Making the decision to become a homeowner is one of the most important financial investments many of us will make, and financing a home purchase is the first step in the process.
Using a trusted lender can save thousands of dollars in unexpected fees and hidden costs, and a good Realtor can help buyers set and stick to a realistic budget.
“The most important thing that we can recommend is to research the lender options,” said Jamie Sauder, president of Sunflower Association of Realtors. “Don’t just go for the cheapest rate. Buyers need to make sure they have a good understanding of what the lender’s fees are, too.”
Some of the worst deals Sauder has seen are borrowers who have gone online or to out-of-town lenders advertising lower interest rates. In reality, these lenders charge high fees upfront in exchange for what only amounts to nominal interest savings in the end.
Once a lender is selected, borrowers receive a pre-approval letter stating the amount they are approved to borrow toward a future mortgage. Lenders approve loan amounts based on the debt-to-income ratio of the borrower. This is determined by how much debt a borrower carries on expenses, such as car payments, cell phone bills, credit cards and other debts they’re obligated to pay on each month, versus how much income they generate during the same time period.
According to Tim Murray, senior mortgage consultant at Capitol Federal Savings, most banks adhere to the Ability-to-Repay guidelines from federal regulators, which provide a framework for determining what a borrower can afford.
“Each borrower’s financial situation and goals are unique,” Murray said. “Capitol Federal has experienced loan staff available to assist borrowers in determining what may be right for them.”
Murray recommends having a pre-approval letter in hand prior to beginning to look at properties. This helps buyers maintain realistic expectations and shows they are serious about buying versus just looking.
Potential buyers might be surprised to find they qualify for a larger loan amount than they initially guessed. It’s important to keep in mind, however, that buying a home at the top of your budget could mean sacrificing on travel, dining out, home improvements, vehicle purchases and other lifestyle considerations in the future.
“It’s a very personal decision how much one would like to spend,” Sauder said. “Some like to spend as much as they can afford and others don’t. As Realtors, we mainly try to make sure that we search for homes that are appropriate for the budget the buyer has set forth.”
First-time borrowers often forget to factor ongoing maintenance expenses into their long-term budget, which can leave them in a pinch. Murray reminds clients to account for expenses such as the replacement of air filters, repairing or replacing hot water heaters, the replacement of appliances as they wear out and painting, mowing and landscaping costs — all of which can add up quickly.
He also encourages them to plan for annual increases in real estate taxes and homeowners insurance when creating a housing budget.
In order to stay within budget and avoid costly repairs that could come up right away, Sauder recommends ordering a thorough inspection of the property before closing. Being diligent during the inspection period can uncover issues and help avoid budget-blowing trouble down the road.
“The most important part of a transaction is the inspection period,” Sauder said. “I have always believed that if there is something bad about a house, it is better to find it during inspections and have a deal fall apart than it is to find out the hard way, which is after closing.”
When selling and purchasing homes simultaneously, making two mortgage payments or paying for temporary housing and storage should be factored into the budget if closings aren’t aligned. Renting a moving truck and purchasing new furniture also contribute to hidden costs and aren’t covered by the terms of a home loan. It’s a good idea to have some extra money set aside for these incidental expenses.
Deal seekers may find the idea of purchasing a fixer-upper tempting and see it as a way to save money, but Sauder encourages first-time buyers to proceed with caution.
“Buying properties that need improvements is something that is not for beginners,” Sauder said. “These scenarios require some experience in ownership. For those that are investing, it is important to have the money on hand to make the necessary repairs.”
There are some loans that allow buyers to borrow money for the purpose of making improvements. However, they typically require bids and estimates for the cost of repairs and work to be performed by licensed contractors.
“It’s important to go into a project with a plan and a budget, and that budget needs to include a contingency plan for when something unplanned comes up,” Sauder said.
Another mistake first-time buyers make is abandoning a budget altogether because the right house at the right price isn’t currently on the market or by buying a house based on emotional decision-making alone.
“Inventory is low, so it is likely that the perfect house at the perfect price won’t be readily available,” Sauder said. “It’s OK to be patient and wait to find the one. The right house will come along, and when it does two things will happen. First, you will know it is the one, and second, your Realtor will help you get the best deal possible.”
Sauder recommends using a Realtor to stay within budget and help buyers look objectively at what is realistic and what may be beyond reach. This advice also extends to those looking to sell at a good price and in a reasonable amount of time.
“Realtors are very good at telling what a home is worth as it sits and what it could be worth with improvements,” Sauder said. “We get to do this every day, and when we come up with a price, we typically have stats to back that opinion up. In the kind of market that we are in now, sellers who have priced their properties competitively have gotten more money for their homes and (sold) faster. My advice would be to listen to the pros.”
Shanna Sloyer is a freelance writer from Topeka. You can reach her at firstname.lastname@example.org.