What you should know before bidding on that house6/5/2012
Warming trends in the housing market have more buyers out strolling into open houses especially first-time homebuyers. But how many of these first-timers are ready to make an offer? Not as many as you might think. Before shopping for a home, homebuyers must shop for a loan so they know if they can swing payments on that two-story Colonial.
In this installment of Buying Advice, we'll take buyers through a quick mortgage-shopping primer and provide resources to help them navigate the often confusing world of home financing. We'll also check in on the latest housing statistics and answer a reader's question about how to help your bid come out on top when several offers are on the table.
Mortgage shopping 101
Before you get in the car with a real-estate agent, you need to know that you have the financial firepower to make a deal. How much are banks willing to lend you, and what will it cost you?
If you figure this out ahead of time, you'll have a better idea of the homes you should look at. You'll also feel more confident about making an offer, says Erin Lantz, director of Zillow Mortgage Marketplace.
"A lot of people think about mortgage shopping at the very last minute," Lantz says. Then they don't have time to choose a lender that they're comfortable with or that gives them the best deal. "Do your shopping upfront."
Especially if you're a first-time buyer, here's where you should start:
Find out how attractive you are to banks. We've said this time and time again: The best place to start is by pulling a copy of your credit report.
Once a year, consumers can request a free copy of their credit report from AnnualCreditReport.com, which gathers its information from the three major credit-reporting companies: Equifax, TransUnion and Experian. For $9, you can get a copy of your credit score, which is how lenders will judge you.
Talk to different lenders. Once you have your credit report and score in hand, see what a handful of lenders will offer you. Don't just take one person's advice, Lantz says. Shop around.
Try reaching out to several different types of lenders, including a credit union, a national bank and a regional lender or mortgage broker about which you hear good things.
You can also shop for loans online. Just keep in mind that many of these websites make money by generating leads for lenders. While many initially screen the lenders on their sites and occasionally "mystery shop" their services, they aren't monitoring all transactions to ensure the lenders are offering you superior service or deals. They also can't recommend one lender over another.
Read these sites' frequently asked questions thoroughly so you know what to expect. Be prepared to receive as many as 20 quotes from lenders once you submit a loan request.
You can keep track of the rates and fees from different banks on the Federal Reserve Board's mortgage worksheet (PDF).
Make sure you understand the different types of loans, from fixed-rate loans of 15 or 30 years to variable-rate loans, in which the rate changes after a certain time. Given that interest rates are at or near historic lows, experts say, it may be best to lock in the longest term you can.
Obtain all cost information. This is where it gets a little tricky. Not only do you want to find out what interest rates banks are prepared to offer you, but you also want to find out about all of the related fees.
Expect appraisal and application fees, as well as third-party closing costs such as title and escrow fees. Space for these fees is included on the Federal Reserve's mortgage worksheet.
Educate yourself about private mortgage insurance, as well. If you're not paying 20% of the purchase price as down payment, your lender will require this additional monthly cost to help cover its costs should you default on your loan.
Ask each lender to break out the interest rate, PMI and all other fees, including estimates on those from third parties, on a worksheet. "Show that to another lender and ask them to beat it." Lantz says. And know that many of these fees are negotiable.
Get preapproved for a loan. Once you have narrowed down your lending choices, get preapproved. This is different from being prequalified, which just means lenders have taken a quick look at your income and credit score and decided that you look like an acceptable risk.
You want to be preapproved so you that when you make an offer, you have a document in hand that says your loan will be funded, as long as the property appraises as expected. Typically, you lock in a mortgage rate for a certain time, ranging from 45 to 90 days. When you think you're within three months of buying a home, make sure you get this letter.
Now you're ready to go home shopping.
Existing-home sales rose 3.4% to 4.62 million in April, from 4.47 million in March. At this pace, sales are 10% higher than they were in April 2011, according to the National Association of Realtors.
The U.S. median existing-home price jumped 10.1% to $177,400 in April from a year ago. Price increases were reported in March and April a good sign.
"It is no longer just the investors who are taking advantage of high affordability conditions," says Lawrence Yun, the NAR's chief economist. "A return of normal homebuying for [owner] occupancy is helping home sales across all price points, and now the recovery appears to be extending to home prices."
FNC's national Residential Price Index, which excludes foreclosures, showed a 0.5% increase in March from February, the first increase since July 2011.
Home-value gains will be modest this year, for sure. Yun expects them to cap at 1% to 2%. However stronger spikes in prices are expected in 2013.