major ones, and speak to the quality of construction and maintenance the home has been through. A home inspection helps you know as much as you can about the property before buying it, says Kenneth Carr of Precision Inspections, a licensed home inspector in New York, Connecticut, and Massachusetts. “It is part of due diligence,” Carr says. “Just as you have your attorney review the contracts, you should have your home inspector review the property, because there may be something there that you don’t have the expertise to know.”

What do home inspectors look for?

“We are looking for things that aren’t working as designed,” says Carr. “We have to describe what’s there, what may be missing, and things that are either not working as they should or not working at all, and bring it to the attention of the buyer.” Many inspectors even recommend that homebuyers attend the inspection, which allows them to see things for themselves and ask questions.

While each state provides minimum requirements that must be checked out, “how an inspector goes about inspecting the property is up to each inspector,” he says. “If you belong to an organization like ASHI [the American Society of Home Inspectors], there is greater training specialization needed, as inspectors are expected to take continuing education classes as part of their membership and state licensing.”

Here are the top six things an inspector will always look for when assessing a property.

1. Basic safety features

Whether a home is safe to live in is a primary concern for any home inspector, which is why many of the things on the home inspector’s standard checklist are safety items. Things they’re on the lookout for include:

    • Smoke detectors: Does the home have them? Are they installed correctly and in the right places (in or near sleeping areas, not too close to the stove)?
    • Ground fault interrupters: These are the special plugs that protect you from shock in areas where water and electricity are in proximity, such as bathrooms and kitchens.
    • Safety glass: Are the glass features installed near stairs or water (like tubs and showers), made of tempered safety glass?
    • Indoor and outdoor stairs: Are the steps a uniform, safe height and angle? Are they built to code? Do they have handrails and guardrails correctly installed and in the right places?

2. The foundation and exterior ‘envelope’

No matter how old the home is, your inspector will look at the basic “envelope” that shields the structure from weather and water. The inspector will walk the property to check for cracks in the foundation and look at rain gutters and flashings, drainage, and window seals.

He or she will also inspect how the walls and roof intersect. For example, an inspector doesn’t want to see lots of caulk there, because that usually means it’s not properly waterproofed. When done right, waterproofing is part of the home design — not something added after the fact. If signs of prior water penetration are found, he or she will also check whether the issue was fixed properly.

3. The roof

An inspector can tell if a roof was done properly by a professional, or sloppily by an amateur. They’ll want to make sure your roof is well constructed, isn’t showing signs of age or deterioration, and will protect you from the elements. They’ll also check to see that any openings — like a chimney or skylights — are properly sealed, flashed, and free of moss growth and debris.

The older the house, the more likely it is that the roof has already been resurfaced at least once, and roofs do need replacement from time to time, which can be an expensive process. As part of their inspection report, an inspector will typically provide an estimate of how many good years the roof has left before you should consider replacing it.

4. Major systems: electrical, plumbing, etc.

The inspector will check out all of your home’s most important interior systems, from electrical and plumbing to heating and air conditioning.

    • Heating and air: How well does the heating and cooling work? Do they serve every area in the home evenly? Is there good airflow in every room? If there’s an air return, is it properly located and sized to serve the house efficiently?
    • Plumbing: The inspector will check to see that the plumbing is in good shape, provides enough water to the house, and drains as it should — no one wants leaky pipes letting water into their home and causing flooding or mold problems. He or she will also ensure there is sufficient water flow and pressure. If the house uses well water, ask to have the pump and water quality checked.
    • Electrical: Electricity is essential for modern life, but it can also be dangerous. An inspector will make sure that your electrical system is safe, provides enough power for the house, and is installed and grounded correctly. They’ll also check to make sure there are enough outlets and look at the electrical panel — an old or obsolete panel may become a fire hazard. 

5. Ventilation

Dangerous fumes can build up in a house if appliances that run on oil or natural gas, like water heaters for example, aren’t installed and configured the right way. Proper ventilation is crucial. Many of these appliances have safety features built-in, but an inspector will make sure the safety equipment is correctly enabled.

Besides checking the water heater’s ventilation, the inspector will also check its maximum temperature to make sure your tap water can’t get hot enough to burn anyone. Additionally, he or she will make sure that clothes dryers are properly vented to catch lint and expel hot air, which helps prevent house fires and may also test for radon.

6. Signs a specialist is needed

Some areas or conditions might need further examination, often by a specific type of pro with specialized equipment. A good inspector will know when to call in the heavy hitters, and may even have a network of specialists they can refer you to.

For example, a fireplace is one feature that always gets careful evaluation. The inspector wants to see that it vents well and doesn’t have any conditions that could become a hazard, like cracks, blockages, or excessive buildup. If they see something concerning, your inspector might recommend a fireplace inspector, who will use a specialized camera to scope out the interior of the chimney and flue.

Sewers are another area that calls for extra care, especially in an older house. A septic problem hidden beneath your yard can be one of the most expensive repairs a homeowner must make. If you’re buying a home that has sewer service, consider calling in a specialist to have the whole system (from the main house to the street) video scoped or a video inspection that goes through pipes, holes, and other areas.

Source: bankrate.com ~ By: Dori Zinn & Grace Kim ~ Image: Canva Pro

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How to buy a house in 2024

Buying home in 2024

Last year may go down in real estate history as the year of correction. After a pandemic-fueled, seller-benefitting boom — with bidding wars, inventory shortages, and spiraling prices all over the country — the housing market began to cool down in 2022. The impact of inflation and fast-rising interest rates dampened buyers’ interest, causing sales to slow and price appreciation to decelerate.

All this made 2023 something of a transitional year. And now, in 2024, inflation is much lower but home prices and mortgage rates are both still high. Sellers still have an edge in many areas, thanks to a continued scarcity of houses, and no one expects a dramatic housing market crash. Still, many analysts see a shift coming toward a more balanced market, which would benefit buyers.

Whatever the economic state of the real estate market, buying a house can be an exciting and emotional process. Before starting your search, be sure you understand the ins and outs of homebuying, so you can make the best decisions for your family — and your wallet. Here’s what to know when buying a house, one step at a time.

Buying a house: A step-by-step guide

1. Determine why you want to buy a house

Purchasing a home is a major decision that shouldn’t be taken lightly. If you’re not clear on exactly what you want out of homeownership, you could end up regretting your choice.

Get started: Define your personal and financial goals. “Buyers should think about when they intend on moving and what they want in a home — amenities, ideal location, and how long it could take them to save for a down payment,” says Edwence Georges, a real estate agent with RE/MAX in Westfield, New Jersey. “These are all important to help define the goals they would like to meet.”

    • Make a list of what’s important to you in a home. Is location the top priority? Any must-have amenities?
    • Analyze whether it makes sense for you financially. Would renting for another year or two improve your financial standing?
    • Be sure you’re prepared for the ongoing expenses of maintaining a home.

2. Check your credit score

Your credit score will help you determine your financing options; lenders use it (among other factors) to set the terms and rates of your loan. The higher your score, the lower the interest rate you will be eligible for — lower scores equate to more expensive mortgages.

Get started: You can get your credit report and score from each of the three major credit reporting agencies, Equifax, Experian, and TransUnion, for free once a year. Your bank or credit card company might offer free access to your score or credit report, too. If you discover any discrepancies, contact each agency and report the error.

    • Consider how different credit score ranges impact your interest rate, monthly payments, and total interest.
    • Pull your credit reports from each of the credit bureaus for free every 12 months at AnnualCreditReport.com.
    • Learn other ways to get your free credit report and score.

3. Save for a down payment

To avoid having to pay private mortgage insurance or PMI, you’ll need to put down at least 20 percent of the home’s purchase price for a down payment. Some lenders offer mortgages without PMI with lower down payments but expect to pay a higher interest rate. Be sure to do your research: Many types of loans require a much lower minimum down payment, and there are many government programs to help cover down payment costs for qualified buyers. Shop around carefully based on how much you’re able to pay upfront.

Get started: Research the requirements for the loan you want so you know exactly how much you’ll need to save for a down payment. If a friend, relative, or employer has offered to provide a down payment gift, initiate a conversation early on to learn how much they plan to contribute and if there’s any shortfall you’ll need to cover — and secure a gift letter from them well in advance.

    • Consider options backed by the federal government. If you qualify for an FHA, VA or USDA loan, your down payment minimum will be considerably lower than 20 percent.
    • Conventional loans offered by Fannie Mae and Freddie Mac, meanwhile, require just 3 percent down.
    • Look into local and state down payment assistance programs to see if you’re eligible for a cost-saving loan or grant.

4. Create a housing budget

The purchase price and down payment aren’t the whole picture. Setting a realistic budget for your new home will help inform how much you can afford and what your all-in costs will be.

Get started: Carefully consider other expenses to determine what you can afford long-term. “Buyers tend to forget to factor in other costs, like homeowners association fees and maintenance,” says Paige Kruger, Realtor and founder of Signal Real Estate in Jacksonville Beach, Florida. “Just because you can afford a mortgage and a down payment doesn’t mean you can afford those long-term costs after you move.”

    • Figure out how much you can set aside for a down payment, plus a buffer fund for ongoing or unexpected maintenance costs.
    • Determine the maximum loan you qualify for. Getting pre-approved can help (see Step 5).
    • Analyze your monthly budget to make sure you can handle mortgage payments along with your other day-to-day bills.

5. Shop for a mortgage

Getting pre-approved for a mortgage gives you a firmer handle on how much you can afford, and it’s helpful when you make an offer on a house because it shows sellers you’re financially qualified. Once you’re ready to apply for official approval, you’re not obligated to stick with the same lender that issued your preapproval — compare the terms and rates offered by several companies.

Get started: Shop around with at least three lenders or a mortgage broker to increase your chances of getting a low-interest rate. Sign up for a Bankrate account to determine the right time to strike on your mortgage with our daily rate trends.

    • Work with an experienced mortgage lender who can walk you through all the options and overall costs.
    • If you’re a first-time homebuyer, inquire about what programs or incentives might be available to you.

6. Hire a real estate agent

An experienced real estate agent can save you time and money by helping you find the right home and negotiating with the seller on your behalf. Agents are licensed professionals who know their markets well and can guide you through your homebuying journey.

Get started: Contact several local real estate agents and talk with them about your needs before choosing one. “Someone with knowledge of an area can tell if your budget is realistic or not, depending on the features you desire in a home,” Kruger says. “They can also point you to adjacent areas in your desired neighborhood or other types of considerations to help you find a house.”

    • Before hiring an agent, ask about their track record and knowledge of your desired neighborhood.
    • Inquire about their workload as well. You don’t want someone who is over-scheduled.
    • Bankrate can help match you with a qualified agent in your area.

7. Go house-hunting

Viewing listing photos online is helpful, but isn’t a substitute for visiting homes in person and getting to know the area and its amenities. In some cases, the right neighborhood might be even more important than the home itself.

Get started: Be specific with your agent about exactly what kinds of homes you want to see, so they can more effectively find options that meet your criteria. Keep an open mind: You may not be able to check off everything on your wish list, so prioritize must-haves over things that are nice to have but not crucial.

    • Explore neighborhoods you like to see what’s for sale, and attend open houses for homes that pique your interest.
    • Take notes on each property you visit — after a few, they can start to blend together in your mind.
    • Keep your schedule open so you can pounce when a great home is listed, especially in a competitive market.

8. Make an offer

Understanding how to make an attractive offer on a home can help increase the chance of it being accepted, putting you one step closer to getting those coveted keys. Confer with your agent and let their expertise lead the way.

Get started: Once you find “the one,” your real estate agent will help you prepare a complete offer package, including your offer price, your preapproval letter, proof of funds for a down payment (this helps in competitive markets), and terms or contingencies.

    • Think carefully about what contingency clauses to include in your contract. Common real estate contingencies can hinge on financing, appraisal, home inspection, and more.
    • It’s not unusual for sellers to make a counteroffer. You can respond if you wish to keep negotiating, or reject it and move on.
    • Once an offer is accepted, you’ll sign a purchase agreement and pay an earnest money deposit, typically 1 to 2 percent of the purchase price. The funds will be held in escrow until closing.

9. Get a home inspection

A home inspection provides an overall picture of the property’s condition and any mechanical or structural issues it might have. This will help you determine how to proceed with the closing process: If major problems are found, you might want to ask the seller for repairs — or, if there’s an inspection contingency in the contract, you might even decide to back out of the deal.

Get started: Your agent can probably recommend a home inspector, but do your homework before choosing one. Depending on your contract and what state you’re in, you’ll generally need to complete the inspection within 10 to 14 days of signing a purchase agreement.

    • Check the inspector’s experience by reading online reviews, asking for client references, and looking at their credentials.
    • To understand what is and isn’t covered, read Bankrate’s home inspection checklist.
    • Fees can vary, but according to HomeAdvisor, you’ll likely pay somewhere between $281 and $403. The average is $342.

10. Negotiate repairs and credits

Your home inspection may reveal a few issues, especially if it’s an older home. Major problems might need to be dealt with before your mortgage lender will finalize your loan, and it’s common to negotiate for the seller to either pay for the repair or offer the buyer a credit to cover the cost.

Get started: Enlist your agent’s help with this — the need for repairs is not unusual, but negotiation can be delicate work and is best left to the pros. They will work with the seller’s agent to come to an agreement about repairs or credits.

    • Hazardous problems like structural damage or improper electrical wiring could keep your lender from approving your loan, so take the solutions very seriously.
    • Some sellers won’t agree to extensive repairs. That’s why a home inspection contingency is important — it gives you a way out of the deal if you need it.

11. Secure your financing

A preapproval is not the same thing as official approval. Getting final loan approval means you need to keep your finances and credit in line during the underwriting phase. Don’t open new credit lines or make any major purchases until the paperwork is signed, and avoid changing jobs before closing too, if possible.

Get started: Respond promptly to requests or questions from the lender, and double-check your loan estimate to ensure all the details are correct. You may need to submit additional paperwork as your lender completes the process, such as bank statements, tax returns or additional proof of income, so keep your paperwork organized.

    • Being preapproved doesn’t mean you’re in the clear — that’s not the case until a lender has given your loan the final stamp of approval.
    • Keep your finances and credit in good shape from preapproval until closing day.
    • Avoid running up credit cards, taking out new loans or closing credit accounts too. These things can hurt your credit score or impact your debt-to-income ratio, which can imperil your final loan approval.

12. Do a final walk-through

A final walk-through is your opportunity to view the property one last time before it becomes yours. This is your last chance to address any outstanding issues before the house becomes your responsibility.

Get started: Your agent will schedule the walk-through for shortly before closing. Bring your home inspection checklist and other documents, like repair invoices and receipts, to ensure everything was done as agreed and that the home is move-in ready.

    • Ask your agent to attend with you — they can act as a witness and help answer any questions.
    • If any problems remain, have your agent communicate immediately with the seller and your lender. Your closing date might have to be delayed to ensure those issues are remedied first.

13. Close on your house

Once all contingencies have been met, you’re happy with the final walk-through and your lender has declared your loan “clear to close,” it’s finally time to make it official and close on your new home. After all of the paperwork has been signed, the home is officially yours and you’ll get the keys. Congratulations!

Get started: Three business days before your closing date, the lender will provide you with a closing disclosure that outlines your loan details, such as the monthly payment, loan type and term, interest rate, loan fees and how much money you must bring to closing. You will attend the closing along with your real estate agent, possibly the seller and their agent, and the closing agent, who may be a representative from the escrow or title company or a real estate attorney. This is also when you’ll wire your closing costs and down payment, depending on the escrow company’s procedures.

    • When you get your closing disclosure, compare it to your loan estimate to ensure the terms are the same. Ask any questions and correct any errors before you sign the paperwork.
    • On closing day, review all the documents you sign carefully, and ask for clarification on anything you don’t understand.
    • Make sure you’re given all house keys, entry codes, and garage door openers before leaving the closing.

Other things to consider

Is it the right time to buy?

Traditionally, spring is the start of the homebuying season, with many listings hitting the market and activity peaking over late spring/early summer. However, your own financial readiness is more important than the time of year.

Mortgage rates recently hit highs not seen in more than 20 years. Meanwhile, strong demand for homes has pushed prices higher and frustrated many potential homebuyers. This combination of high rates and high prices has plenty of people wondering whether they should try to buy a home now, or wait for things to settle down.

The answer likely depends on your own personal circumstances more than the condition of the housing market. If you’re financially stable, you have enough in savings to cover the down payment and other expenses, your employment and income are secure, and you’re ready to stay in one place for a while, then now is a perfectly fine time to buy a house. You can always refinance if rates drop significantly. On the other hand, if your savings are tight or your credit score is less than stellar, it might make more sense to take time to build those before buying.

One thing to keep in mind: Be sure to exercise caution anytime there’s a spike in home prices. “Be careful about buying near the top of the market, especially if you want to be in the home for only a few years,” says Ken H. Johnson, a real estate economist at Florida Atlantic University and co-author of the Beracha, Hardin & Johnson Buy vs. Rent Index. If you’re looking to buy under these conditions, says Johnson, “bargain aggressively and be willing to walk away.”

What’s your local market like?

The area you’re house-hunting in has a major impact on what to brace for as a homebuyer. Each market has its own quirks to consider: For example, the taxes, cost of living, job market and housing situation in California will yield different buying conditions than in Texas or Ohio. And even within the same city, real estate is very localized — you might be surprised by how drastically market conditions can vary from one neighborhood to the next. This is why partnering with a knowledgeable local agent who understands the intricacies of their market is so important.

How prepared are you for extra costs?

The down payment is often considered the biggest homebuying expense, since it’s a large amount that the buyer has to actually pay upfront. But homeownership involves plenty of additional costs that you should be ready for. Before you even close on the purchase, you’ll need to make sure you have enough money set aside to cover closing costs. These fees will vary by state and by individual transaction, but they will almost certainly range into the thousands of dollars.

When budgeting for your monthly housing costs, factor in not only the principal and interest amounts of your mortgage payment, but also property taxes, home insurance premiums, and homeowners association fees (if applicable), plus private mortgage insurance if you’re putting down less than 20 percent. And don’t forget to set aside money for ongoing maintenance and unexpected repairs, too.

Source: bankrate.com ~ By: Jeff Ostrowski ~ Image: Canva Pro

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The Guide to a Real Estate Bidding War

Real Estate Bidding

Many real estate markets across the country right now are marked by low inventory. This is due in large part to higher interest rates, making new mortgages more expensive and hindering construction starts. Homeowners who might like to move (and thus put their home on the market) are not willing to give up a lower interest rate on their mortgage to take on a notably higher rate for a mortgage on the property they might buy. Many people are feeling locked in; there are fewer sellers, and thus, inventory is significantly reduced.

In a low inventory environment, even when fewer active buyers are pounding the pavement, it’s common for a well-priced and well-presented property to attract attention and possibly receive multiple bids. So buyers today should be prepared for competition when they’re ready to make an offer on a well-priced property. And if sellers have truly priced their property in line with today’s nuanced market conditions, they should prepare for the possibility of multiple bids. Most sellers hope for a bidding war when they list, but a competitive bidding situation can fall apart quickly if not handled properly by all parties.

Will We See Bidding Wars This Spring?

Each year, spring brings new market activity, even in a high interest rate environment. “With seasonal demand starting to tick up, we are seeing more bidding wars than expected, given the generally low volume of the market,” says John Walkup, co-founder of Urban Digs, a New York City data and analytics company that tracks Manhattan and Brooklyn real estate. “For many people, there is only so long you can postpone a move, so as those forces run into continual tight supply, you’re going to see bidding wars spring up where, on paper, at least, there should be easy deals for buyers.”

With the spring market almost upon us and interest rates ticking down, it’s likely that many buyers will come off the sidelines, adding to the competition in this low inventory market. “It’s a question of alternatives,” says Walkup. “In a ‘normal’ market, a buyer might be able to find an alternative home within a few weeks as more listings come on. In a tight supply market, that timeline could be extended to months, so a ‘finders keepers’ mindset takes over because the opportunity cost of losing a deal is much higher. That focuses conversations on the cost of not bidding aggressively when the time comes. In a nutshell, agents need to help their buyers understand that lowball bids will likely fail in today’s lower inventory environment.”

If a buyer loves a property and wants to beat out the competition, there are certain strategies they may employ. Additionally, and perhaps less obviously, the seller and listing agent need to handle the bidding war properly, or they run the risk of upsetting all of their suitors and ending up with nothing. A badly managed bidding war can end in disappointment for the seller if the potential buyers feel misled or used – after all, no one wants their offer shopped around.

If you are in the market right now, here are a few evergreen best practices for buyers and for sellers to navigate a bidding war, no matter the market conditions. “Four walls and a roof don’t change,” says Gail Roberts, a realtor with Coldwell Banker in Cambridge, Massachusetts. “The rules of the game haven’t changed, even if market conditions have. When properties are priced well and show well, there’s a good chance they will get multiple bids. The market will always tell us what a property is worth.”

How to Navigate a Bidding War as a Buyer

For buyers, a proper offer on a home includes a strategic number (offer price), a proposed closing date, and financing terms. A buyer should arrive at each of these three terms based on the comps, as well as timing and financial needs. Arming yourself with current and relevant data and information will help you approach the process with confidence and efficiency, which can work to your advantage. And when it’s time to make an offer, being flexible and friendly are two of the best ways to win over the seller and/or the listing agent.

Get smart. The buyer or the buyer’s agent should schmooze with the listing agent and get some intel. Who are the sellers and what are the factors that will influence their decision? Is the seller an investor looking to cash out? An older couple selling their long-held nest egg? If the seller is moving, do they know where yet? And have they emotionally moved on to this new property and chapter of life? If the seller has flexibility on a closing date versus a need to sell quickly, this timeline may greatly influence how they assess offers. And who are the other buyers? Are the other offers all cash? Are there contingencies you can waive to strengthen your position in comparison with the other bidders? Information gathered about the seller and about competition helps a buyer craft a more compelling offer.

Jump in early and come prepared. If you love a property, make an offer. That offer should include not only your bid but also accompanying documentation like a loan preapproval letter or proof of funds. This shows that you’re serious, and should give the sellers confidence that your financing won’t fall through. Start the negotiation quickly, before another shark enters the water. Being first in the swimming pool has its advantages, as many sellers feel a sense of loyalty to the first bidder. Even if someone else comes along, a smart listing agent will circle back to the first buyers who submitted an offer to see if they can improve their bid. If you start a negotiation before another buyer, you won’t be negotiating against the competition (yet).

If you can, drop contingencies and be flexible. “For a buyer, the cleaner your offer, the better,” says Roberts. “This includes a certain amount of flexibility with dates and terms, especially in a competitive market.”

Sometimes, the best offer isn’t the highest. If two offers come in and the higher bid comes with many contingencies (financing, appraisal, inspection contingencies, etc.), the seller may go with the lower number. Talking with the listing agent can give you some insight as to which contingencies can be dropped, and a window into what the competition’s offer comes with.

Decide beforehand when you’re OK walking away. If you’ve done your homework, then you know the comps and you have a good idea of the subject property’s value. Are the sellers being overly ambitious with their asking price? Or did they price it tightly, so if you bid above the asking price you’re still in the ballpark of market value? More importantly, how much can you afford? At a certain number, the property won’t be attractive anymore, so identify that number beforehand and be ready to walk away without regret. Stay cool-headed and don’t let your emotions get the best of you – buying a home is an emotional process, so make sure you understand the numbers and the math beforehand.

Take note also: “How bad will you feel if someone else gets it for just a small amount more than your bid?” asks Roberts. “A good agent helps a buyer understand the market, and can educate you to say ‘this is the value for me’ and to not regret losing a property.”

Make it personal. It may sound silly, but a flowery personalized letter to the sellers along with your offer can add a human touch and differentiate you from the competition. A warm and fuzzy letter may appeal to the sellers, making them feel good about choosing you over the other bidders. Perhaps you remind them of themselves 20 years ago, passing along a dream home from one family to the next. Flattery can go a long way. That said, “your offer should speak for itself,” Roberts says.

Strategize. One tool that buyers can call upon in a bidding war is something called an escalation clause. An escalation clause is “a tool to stay above other offers coming in, while not potentially going over budget, or wildly outbidding any other offers,” says Kate Jay Zweifler, a realtor with Berkshire Hathaway HomeServices Fox & Roach in Philadelphia. “An escalation clause is an addendum to an agreement of sale that will automatically increase the amount of the purchase price above any other offers in competition, up to a certain amount set by the buyer.”

“However,” says Zweifler, “this is a strategy that comes with its own risks. In a bidding war, sellers are looking for a decisive and strong best and final offer, and they don’t want to drag the process out in small increments. And if there’s emotion wrapped up in the sale, it can be tricky to use an escalation clause. In those cases, sellers want to feel that the buyer really wants the home and isn’t playing games.”

End with an odd number. If your offer is almost identical to another offer, add a few dollars to your offer to tip you over the edge.

How to Navigate a Bidding War as a Seller

Pricing a home correctly is the first step in laying the groundwork for a bidding war. “To get the right buyers, you need to nail the right asking price,” says Roberts. Pricing too ambitiously is often a turnoff for many buyers, but “pricing too low doesn’t help buyers understand how high they need to go. Price with energy that makes buyers say: ‘This seems fair. I don’t want to lose out.’ ”

Roberts adds: “I want to hear buyers say to their broker: ‘How high do you think we have to go?’ I don’t want to hear them say: ‘What do you think they’ll take?’ or ‘What’s it really worth?’ I don’t want them to question the value.”

For sellers, properly handling this exciting but likely stressful process is paramount and an experienced real estate agent should be able to guide you. Above all, it is important to manage the offers and buyers so nobody feels misled. Sellers and their agents must keep in mind that many buyers who enter a bidding war might have already lost out on another property, so their emotions may be running high. This is especially true when inventory is low. You should be timely in your response to each offer, and also do the following:

Get smart: Who are the prospective purchasers? Sellers and their agents should gather as much information as possible about each buyer. Are they financing or all cash, and if they’re taking out mortgages, have they submitted preapproval letters from reputable financial institutions to accompany their bids? What is the debt-to-income ratio for each party? Are these buyers flexible on the closing date? All of this is relevant in helping to choose not just the right buyer from the pack, but also the best backup offer just in case the first deal falls through. Sometimes the winning bidder gets cold feet, so keep those backups in play.

Maintain a schedule and deadlines. In a multiple bid situation, it’s important to set a schedule and keep to it. Determine the deadline for receiving new offers, and clearly communicate this to all interested parties. If you plan to go an additional round with your potential buyers, often referred to as “best and final” offers, set the deadline and be disciplined about this. Once the initial offers are submitted, a “best and final” round allows the buyers to improve their offers. If the market is very active, it makes sense to end the bidding process and make a deal before new inventory comes onto the market. In certain particularly active markets, new properties may be listed on Thursdays, with open houses over the weekend and offers submitted by Sunday night or Monday. If this is the case, for example, “wrap it up before new stuff comes onto the market, ideally by Tuesday,” says Roberts.

During the process, stay in close communication with all bidders. “We need to get back to our prospective buyers in a timely fashion,” Roberts says. “Sellers should not be unreachable during this process, even if they’re in another time zone.”

Know that the best offer might not be the highest. Even if one party is offering you more money, it might not be the best offer. Money is money, but a cash offer is generally stronger than an offer that comes with financing. An offer that includes a mortgage will take longer to close than a cash deal, and if the buyers’ financial profile is at all questionable (for example, how is their credit?) there’s a chance they might not secure their financing, especially if they are heavily invested in unstable assets. And do these offers come with contingencies? Offers that have an inspection contingency waived might be particularly attractive, for example.

If financing is involved, the seller must understand the buyer’s financial profile and their likely ability to secure a loan. But if the purchase requires further approval, perhaps from a homeowners association or from a co-op or condo board, then vetting each buyer is even more relevant and imperative. It’s possible that the second-highest bidder might have a more straightforward and simple financial profile, and thus be more of a slam dunk to make it to the closing table. For example, if the highest bidder is taking out a large mortgage and presents a financial profile that includes student debt, outstanding child support payments or a lackluster credit score, it might be wiser to accept a lower bid that might be all cash from a buyer with no debt.

Leave the door open with your backups. In a competitive bidding situation, buyers can become overly enthusiastic, get caught up in the moment and bid above their comfort level or well above their perceived value of the property. There is always a good chance that the winning bidder may walk away for any number of reasons, including buyer’s remorse or a reassessment of value after a few nights of sleep while the contract is being drawn up. It is prudent to stay in touch with the backup bids and keep them in play, if possible, to be called upon if needed.

Even if the market is slow, in low inventory environments bidding wars should be expected for well-priced properties. The New York City market, for example, seems sluggish, but the data tells a different story. “About 20% of deals are trading at or above the asking price,” says Walkup. “In a true buyer’s market, this would be lower. Historically, discounts for deals signed within 30 days remain very low, including for Q4 2023. This is a sign that the market remains robust and transactional.”

Of course bidding wars are more common under certain housing market conditions than others, but a great property that is priced well will almost always get the attention it deserves. And for buyers, it’s important to note that just because there isn’t a bidding war and you’re the only interested party, it doesn’t mean it’s not a great home. If it’s meant to be, well, it’s meant to be.

Source: realestate.usnews.com ~ By: Steven Gottlieb ~ Image: Canva Pro

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Insider Insights: 12 Housing Market Experts Highlight Key Strategies For Home-Buying Success In 2024

Strategies For Home-Buying Success

Aspiring homeowners experienced a lot of challenges in 2023. Elevated interest rates, eye-watering home prices, and abysmal housing stock resulted in inflated costs that stymied buyers. While experts say the housing market should see some easing in 2024, don’t expect much.

If you plan to dive into the housing market in 2024, you’ll need to plan strategically to outpace the competition and attain a home that meets your preferences and goals.

Forbes Advisor spoke with 12 top industry experts to weigh in on what hopeful buyers should do as they pursue homeownership in 2024.

1. Watch Interest Rate Trends To Get the Best Mortgage Rate in 2024

Mortgage rates are steadily declining after flirting with 8% in late October. Most housing market experts agree that rates will trend down further in 2024 but remain elevated.

Nonetheless, rates can jump around quickly, and even a fraction of a percentage point change can impact the cost of a monthly mortgage payment.

Given this, Michael Merritt, senior vice president of mortgage servicing at BOK Financial, advises buyers to monitor the news and the Federal Reserve’s interest rate decisions to stay on top of trends.

Merritt explains that keeping an eye on the Fed’s monetary policy moves can give borrowers a heads-up for where mortgage rates will go in 2024, as the central bank’s policy rate actions tend to impact mortgage rate movements indirectly.

“It’s hard to forecast rates in a volatile market, but most indicators predict lower rates by the end of 2024,” Merritt says.

Pro Tip
Bonus Advice: “The first step in getting the best mortgage is understanding what you want to achieve. The best mortgage product might be different for a purchase than a refinance or for a home you plan to own five years versus 10 years.” — Michael Merritt, senior vice president of mortgage servicing at BOK Financial

2. Attend Local Real Estate Investor Meetings

The housing market remains competitive mostly due to historically low inventory. However, house hunters can stay ahead by using less conventional methods to track down available homes—especially those that buyers won’t find in traditional listings.

Rick Sharga, founder and CEO of CJ Patrick Company, a market intelligence and business advisory firm, suggests attending real estate investor meetings in areas where you’re interested in buying.

“Almost every city or county across the country has investor groups made up of people who are more or less your neighbors,” Sharga says. “A lot of these investors fix and flip properties and might be willing to give a buyer a little bit of a break if they can save the investor the time and money involved in marketing the property.”

Pro Tip
Bonus Advice: “Focus on homeowners who need to sell, not on homeowners who might want to sell. About 70% of homeowners with a mortgage have an interest rate of 4% or lower and just aren’t going to put their home up for sale unless they have to.” — Rick Sharga, founder and CEO of CJ Patrick Company

3. Investigate Expired or Withdrawn House Listings

Blake Blahut, a broker associate and real estate agent at Realty ONE Group Inspiration in Florida, offers a unique tactic to uncover unidentified for-sale homes—asking real estate agents to scour local neighborhoods for expired or withdrawn listings.

“They can also do mailers or door-knocking in those same areas in the hope of finding someone that is looking to sell,” Blahut says. “In a market with unique challenges, it’ll sometimes require a unique method to overcome them.”

Pro Tip
Bonus Advice: “Be patient and start your search early. … [B]eginning your search at least 75 to 90 days before your lease ends or you need to move would take a lot of unnecessary pressure off [you].” — Blake Blahut, broker associate and real estate agent at Realty ONE Group Inspiration

4. Consider an Adjustable-Rate Mortgage (ARM)

Hybrid ARMs are mortgages that start with a low fixed interest rate and change to a variable rate at the end of the fixed term. For example, a 5/1 ARM has a low fixed rate for five years, and then the rate resets once a year until the end of the loan term. Each rate adjustment could move higher or lower.

While ARMs gained a bad reputation due to their role in the 2008 housing crisis, they’re considered less risky now due to higher lending standards. Mark Fleming, chief economist at First American Financial Corporation, suggests an ARM can be a good fit for some people.

“While we are all familiar with the 30-year fixed-rate mortgage, remember that we rarely live in one home for 30 years,” Fleming says. “Why pay for the privilege of fixing the rate for 30 years when you’re likely not going to use it? And you get an affordability boost now when you need it.”

Pro Tip
Bonus Advice: “They say to date the rate and marry the house because you can refinance later. But beware, that [assumes] the rate will be lower in the future and there are costs associated with refinancing—it’s not free.” — Mark Fleming, chief economist at First American Financial Corporation

5. Don’t Wait Until Spring to House Hunt

Spring can be a busy time for the housing market, as listings often climb when the weather warms up.

Louis Gordon, a broker at Century 21 Revolution in Massachusetts, says to get out there early in the year before the temperature—and home prices—start rising.

“The best deals are usually found in winter when inventory is limited and sellers are more desperate to get a deal done,” Gordon says. While on the hunt, Gordon advises you to keep your eyes open for homes already a few weeks on the market and need a little TLC.

“Those sellers are more willing to negotiate on price and terms, like offering a rate buydown,” he says.

Pro Tip
Bonus Advice: “[D]on’t wait until the rates come down. If the rates go back into the 6’s or 5’s, the prices will shoot up like they did in 2021 and early 2022.” — Louis Gordon, a broker at Century 21 Revolution

6. Review Your ‘Must-Haves’ Before Home Shopping

As you embark on your house-hunting journey, Bob Driscoll, senior vice president and director of residential lending at Rockland Trust Bank, advises buyers first to take stock of the home features most essential to them.

“Not every house will become a home to everyone—something that one person may consider a need, like a yard for a pet, could be a want for someone else.”

Though you understandably want to keep costs down, Driscoll says buying a home because it’s affordable is not the best approach.

“For example, if hosting large gatherings is a priority for a certain home buyer, they shouldn’t let the frustrating market pressure them into settling for a home without the space needed to accommodate those activities,” Driscoll says.

Ultimately, homeownership is a major purchase that is as much a financial investment as it is about investing in a home that aligns with your priorities and values.

Pro Tip
Bonus Advice: “Instead of focusing on external factors beyond their control in 2024, prospective buyers should be focusing on their personal timelines, goals, and desires.” — Bob Driscoll, senior vice president and director of residential lending at Rockland Trust Bank

7. Research New Construction Options

With resale housing stock hovering at historic lows—and expected to remain there for the foreseeable future—Nick Bailey, president and CEO of RE/MAX, says buyers should consider researching new construction homes.

“Given such low supply and demand softening, builders have returned to offering competitive mortgage rates through their partner lenders and offering builder incentives and complimentary upgrades to entice buyers,” Bailey says.

Moreover, between October 2022 and 2023, the national median price of new homes dropped over 17%, maintaining a narrow enough gap between new home prices and existing home prices that could prove attractive to some buyers.

Bailey points out that buyers should also consider building a new custom home, which you can finance with a construction loan.

“With the crazy lack of inventory still causing headaches in the market, building a home becomes an attractive option, and with spec homes and semi-custom-building options, it’s easier than most consumers think,” Bailey says.

Pro Tip
Bonus Advice: “I wouldn’t write off older or outdated homes and would encourage buyers to picture what something could look like. For (sometimes) simple repairs and few upgrades, you could turn a house with potential into the house of your dreams.” — Nick Bailey, president and CEO of Re/Max

8. Shop for Homes Outside City Centers

If your dream is to live in a place that offers plenty of culture, sports, entertainment, and dining options, but the housing prices and cost of living exceed your budget, Danielle Hale, chief economist at Realtor.com, advises you to look outside city centers.

“Buyers will generally find that they get more value for their dollar further away from city centers, so shoppers with flexibility should consider expanding the geography of their home search,” Hale says.

For example, if you want to put down roots in the Los Angeles metro area where the median home price was $1,159,000 in October 2023, according to Realtor.com data, consider expanding your search to Riverside, where the median home price during the same period was $580,000.

Pro Tip
Bonus Advice: “No matter how buyers decide to compete, it’s important to make sure that they understand the terms and implications of waiving contingencies, which may be more likely to help them win the bid but may put them on the hook for more financial risk.” — Danielle Hale, chief economist at Realtor.com

9. Pre-qualify Yourself

Before becoming attached to a home that requires a loan you can’t afford, Keith Gumbinger, vice president at mortgage website HSH.com, encourages prospective buyers to determine their income and debt loads ahead of time to get a sense of how much financing they qualify for.

“Borrowers should pre-qualify themselves at a few different interest rates to see whether or not a rate that is likely to appear in the next year is sufficient to allow them to participate in their housing market,” Gumbinger says.

Plugging various rates into a mortgage prequalification calculator can help borrowers determine their maximum loan amount.

Pro Tip
Bonus Advice: “[B]e both opportunistic and flexible. A great house that checks 80% of the boxes and is available at a price you can afford with a mortgage rate that works well enough is likely to be better than waiting for a 100% match.” — Keith Gumbinger, vice president at mortgage website HSH.com

10. Look Into House Hacking

High mortgage rates and house prices may keep homeownership out of reach for some would-be buyers in 2024.

If that’s the case for you, Sherry Chen, a real estate agent with Kappel Realty Group at Compass in California, says house hacking could be the answer.

For instance, Chen says you could buy a four-bedroom house and rent out the other three rooms. She also suggests buying a home with an accessory dwelling unit, or ADU, to generate rental income.

“These strategies can oftentimes cut your mortgage in half or even allow you to live for free,” Chen says.

Pro Tip
Bonus Advice: “Get a fully underwritten preapproval.” — Sherry Chen, real estate agent with Kappel Realty Group at Compass

11. Be Prepared To Bid Over Asking Price

Though bidding wars are less common than they were a few years ago, demand will likely continue to outpace supply, and borrowers will still face plenty of competition in the coming year.

Consequently, Glenn Brunker, president of Ally Home, says to expect to make offers a little over the asking price to improve your chances of landing a home in 2024.

“You may be competing with buyers that have more cash to put towards a house, but if you have a plan in place and know your budget, you’ll be better equipped to make a decision that you’re comfortable with, ” Brunker says.

Pro Tip
Bonus Advice: “Buyers must do their homework in advance by researching lenders and securing a preapproval so you have a competitive advantage when making offers.” — Glenn Brunker, president of Ally Home

12. Build Your Home Buying Team Early

Shopping for a home can be an overwhelming experience, especially for first-time home buyers. To minimize the stress, Cerita Battles, managing director, and head of community and affordable lending at JPMorgan Chase, recommends assembling your team sooner rather than later.

“You don’t have to go through the home-buying process alone—in fact, it’s best to get help very early in the process,” Battles says. She advises buyers to prioritize working with a lending advisor team “because they can help you navigate the home-buying process, with everything from considering homeownership to walking through your new front door to getting connected with a reputable real estate agent.”

Battles also says a trusted lender can guide you through the current rate environment, and educate you on loan products, terms, and fees.

Pro Tip
Bonus Advice: “It’s important to keep in mind that this will be your first home! Even if it lacks some bells and whistles, you can still add more features in the future or use the property as a stepping stone for your dream home.” — Cerita Battles, managing director, head of community and affordable lending at JPMorgan Chase

How To Prepare for Your 2024 Home-Buying Journey

Perhaps the first bit of advice that most housing experts offer hopeful buyers is to confirm you can afford this big step.

“[M]ake sure your financial house is in order and that you’ve factored in all of the costs associated with homeownership beyond a mortgage, like insurance, maintenance, and HOA fees,” Merritt says.

Using a home affordability calculator prior to beginning your search can help you determine a home price range based on your income, debts, mortgage rate, desired loan term, and down payment capability.

Taking these preparatory steps will also improve your borrowing strength, reduce stress, and keep you a few steps ahead of the competition in this fast-moving market:

    1. Create a realistic housing budget that considers all monthly costs
    2. Boost your credit score to help secure a lower mortgage rate and better loan terms
    3. Lower your debt-to-income (DTI) ratio to increase borrowing power
    4. Set aside savings for a down payment
    5. Research and compare loan products
    6. Look into down payment assistance programs in the state where you plan to buy
    7. Gather financial and personal documents lenders require for your mortgage application
    8. Explore different neighborhoods in person to optimize your time when you’re ready to check out homes
    9. Get to know the local real estate agents

Experts Reveal How To Get the Best Mortgage Rate in 2024

Qualifying for the most competitive mortgage rate requires a multi-pronged approach.

Besides keeping on top of mortgage rate trends, here are some other essential actions experts advise you to take to increase your chances of locking in a solid mortgage rate:

    • Save for a larger down payment. “Remember: the higher your down payment, the more likely that you’ll be approved for the loan, the less likely you’ll need to get a loan with mortgage insurance, and the lower your monthly payment will be,” Sharga says.
    • Boost your credit score. “There are dozens of factors that influence a borrower’s mortgage interest rate, and credit score is one of the most important,” Chen says.
    • Shop multiple lenders. “Today’s market is very challenging for mortgage companies who are all hungry for business,” Sharga explains. “[T]hat’s a perfect environment for a consumer to do comparison shopping in.”
    • Strategize and consider points. Blahut advises buyers to budget for mortgage points or to “strategize with their trusted real estate professional” and figure out how to get the seller to contribute closing concessions.
    • Determine the best loan product for your situation. “Discussion about rates typically focuses on the 30-year fixed rate,” Bailey says. However, the average homeowner lives in their home for eight years, so Bailey suggests buyers weigh all their lending options, including ARMs.

Source: Forbes.com ~ By Robin Rothstein ~ Image: Canva Pro

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How to Get Your Finances Ready to Buy a House

Home Buying Financial Readiness

In fact, your finances are so important that you’ll want to start working on them well before you’re ready to apply for a mortgage. That way, if you need to improve your finances or your credit, you’ll have some time.

We’ll delve into tips about how to get your finances ready to buy a home so you can prepare for the process.

Step 1: Know what lenders are looking at when assessing your finances

When you apply for a home loan, lenders want to assess whether you’ll be able to pay them back. They’ll check to see that you have a steady income and look at how much cash you have available to cover a down payment, closing costs, taxes, and other expenses. Recent banking activity, investments, and other aspects of your finances will come under the microscope too.

If you’re a candidate for a no-down-payment loan, such as a VA loan through the Department of Veterans Affairs, you’ll need documentation to prove it.

Lenders will also check your credit to assess your history of paying your debts and look at how much outstanding debt you have.

Different lenders may look at different things when checking your finances, but the goal is the same — to help decide whether to risk lending you money and how much interest to charge. Here’s a list of what lenders are likely to consider.

    • FICO® credit scores and credit history
    • Down payment amount
    • List of assets (stocks, real estate, etc.)
    • Income and employment history
    • Tax returns
    • Bank statements for two to three months
    • Desired loan amount compared to the value of a home
    • Total debt compared to income — your debt-to-income ratio
    • Rental history (if you’re currently renting or have rented in the past)

To improve your chances of getting a home loan with the best possible terms, you should save as much as you can for your down payment, get your debt-to-income ratio under 43%, and do what you can to improve your credit scores. Specifically, we’re talking about the scores compiled by Fair Isaac Corp., known as FICO, which are the mortgage industry benchmark.

Step 2: Take stock of your credit scores and credit reports

It’s not possible to say exactly how to raise your FICO® scores — everyone’s personal situation is different — but there are a few practices that can usually help, especially if you adopt them a year or more before you apply for a mortgage.

    • Pay your bills on time — Your credit scores will fall if you’ve missed payments on a credit card or another debt.
    • Use less of your available credit — Your credit utilization ratio, which measures how much debt you’ve taken on compared to what’s available to you, is an important factor in your scores. Using less than 30% of your available credit may lift your scores. Paying down your debts may also lower your debt-to-income ratio, another measure that doesn’t affect your credit scores but is used by banks to assess your creditworthiness. (We’ll explain later.)
    • Hold off on opening new credit accounts — When you apply for credit, a lender will initiate a hard credit inquiry, which will have a temporary negative effect on your scores.
    • Maintain a mix of credit accounts — Your credit scores are affected by what kinds of credit accounts you have, how old they are, and how many of them you have. If you’re managing a mix of different types of credit without trouble, you’ll look less risky to lenders. Note that you shouldn’t open new accounts just for the sake of creating this mix (see point above).

If you have poor credit and stick with these approaches, your credit scores are likely to rise over a period of months. If your credit improves, lenders may see you as a better risk and charge you a lower interest rate on your mortgage.

Why should you worry about your credit scores? Imagine getting a $250,000 mortgage that lasts 30 years and has a fixed interest rate. Take a look at the table below to see how credit scores affect how much you could pay just in interest (not counting the actual money you borrowed) over the life of the loan. You can plug in your own information on FICO’s site to get a better idea of what your interest payments could be.

FICO® score APR Total interest paid
760 to 850 2.422% $101,970
700 to 759 2.644% $112,384
680 to 699 2.821% $120,811
660 to 679 3.035% $131,145
640 to 659 3.465% $152,384
620 to 639 4.011% $180,245
Note: Rates change frequently. The rates in this example were selected on Oct. 7, 2020.

Step 3: Save for your down payment: Bigger is better

You should save as much as you can for a down payment. A bigger down payment means you’ll own more of your new home from the start. This makes you a lower-risk borrower in the eyes of lenders and usually translates into a lower interest rate on your home loan.

Another reason to put down more cash is to avoid private mortgage insurance or PMI. Most lenders will require you to buy PMI — which protects the lender in case you default on your loan — if your down payment is less than 20% of the purchase price of your home.

The cost of PMI depends on the type of mortgage you get, how much you put down and some other factors, but usually costs between 0.5% and 1.5% of the loan amount each year and can add up to thousands of dollars.

Plus, you’ll want to factor in additional closing costs, which can include home inspections, an appraisal, and escrow costs, like homeowners insurance and property tax payments.

Step 4: Measure your debt-to-income ratio: Getting to 43%

Your debt-to-income ratio, or DTI, — which measures your outstanding debt as a percentage of your income before taxes — is used by lenders as another way to gauge your ability to repay your mortgage.

Your DTI ratio is calculated by adding up all your current monthly debt payments (think student loans, personal loans, credit cards) and your proposed mortgage principal, interest, taxes, and insurance payments, and then dividing that number by your gross monthly income (your income before taxes and other deductions).

For a qualified mortgage — a home loan that meets certain regulatory requirements put in place in 2014 to protect lenders and borrowers — you’ll need to have a DTI ratio of 43% or less.

Lenders can extend loans to borrowers who have a DTI ratio higher than 43%, but you generally need a compensating factor like high cash reserves, and even then it’s rare. Lenders consider a higher DTI risky for both you and the lender, as it suggests to them that you may struggle to pay your mortgage and keep up with all your other debts.

If your DTI ratio is too high for lenders’ comfort, you’ll need to lower your debt increase your income, or both. Since changing jobs or demanding a raise mid-mortgage application may not be practical, you may want to focus on paying down debt.

There are differing opinions about the best way to tackle the job. Some experts recommend paying off your smallest debt first — which research has shown can be effective. Some say it’s better to start with the highest-interest loans — that way you pay less interest over the long term. Still, others say that paying down your debt with the biggest monthly bill is the best way to lower your DTI quickly.

Whichever way you decide to go, keep in mind that the goal is to lower the amount of debt you have as a percentage of your income, so choose a method that you can commit to and that effectively moves you in that direction.

Tips for choosing a home you can afford

It may take a while for you to save for a down payment, lower your DTI ratio, or improve your credit scores. But if you work hard and stick with it over time, you may begin to see some rewards, like easier loan approval and better loan terms.

In the meantime, here are some things to consider as you think about what home you’d like once your finances are ready.

Set a budget

To figure out how much you can afford, consider getting preapproved for a mortgage. But when you do, remember that the lender is making a mostly mathematical calculation and not taking into account your comfort level or preferences. Make sure you’re comfortable with the amount you plan to borrow, even if the lender says you can borrow more.

Your mortgage payment isn’t the only expense you’re responsible for.

Narrow down location and neighborhood

Before you begin looking for a home, take some time to think about the type of environment you want to live in — city, suburbs or rural.

Next, narrow your search to a few neighborhoods. Here are some things to consider.

    • Safety — Some websites offer crime statistics by area. If you’re especially concerned about crime, check with the local police department.
    • School district — Houses in good school districts typically have higher property values. Look up ratings of schools in the area. But don’t rely on ratings alone. Check out online reviews or talk to parents who send their children to local schools.
    • Activities — Find out whether there’s a park nearby. Can you get to hiking trails quickly? What about playgrounds, pools or playing fields?
    • Convenience — Do a test run of your morning commute and check the drive time to the local grocery store. Time spent on the bus or driving to the store adds up and will affect how you spend your time when you move into your new home.

Type of home and other considerations

You’ve got the location and neighborhoods. But what type of home do you want — single-family, townhouse, condo or apartment? Here are some other considerations.

    • Condition — Move-in ready or fixer-upper? Consider how much you’re spending, whether you’re handy or hate the sight of a screwdriver, and how long you’re willing to wait to move in.
    • Resale — If you’re planning to stay in your home for a shorter time period, resale value will be more important than if you’re planning to stay long-term.
    • Other features — Central air conditioning, swimming pool, garage, granite countertops, hardwood floors, walk-in closets. Have some fun figuring out what you can and can’t live without — and how much it will cost you.

Source: creditkarma.com ~ By: Erin Dunn ~ Image: Canva Pro

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Buying or Selling a Home in Winter: What You Need to Know

Buying or Selling a Home in Winter

Nobody buys or sells a home in the winter, right? Well, if you checked the numbers, you’d find that plenty of homes are sold during the coldest months of the year. From December 2022 to February 2023, nearly 800,000 homes sold in the U.S. That’s a lot of houses!

In other words, the number of homes bought and sold during the winter is nothing to sneeze at. Plus, since most buyers search for homes online these days, it’s not like outdoor temperatures are keeping potential buyers from looking around.

If you’re wondering whether you should put off buying or selling a home until spring, there’s no need to wait. In fact, there are several advantages to buying or selling while Jack Frost is nipping at your nose. Let’s look at some of the biggest ones and go over some tips that’ll get you moving in the right direction.

Tips for Selling in the Winter

Nothing says welcome home quite like the smell of a gingerbread candle and some Christmas lights—it’s easier to stage a house and make it feel like home in the wintertime!

Here are a few tips to help you set the buying mood:

    • Keep it simple. If you’re selling around a holiday and have decorations up, make sure they accent—not overpower—a room. Less is more.
    • Crank up the cozy. Light a fire in the hearth, play soft holiday music in the background, and prepare fresh-baked goods or mulled cider for guests.
    • Shine a light outside. Winter days get dark early. Brighten your home’s exterior with outdoor spotlights.
    • Take down outside decor. Nothing says “my home won’t sell” like a house with reindeer inflatables on the lawn in February.
    • Avoid a winter wonderland. Snow is great—unless we’re talking about outside shots of your home. Buyers want to see details of the house, not a blanket of snow. Make sure you have clear-weather photos of your home.

Remember, the nicer your home looks, the more likely it is to sell—and for more money.

Advantages of Selling Your Home in the Winter

Okay, huddle up, home sellers. Let’s unpack the perks of selling when the air gets chilly.

1. You’ll face less competition.

Come spring, more sellers will flood the market and your home will be just another fish in a great big pond. But in winter, you’ve got a limited number of sellers on the market. For example, the number of active home listings in the U.S. during 2021 and 2022 dipped during the winter and didn’t begin rebounding until the spring of the following year.2

If that pattern repeats in 2023–2024, you’ll have less competition on the market if you list your home during the winter! Buyers have fewer homes to choose from, which means you could sell your house faster.

2. Buyers often mean business.

Most folks want to curl up under a blanket next to a warm fire on a cold winter day. If a buyer is trudging around in freezing weather or breaking away from their holiday schedule to look at your home, they must be serious. That’s because many winter buyers are working against a deadline, whether it’s an expiring lease, relocation, or a contract on their current home. They may also be trying to snag some tax breaks before the end of the year.

3. People have time off during the holidays.

You may think people are less likely to see your home in the midst of their hectic holiday schedules. That can definitely be true. But keep in mind, that many people also have more time off around the holidays. That means more time for browsing their favorite home apps, dreaming about their future decor, and even scheduling home showings.

Tips for Buying in the Winter

Alright, home buyers. Now it’s your turn. Below are some tips for buying a house when the weather outside is frightful.

    • Don’t buy until you’re debt-free with an emergency fund. Hold off on buying a home if you haven’t paid off all your consumer debt (think credit cards, car notes, and student loans) or saved up a full emergency fund worth 3–6 months of your typical expenses. You should prioritize those financial goals first.
    • Save up a strong down payment. You need to make a strong down payment when you buy a home because a bigger down payment means smaller monthly payments and less debt overall. Aim for a 20% down payment since that’ll keep you from having to pay monthly private mortgage insurance fees. (A 5–10% down payment is fine if you’re a first-time home buyer, though.)
    • Stick to your budget. Sure, home prices might drop a bit with the temperatures. But that doesn’t mean you should justify spending any more than 25% of your monthly take-home pay on monthly housing payments. To make sure your winter home purchase is a blessing and not a curse, calculate how much house you can afford and stick to it.
    • Negotiate with confidence. Remember, there isn’t much competition. So, sellers will probably be willing to work with you. If the home inspection brings up some issues, don’t be afraid to ask your seller to make repairs or lower the asking price.

Advantages of Buying Your Home in the Winter

Now, here are some of the biggest advantages to buying a home in winter:

1. You’ll have less competition.

Home sellers aren’t the only ones who face less competition during the winter! As we saw earlier, home sales take a bit of a plunge during the winter. So, typically, you won’t have to deal with as many competing buyers as you would if you waited to buy in spring. This probably means you don’t have to worry as much about someone else snagging your dream home before you can submit an offer, or about getting caught in a bidding war.

It’s kind of like when someone brings in holiday treats to share with the office but most of your coworkers are out of town. You get first dibs on the best desserts!

2. You may get a better deal.

Since supply and demand for housing are both down during the winter months, you might be able to save money on your purchase! Hard to believe? Get this: The median sales price of homes sold from December 2022 to February 2023 was about $20,000 lower than homes sold from March to May 2023.

That means people who bought their homes during winter saved tens of thousands of dollars compared to those who waited to buy in the spring or summer! That might make any challenges of buying during the wintertime worthwhile.

3. You can lock in the current mortgage rate.

As you’ve probably heard, interest rates have climbed up a lot lately. Well, there’s a chance that the trend will continue moving forward since the Federal Reserve (the Fed) could raise the national interest rate again at its next meeting. So, if you’re going to use a mortgage to buy a house, locking in your rate now could save you from paying even more down the road. And if rates wind up going down over the next year or so, you can always refinance.

If you follow these tips, there’s hope you’ll find the house you want and get a good price on it this winter.

Ready to Buy or Sell Your Home in Winter?

With all these advantages on your side, hopefully buying or selling your home in the winter won’t feel so daunting. We know you’ve probably got a lot on your plate this time of year though. So, we’ve put together some resources to help you check everything off your list. For a step-by-step plan that’ll walk you through every part of the process, use our free Home Buyers Guide or Home Sellers Guide.

Source: ramseysolutions.com ~ Image: Canva Pro