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Part 1 of 2 Real estate is often considered a wise investment: it diversifies your investment portfolio and can provide a steady stream of passive income. But when does it actually make sense to rent out your current home to fund a second one or to buy a property specifically to rent? Experts in the real estate industry weigh in on questions prospective additional-home-buyers should ask when considering such a weighty purchase. Will my income cover more than enough for both homes? “If the new purchase produces enough rental income to cover its own expenses, a debt payment, and a healthy stream of cash flow, then it's a good deal. That said, if the new loan does not have a fixed interest rate, the purchaser should start seeking a long-term loan on the property with a fixed rate soon after purchase to avoid rates going up and eating up cash flow. The new investor needs to have a plan to take the property to profitability and a team in place to implement the plan. That team should consist of a property manager, maintenance staff, accountant, and an attorney.” Matt Faircloth, author of Raising Private Capital: Building Your Real Estate Empire Using Other People's Money and Co-founder/Owner of the DeRosa Group “Before you jump into buying an investment property to rent out, conduct careful comparative market analysis and investment property analysis to make sure exactly how much rent you can expect to charge for this property and how much your expenses associated with owning and running this rental property will be. If you think you might end up with negative cash flow, don't take a second mortgage to buy a house to rent out.” Daniela Andreevska, Content Marketing Director at Mashvisor, a real estate data analytics company Could I stay afloat in a worst-case scenario? “What drives a lot of people away from the rental business is tenants and repairs, and rightfully so. If you don't buy a property that cash flows significantly, then you can get hammered financially. The income from rentals should cover your expenses, such as mortgage, property taxes, repairs, upgrades, property management, and vacancies.” Shawn Breyer, Owner of Breyer Home Buyers of Atlanta “The first rule of real estate investing is to make sure you always can cover your expenses in the worst of times. If your renter decides not to pay, and it takes six months to evict him, will you default on your mortgage? If so, then maybe you are not ready yet. Single family homes and duplexes are always a safer investment bet than condos, since you have more control over your expenses. If you run into tough times, you can decide to turn off the water, electricity, skip the landscaping, drain the pool, etc. In a condo, those things stay maintained, and your condo fees don't change just because you are having financial challenges.” Sep Niakan, Founder and Broker at Condo Black Book and HB Roswell Realty “To avoid taking out additional financing, I suggest that each buyer have ample reserves in place to cover the expenses associated with being a landlord. Expenses include repairs, maintenance and leasing costs if the property becomes vacant. The size of a buyer’s reserves depends on the price of their home and their initial down payment. As an example, for a two-bedroom/two-bath single-family rental in Kansas City on the market for $138,000, we recommend that a buyer save at least $3,245 for expenses, assuming a down payment of 25 percent. But that number is only an estimate, and I recommend consulting with a lender for more guidance.” Zach Evanish, Director of Retail Sales at Roofstock, where single-family home investors can buy properties remotely How will this benefit me in the future? “It makes sense to keep your first or second home as a rental when the rent you’d earn would pay the cost of your mortgage, taxes, insurance, and other property-related expenses. When that happens, the renters are paying off an asset you own. You can fund a college account for your kids by getting a 15-year mortgage, and if the child you’re saving the college fund for is three years old or younger, it will pay off by the time they head to college at age 18. You can then either use the rental income or sell the house to help pay tuition. If you time a mortgage to pay off before you retire, rent can also be a source of income in your golden years.” Henry Brandt, Branch Manager of Planet Home Lending “I have represented many people who have either leased their home as an investment when they moved or taken out a home equity loan to fund an investment. Real estate over the long term has been an excellent inflation hedge, offers significant tax advantages through depreciation, when sold the taxes can be deferred in a like-kind exchange, and unlike other assets, you can leverage the investment, borrowing 80-95% of the investment. I have been investing since I was 21 and I am 61 now. My son has been investing since he was 20 and he is 30 now. Both of my daughters bought property while in college, and both properties are now leased and paying for their current home.” Bruce Ailion, Realtor and Attorney at RE/MAX Town and Country of Atlanta The Final Word If you think renting out a property will pay off for you in light of what the experts have to say, it might be time to consult with a home loan company to weigh your purchasing options. In Part 2 of this series, the experts will discuss the benefits and challenges of purchasing and renting out different home types (single-family, apartment, duplex, and condo) as well as tips for being a successful landlord.
Most often the hardest part about buying a house is saving up for the down payment, the closing costs, and the associated fees. A large chunk of your savings, or maybe the entirety of it, is all going towards one of the biggest purchases of your life. So where do you start? How do you plan to save enough money for this important purchase, and how do you stick to such a plan? Here are a few financial tips you could implement into your home-buying plan: Make a detailed budget The first and most important step to saving money is creating a detailed budget. If you don’t have a plan, you may fall back into bad habits and let saving money for that dream home slip through your fingers. There are free budget templates you can get online, or you can design a personalized one of your own. Whatever you prefer, just make sure it is something you think you can stick to and benefit from. Schedule updates Having a plan is great, but if you don’t have regular updates and keep up with it, your master plan can easily fade day by day. Making time for weekly, monthly, and yearly updates is a great way to make sure you are staying on task and saving as much money as you had originally planned. Initially, it might even be beneficial to do daily updates, especially if you have a hard time getting into the habit of saving money. Put the money somewhere you can’t access easily People have different ways to save money, whether it be saving it in a big jar marked “Dream Home” or keeping it in their checking account for easy access. These may be options that work for some people, but we suggest changing it up a bit. Having your saved money easily accessible can often prove to be a temptation. If you put your saved money somewhere that is difficult to get to, there is a better chance that you will not defy your budget. One way to do this is to open a separate savings account that is not linked to your checking account. Keeping money in your checking account could end poorly if you forget how much money is supposed to be saved and what money you can spend. (This is also where a budget can come in handy.) Additionally, there is often a withdraw limit on savings accounts that resets monthly, making it more difficult to keep withdrawing money from it. This could prove to be the financial motivation you need not to touch the money you have in savings. Utilize automatic saving tools If you have your paychecks automatically deposited into your account, most employers also offer an option that allows you to allot a certain amount of your paycheck to be taken out and put straight into a savings account. That way, when you get your paycheck, you won’t even have to worry about putting aside the money yourself; the money will already be separated. Cut out any unnecessary expenses Part of saving money is deciding what expenses are necessary and what expenses you could really do without. Try making a list of all your monthly expenses and decide which ones you can get rid of. This will help lighten the load on the things you have to pay for and will ultimately help you reach your savings goal faster. Saving for a home can be overwhelming, but if you use these financial help tips, we think your experience will go much more smoothly.
Am I ready? How do I start the process? Do I have enough money saved? These might be just some of the questions that you’re asking yourself as you prepare to buy a house. Thanks to the assistance of more than 10 real estate experts, we have created a house hunting checklist that will help you feel more prepared for finding and buying your dream house. Let's get started. Dive deeper into one of the tips below or start from the very beginning: Get financially fit Build a strong real estate team Get a full pre-approval Evaluate what type of home you want Determine your priorities and deal breakers 1. Get financially fit Multiple financial factors can affect home loan approval. Typically, the most important factors include the following: Credit score Debt-to-income (DTI) ratio Down payment Work on your credit score Credit score requirements vary based on lender and loan type, but a 620 credit score is generally the minimum requirement for conventional mortgage products. Your credit score plays a significant role in loan approval and determining what rate you qualify for. Therefore, while there are options to buy a house with bad credit, you should be aware of your credit score and do everything you can to increase it. Senior Loan Officer Kim Hankins advises prospective homebuyers on specific ways to protect and improve their credit score: Treat your credit score like your adult GPA, and be organized and conservative with your finances — that’s all a lender could ever dream. First-time homebuyers often overlook the importance of a strong credit score. An 800 credit score is more valuable than $100,000 in the bank. search How to strengthen your credit score: Avoid late payments on all debt types Keep your credit utilization low Avoid opening multiple, new credit accounts — doing so incurs hard credit checks, which will impact your overall credit score Manage your existing debts In addition to your credit score, mortgage lenders are also interested in how much money you have tied up in other debts. This is illustrated as a percentage known as your debt-to-income (DTI) ratio, which is calculated by dividing your monthly expenses by your gross monthly income. While you want to ensure that your credit score is high, you want to aim for a low DTI ratio. In most cases, you will need to have a DTI ratio of 43 percent or less to qualify for a mortgage. While there may be some exceptions to this rule, mortgage lenders are less likely to approve you for a home loan if they see that you already have a substantial amount of debt — they want to make sure that you’ll be able to make your mortgage payments. If you calculate your DTI ratio and discover that it is higher than the recommended 43 percent, work on paying off some of your existing debts or consider consolidating debt. Either option could help you secure lower interest rates, reducing your monthly mortgage payments. Consistently save for your home A 20 percent down payment is recommended when buying a house. However, that doesn’t mean that a 20 percent down payment is the fixed rule. In fact, most homebuyers make a down payment between 12 and 16 percent. Many mortgage lenders even have lower down payment options from 3 to 5 percent. When saving money to buy a house, it is also important to factor in closing costs. Closing costs usually account for about 2 to 5 percent of the purchase amount on the house you are closing on. Keeping all these costs in mind, it’s beneficial to save money and put aside a portion of your income. Doing so can provide you with peace of mind, as well as the confidence that you are financially prepared to purchase a house. Determine how much home you can realistically afford Utilize a home affordability calculator and consult with lenders about your financial situation to determine how much home you can afford. John Bodrozic, co-founder of HomeZada, recommends doing thorough research of the costs associated with homeownership: Use mortgage calculators to estimate your monthly payments and estimate the annual household expenses, such as utilities, property taxes, and preventative and normal repair costs. Once you have these numbers, then you will know what price range of a home your finances will support. This method makes sure you are looking for a house that is within your budget, versus getting emotionally attached to homes you really love but financially you cannot afford them. It also helps you be a more competitive and ready buyer because once you have the financial aspects down, you are ready to move quickly when you find a home that works for you. Other competing buyers for the same home may not have their financial house in order so you can move quicker with your offer. 2. Build a strong real estate team Shop around before committing to a lender Doing research, talking to loan companies, and getting quotes is the best way to discover which lender and loan type is best for you. You can consult our list of top-rated lenders to learn more about specific lenders and what they offer. There are several loan types with varying benefits, down payment options, and minimum credit score requirements. The most common loan types include some of the following: Conventional fixed-rate loan Adjustable rate mortgage (ARM) loan FHA loan VA loan USDA loan Jumbo loan All mortgage lenders typically offer conventional fixed and adjustable rate loans, as well as the FHA loan product. The FHA, VA, and USDA loan products are government-backed loans that provide greater down payment flexibility for eligible borrowers. The jumbo loan product is reserved for home purchases that exceed the conforming loan limit, and it is not available with all mortgage lenders. Kendra Barnes, founder of The Key Resource, offers her best house hunting tip for lender shopping: Shop around. Most buyers go with the first lender they call because they aren’t aware that they can shop around! Just because a bank gives you a pre-approval letter does not mean you have to stick with them! Ask about incentives. Ask the lender if they have any incentives such as lender credit at closing or fee waivers. Make them compete for your business. As you’re shopping around, be sure to tell each lender you call what the other lender is offering. Ask them if they are able to match or beat that lender’s terms. search How to comparison shop for a home loan: Shop around — don't do business with the first lender you find Ask about incentives Make lenders compete for your business Find a realtor who is a good fit Consider using a real estate agent to help you find houses that meet your expectations and are in your price range. Because real estate agents are familiar with the mortgage process, they can also answer any questions you may have along the way. There are practical considerations to keep in mind when choosing a real estate agent. Shawn Breyer, owner of Breyer Home Buyers, describes what buyers can do to maximize efficiency and success within the realtor-client relationship: You should find properties online and then do a drive-by as soon as possible before reaching out to your realtor. When you do this, you will quickly weed out homes that don't match your criteria. Imagine that you're trying to find a home in a well-maintained neighborhood and a couple of the neighbors have cars parked in the yard that they are working on. These are things that Google Maps or the listing may not show. You will weed out properties much quicker with this approach while respecting your realtor's time by not making them meet you at houses that you instantly realize you don't want to buy when you pull up. In a competitive market, speed is king. Find a highly recommended property inspector Alex Romanov, co-founder of iwillbuyhouse.com, emphasizes the importance of an oft-overlooked aspect of house hunting: Prior to house hunting, every buyer should find a highly recommended property inspector. A careful property inspection done by an expert can save you tens of thousands of dollars of costly repairs. Therefore, the top inspectors are highly sought after and are often booked for weeks in advance, so it helps to get one on your team as soon as possible. 3. Get a full pre-approval Prepare paperwork and complete a loan application Senior Loan Officer Amy Tierce describes why it's smart for prospective buyers to choose and start working with a lender early on in the homebuying process: Speak with a competent mortgage lender if the borrower is not looking to purchase for as long as a year out. Why? Because there are many items that can impact qualification, starting with credit. If there is an error on the credit, getting it corrected can take weeks, which is often too late if you have an accepted offer on a home. Self employed (Schedule C) buyers need to look at year over year income and may want to change the way they file to maximize income. Multiple asset accounts or complicated down payment strategies may also need to be addressed. For example, if a borrower is getting a gift, or has money in a trust or other financial vehicle, some adjustments may need to be addressed prior to buying. Imrad Poladi, vice president of NextHome, describes what the ideal pre-approval process looks like: It's been said before, but having a complete pre-approval process with a reputable lender is critical in the early stages of a home search. Buyers should aim to have as deep of an approval as possible. Do your best to get what is known as underwriting approval, which basically means that the buyer has been vetted to buy a home up to a certain purchase price and all that is left to do is find the right home. The lender sees no current red flags on providing the buyer a home loan. Talk to your lender about buying down your rate Poladi also suggests buyers look into buying down the interest rate on their loan: Depending on the type of loan, every $1,000 negotiated down only saves the buyer a few dollars per month. But if the buyer buys down the rate, the savings could be far more significant on a monthly basis. I suggest that a buyer talk to an agent and/or lender for further clarification on how this would work. Buying down your rate is typically achieved through purchasing mortgage points — fees paid at closing in exchange for a reduced interest rate. 4. Evaluate what type of home you want Before you start looking at homes, it’s important to determine what type of house you want: Do you want to move in and not be required to change a thing? Do you want a challenge with a house that might need some renovations? search Two types of homes: Move-in ready/Turn-key — a home that is immediately livable, requiring no major repairs or improvements Fixer upper — a home requiring repair or renovation (often purchased by individuals who want to make a return on investment by immediately renting out or selling the property after renovation) Compare the benefits of a turn-key home or fixer upper John Bodrozic, co-founder of HomeZada, explains how buyers can compare the implications of the choice between a turn-key home or a fixer upper: [A turn-key home] house commands a premium purchase price. So as an example, with a $400,000 house with a 20 percent down payment of $80,000, your mortgage would be $320,000. At current market rates, with a 30-year fixed-rate loan of 4.5 percent, the buyer’s monthly mortgage payment would be $1,620 and you would pay approximately $263,000 in total interest over the 30-year loan. [A fixer upper] might sell for $325,000. A 20 percent down payment would be $65,000, which would be upfront cash savings of $15,000. The mortgage would be $260,000, which at the same 4.5 percent interest rate would be a $1,317 monthly payment, which is a savings of $303 every month. The total interest on this loan would be $214,000, which is an overall $49,000 savings from the other scenario. The ability to pay for those renovations could come from the savings in down payment along with the savings over time of having a lower monthly mortgage payment. Realtor Tania Isacoff Friedland of Warburg Realty weighs in on the question of how much capital and time is realistic to invest in a property: Some first-time buyers think they'll like the excitement of a renovation, but it's important to take into consideration the realistic cost and time involved to complete the work. In addition, renovating to your taste level or specifications is not always what someone else will want, so I caution first-time buyers doing a renovation not to ‘over-renovate’ and to keep things simple. When it comes time to re-sell, no one wants to overpay for someone else's renovation. Many first-time buyers don't have the time or energy to endure a renovation and will pay up for modern conveniences in a new development. Don't be misled, as there's still work to be done in new construction aside from decorating. For example, you will most likely have to outfit the closets and wire for audio-visual technology. Determine what home and yard maintenance you can handle Realtor, Broker, and GRI Frances Dawson reminds first-time home buyers to consider yard maintenance: One common pitfall for first-time homebuyers is not considering the maintenance of properties compared to the time they want to spend. A condo or townhome has a monthly fee for maintenance, but frees the homeowner's time for other pursuits. A property with a big yard or acreage, while appealing, can quickly become an overwhelming drudge or an expensive chore to hire out. 5. Determine your priorities and deal breakers Knowing what you want may sound like the easiest task of them all, but this can be difficult to decide, especially if you are buying a house with someone else. If that is the case, the best house hunting tip would be to find middle ground on both your wishlists. Here are a few questions that you can ask yourself to nail down your must-haves for a new home: How many square feet do you want? How many bedrooms do you want? Where do you want the house to be located? Do you want a big yard? Do you want to live in a populated neighborhood or a secluded area? If you know what you want ahead of time, the process of buying a house is going to be less grueling. Realtor Tracey Hampson recommends the whole family participate in this part of the house hunting process: I always recommend doing a want list and a need list with the whole family. It helps so much! I wish my previous buyers had listened to me and done this. We had been looking for homes for about six months and they finally decided on a gorgeous home, but when they told their children they burst into tears because they did not want a swimming pool! I know, what kid doesn't want a swimming pool? So including the whole family is always a good idea! Aside from the essentials (i.e., number of bedrooms, bathrooms, square footage), some home features to consider when you're making your wish list are ceiling height, closet space, versatility of the space, proximity to schools or work, gated communities, outdoor space, as well as additional storage in the building. Study cities and neighborhoods in-depth Suburban Jungle Founder and CEO Alison Bernstein shares three recommendations for town and neighborhood hunting: Don’t prioritize the house over the town in which it resides. The goal is to find a place where the culture and values of the town match yours. You can always trade up or down for a new home, add a third bathroom, or renovate a basement. Don’t excessively limit your search area by your commute. Just 10 more minutes on the train or bus could perhaps score you a lot more for your money. Don’t over romanticize walkability. Often, buyers coming from more urban centers feel they need a house as close to the shops and restaurants as possible. The reality is that schooling, sporting events, and other activities often take place out of the town center, limiting the importance of this feature. search How to find the right location for your home: Don't prioritize the house over the town in which it resides Don't excessively limit your search area by your commute Don't over romanticize walkability In addition, House Heroes co-founder, Earl White, recommends looking into neighborhoods that are most likely to hold value over time: Nobody wants to buy property in the process of depreciating. Sales comparison prices and online estimates look back in time, not forward. The clearest sign that a neighborhood will continue to hold its value is average days on the market. The days on market part of a listing tells you how long properties take to sell — it is an objective measure of neighborhood demand. If properties are sitting around for long periods of time at a certain list price, market values will fall below that price. When houses are ‘flying off the shelf,’ it's a good sign values will be stable or even appreciate. Similarly, regardless of sales comps, if houses are sitting on the market and not moving, it's a sign prices are on the way down from those list prices. Take a deep breath It's a big deal to buy a home and there's a lot to consider and prepare, but by following some of the steps above you’ll be able to prioritize and manage the homebuying process with less stress. Steve DiMarco, president of Key Mortgage Services, reminds first-time buyers of the long-term benefits and achievability of homeownership: While it's a seemingly large investment at the time of purchase, this is an investment in your future and your overall wealth. The investment goes beyond the physical home. You're not just purchasing a piece of real estate, you are building wealth. Homeownership is the first very important step toward that wealth creation. I tell first-time buyers that they are overlooking how achievable homeownership is. There are so many programs for first-time buyers — programs that require as little as three percent down. That's a few months of savings right there to get you into your home. Don't forget to get your handy home buying process checklist below.
Anyone who's actually traversed the complex and often lengthy home-buying process understands that HGTV shows tend to oversimplify just how much goes into buying a home. To be fair, HGTV's priority is not to highlight the boring loan approval and offer acceptance waiting games that accompany the home-buying process, but these are crucial steps in the home buying process that can’t be overlooked. While HGTV can give you great ideas for interior design, and priceless entertainment value, there are certain things you won’t necessarily learn about regarding the home buying process: Buying a home takes time Shopping around for a mortgage lender is crucial There are mortgage qualifying factors beyond your income There are different types of mortgages You should lock in a mortgage rate There are additional costs for buying or building Luxe features require a higher budget Managing renovations can get messy Hiring a contractor isn’t cheap Knowledge and grit don’t guarantee success 1. Buying a home takes time Lots of us are suckers for before and after pictures without regard to the time it took in between, whether it’s a dramatic fitness transformation or a home makeover that’s turned grungy into gorgeous. On average, the home buying process takes about four and a half months from shopping to closing but can range anywhere from 30 days to the greater part of a year. Debra Carpenter of Sandpoint, Idaho’s Nathan Oulman Realty has noticed that many first-time buyers are unaware of the time it can take to make offers and finalize an accepted offer. “Reality shows don’t portray how long it takes to close on a house once you’ve made the decision to buy,” Carpenter explains, but she admits that while the process definitely takes longer than it appears on TV, “the feeling of being in your new home is completely worth it.” When faced with TV-inspired unrealistic expectations from clients, top agent Lisa Larson of Warburg Realty in Manhattan wisely poses the question, “Would you take relationship advice from The Bachelor?” Larson continues: If you watch reality shows, be aware that they are scripted and edited versions of reality. The irony, of course, is that the popular and entertaining shows on HGTV set up unrealistic expectations when it comes to renovation, its expense budgets, time constraints, and obstacles — as well as real estate in general. Quickly flipping a home and expecting a huge return profit is not feasible in every market, especially for the inexperienced. Even if you’re buying a move-in ready home, the process could take a month or two — buying, building, or renovating a house isn’t an overnight experience. 2. Shopping around for a mortgage lender is crucial Shopping around and choosing a good mortgage lender is crucial because it will affect your mortgage rates, fees, loan terms, and how quickly you’ll be able to close on your new house. So, how do you choose a good mortgage lender? Here are some helpful tips: Read real, verified customer reviews. Doing so will help you determine if a lending company provides good customer service and follows contractual agreements. Determine whether or not a mortgage company is transparent in the mortgage process. You’ll want to know if a company is likely to charge you additional fees that you didn’t know of when you applied — you want to make sure that you can trust them. Choose a loan type. The type of loan you seek for your purchase and/or remodel is important because not all lenders offer every loan product available. Pre-qualify with multiple lenders to get the best rate. Interest rates may vary by lender, but get an interest rate estimate from multiple lenders to see how each lender’s rates compare to the national daily average. 3. There are mortgage qualifying factors beyond your income Two terms rarely mentioned on House Hunters are "credit score" and “debt-to-income (DTI) ratio”. But they are two of the most important factors in determining whether or not you’ll qualify for a mortgage. Credit score Your credit score is measured by a number of factors, including your credit history, the number of lines of credit under your name, and how prompt you are in making your monthly payments. Banks and other lenders pay close attention to your credit score to help them quantify your trustworthiness in paying back a home loan on time. Most lenders won't even make you an offer if your credit score is below 620. If your credit score is above 700, you are considered a low-risk borrower, and lenders have confidence they will get their money back. In addition, the higher your credit score, the more likely you are to secure a lower interest rate. If your credit score is too low (below 600), you will be considered high-risk and likely may not qualify for a conventional loan. There are bad credit mortgage options available, but the lower your credit score, the higher your mortgage interest rates and monthly payments are likely to be. Sometimes a greater down payment is also required. Debt-to-income (DTI) ratio Simply put, your DTI ratio measures your housing, monthly, and other debt expenses against how much you earn. This number shows creditors how well you can manage your debt payments and, unlike your credit score, you want to keep this number as low as possible. Generally, lenders want to see a DTI ratio of 43 percent or less. Before applying for a mortgage it is a good idea to calculate your DTI ratio, and to determine ways you could lower it, if necessary. You can typically improve your DTI ratio in two ways: increase your income or decrease your debt. Unfortunately, these methods tend to be easier said than done. While there's no magic bullet answer for increasing your income, some smart strategies can help you cut down debts and improve your personal finance management. search Highlight: Lenders pay particularly close attention to two types of DTI ratios. Front-End DTI — Also known as the housing ratio, the front-end DTI shows the percentage of your income that goes exclusively to housing expenses, such as mortgage payments, mortgage insurance, etc. Usually, your front-end DTI needs to be around 28 percent or lower in order to qualify for a mortgage. The higher your front-end DTI, the more likely you are to default on your mortgage. Back-End DTI — The back-end DTI measures what percentage of your income goes to paying off other debts, like credit card payments or car payments. 4. There are different types of mortgages Whenever agents on TV tell clients something like, "Alright, now we just have to fill out some paperwork," they are most likely referring to the loan application. And somewhere on that application, the future homeowners will have to indicate which type of mortgage loan they are shopping for. Mortgage loan types include some of the following: Conventional fixed rate loan Adjustable rate mortgage (ARM) loan FHA loan VA loan USDA loan Jumbo loan Each type of loan has unique eligibility requirements, advantages, and disadvantages. If you’re not sure which loan type will best suit your needs, you can always speak with your mortgage lender/loan officer to discuss your finances and best options. 5. You should lock in your mortgage rate Occasionally, while you're watching your favorite home-buying program, you might wonder why the homebuyer is particularly anxious to close the deal on a certain day or at a certain time. One contributing factor, beyond the desire to move into their new home as quickly as possible, could be that they’ve locked in a competitive mortgage rate and they don’t want it to expire before they close on their home. Mortgage rates fluctuate frequently, even several times a day, and the best way to secure a competitive rate is to lock it in with your mortgage lender. A rate can typically be locked for a period of 30 to 120 days, protecting you if rates increase, but also limiting you if rates drop. Most mortgage experts encourage locking in your rate early, but then you’ll want to make sure you close on time so that your lock doesn’t expire and you end up losing that rate. To get a taste for mortgage rate trends, rate aggregators like Zillow can clue you into the best mortgage rates at any given time, and many top mortgage companies will update their mortgage rate estimators according to market conditions. 6. There are additional costs for buying or building Jonathan Faccone, managing member and founder of New Jersey-based Halo Homebuyers, says that whether it’s from the house-flipping show phenomenon or the first-time home buyer shows, everyone thinks they know what it entails to purchase and renovate the perfect home. However, a key element missing from the media portrayal is cost. Faccone explains that “the flipping shows never show you what the ‘soft costs’ are when purchasing a fixer-upper.” These soft costs include all the costs other than the actual construction-related expenses that will be incurred. search Highlight: There are additional or "soft costs" involved in a house purchase or renovation, that you should be aware of. Title insurance Attorney fees (in certain states) Home inspection Home insurance (impacted by vacancy and need for a builder’s risk policy) Closing costs Carrying costs When planning your home purchase with renovations in mind, plan for the expected, but also the unexpected, costs. Faccone suggests that the amount of money a typical buyer thinks a home needs for a renovation budget should be doubled: I am always going over budget in my own projects because of the unknown fixes that I didn’t expect lurking behind the walls. Alberto Marinas, CEO and co-founder of PadBlock, reminds buyers about the impact of the appraisal on the home sale. The price, the value of upgrades, and the reliability of current appliances may not be appraised to the agreed purchase price. Not to mention the cost of new furnishings for the home once the renovation is complete: This can derail even the most cooperative seller. Unless the buyer has additional cash to cover the difference, the asking price will have to drop to the appraisal price. More often than not, in today’s market, the buyer has just enough cash for downpayment and closing fees — and not a penny more. Finally, adequate insurance for a house requiring major renovations can be steep. Scott Johnson, founder of Marindependent Insurance Services in the Bay Area, California, explains that “consumers often fail to disclose to the agent their intentions [to flip] and often go mis-insured.” He describes two issues regarding property insurance during a house flip: One, if you are not planning on living in your new purchase in the first 30 or 60 days, then the home will be considered vacant and you are not eligible for typical home insurance. Two, if your home undergoes significant construction, you should secure a builder’s risk policy protecting contractors and workers on your property. So how much does proper coverage cost under such circumstances? Johnson says it’s impossible to say without knowing all of the details of a situation, but a builder’s risk policy can easily cost $3,000 per year, while a regular home insurance policy might only cost $900. 7. Luxe features require a larger budget Doug Smith, president of Miller & Smith, a Washington, D.C.-based home builder and real estate developer, has seen "a seismic shift in buyer expectations” over the last few years. Today’s consumers bypass anything mass produced in exchange for ‘artisan’ products, fixtures, and features. Thanks to the HGTV phenomenon and saturation of home improvement shows, many buyers expect luxe features, such as hardwoods on every floor and granite or quartz countertops, to come standard at all price levels. Of course, that’s simply not the case. The price tag of such specialized features is above standard levels, and the customization homeowners crave may not fit into their budget. That doesn’t mean homebuyers, flippers, and builders need to be millionaires to make their homes into something that suits some of their preferences. But be prepared to pay more for luxe materials and features in your home. Smith explains that his company finds the balance in offering customization and providing simplified options through a selection process where homebuyers can capitalize on what is most important to them. 8. Managing renovations can get messy In Fixer Upper, Chip and Joanna Gaines never shy away from the physically messy aspects of flipping a home, whether it’s removing an abandoned refrigerator with rotting food or discovering a termite infestation in a crawl space. But if you’re not a contractor yourself, you need to be on top of your game managing the various parties renovating your home. John Bodrozic, co-founder of HomeZada, says that home improvement shows completely underestimate how you, the homeowner, need to manage your contractor on the remodel projects. HomeZada helps customers negotiate pricing, build budgets for projects, and track documents and photos to manage your contractor. Bodrozic explains, “you need to review a contractor’s quotes, make sure they are licensed and insured, check their references, and agree to a contract with payment terms that protect you.” Otherwise, you can end up paying more than you bargained for with unsatisfactory results at best — and damaged property at worst. Bodrozic also advises homeowners to take pictures during the remodel to document in case things go wrong “so you can hold your contractor accountable to finish the project to your satisfaction.” Keep in mind that before renovations or even a purchase, a proper inspection that goes more than skin deep is key to determining if a house is worthy of an offer. And, like hiring a contractor, that depends on someone else (in this case, the home inspector) doing a job right. Ben Mizes, founder and CEO of St. Louis-based Clever Real Estate explains that “the walkthrough process isn’t like as seen on TV. There’s much more meticulous inspection of the core systems of the property and looking for major red flags than it is talking about dream floor plans and designs.” A good home inspector won’t let emotions interfere with what should be a thorough and unbiased inventory of the condition of the home. 9. Hiring a contractor isn’t cheap After watching Ben and Erin Napier from the HGTV program, Home Town, renovate and revitalize properties, you may be tempted to hire a well-known contractor in your area to breathe new life into your home. Hiring a contractor isn’t always a cheap venture. Yes, there are some home renovation projects that require a professional, but there may be some projects you could tackle yourself. That being said, the cost of your own time is an important consideration, since contractors can typically get jobs done much faster than you might be able to by yourself. The HGTV shows make it seem quick and easy to hire a contractor to completely redo your house, but it’s important to remember that you will be paying for the contractor’s labor, as well as all material costs, so it’s important to have a plan and not get carried away in all the tempting possibilities a contractor could offer. 10. Knowledge and grit don't guarantee success Successfully renovating a home or even purchasing the perfect move-in ready home can’t be guaranteed on a certain timeline or with certain financial limits, even for the most persistent buyers. Grit, talent, or strong emotions alone won’t carry a sale or renovation to fruition. An evolving market and other factors outside your control are at play. John Bodrozic, co-Founder of HomeZada, laments that real estate TV shows “tend to focus on the lifestyle and emotional aspects of buying a home and fixing it up while glossing over financial details” such as negotiating strategies on how much to offer based on list price and other market comparisons. In addition to knowing how much of a down payment you can make and the loan amount you qualify for, “it is wise to get a comparative marketing analysis (CMA) to help you determine your approach” when it’s time to make an offer and negotiate. Remodeling costs, too, can vary dramatically based on your product and brand selections and the market conditions with local contractors. In regards to a complete remodel, even the most experienced flippers find that things unexpectedly go wrong throughout the process. Many of the experts we consulted for this piece shared their own not-made-for-TV stories. Ben Mizes, founder and CEO of Clever Real Estate, says: I wish these shows would share that investing and flipping isn’t as glamorous as it sounds. When I first started investing in real estate, I did all my own work, and there was a lot more hauling of old cabinets and 2:00 a.m. sewer clogs than there were brand new houses and excited buyers. The final word If you’re disappointed we've ruined the picture-perfect world of your HGTV binge-a-thon, take heart in knowing you can still embrace the entertainment value of these shows while also being armed with the knowledge of important details often left out of these portrayals. And when the time comes for you to play the lead in your own, real-life house-hunting drama, you’ll have realistic expectations to guide you and keep you grounded through the excitement.
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