Topics:Homeowner Tips Home Improvement Financing Downpayment Home Improvement First-Time Homebuying Working With An Agent Successful Selling House Hacking Best Mortgage Rates Companies real estate investing Closing Costs Home Loan Research Press Releases
September 19th, 2022
May 27th, 2022
After hours spent researching and comparing mortgage options, you’ve finally closed on your loan with your chosen mortgage company. But after a few months, you receive notice that your loan has been sold. At first, this news may seem like a reason to worry, but it really isn’t. The truth is that mortgage companies buy and sell loans all the time. It’s a common practice in the industry that makes it possible for companies to offer home loans in the first place. But let’s answer some big questions that you might have: Why did my lender sell my loan?What does it mean for me that my loan has been sold?Which mortgage companies don't sell loans? For answers to other questions you may have, jump down to the FAQ section. Why did my lender sell my loan? Before you can understand why your mortgage lender sold your loan, let’s take a look at some of the key players in the mortgage industry: Mortgage lender — Your mortgage lender is who lent you the money to purchase your home and who typically works with you directly on anything related to your mortgage. Loan servicer — Your loan servicer handles your mortgage after closing on your home loan. You make your payments to your loan servicer, typically facilitated by your lender. Investor — Investors purchase mortgages from lenders. After a mortgage is sold to an investor, a lender may retain servicing rights, which means that you’ll continue making payments to the same company even though they don’t technically own the loan anymore. While each of these entities are involved in helping you purchase a home, it is important to remember that they don’t view your mortgage loan the same way that you do. For you, your mortgage is a big personal investment, perhaps a step closer to achieving important life goals. For mortgage lenders — banks or other financial institutions — your mortgage loan is solely a financial asset. search Lenders typically sell loans for two reasons: Free up capital to offer mortgage loans to other homebuyers Generate cash while retaining servicing rights to a loan When you get a mortgage you will be required to pay interest on your loan. Interest will be combined with your principal loan amount into a monthly payment — payments that you will be making for the next 15 to 30 years depending on your loan term. While the lender will make money from these payments each month, it typically isn’t enough money to support further lending opportunities to other homebuyers at the same time, which is the case for many brokers and small lenders. Lenders would quickly max out how many people they could lend to if they had to wait three decades to get all their money back, so they sell loans to free up cash and continue offering mortgages to other homebuyers. In addition to interest, lenders also charge various fees, but selling loans is a much faster way to make more money and replenish funds to lend to others. It’s important to understand that your loan broker/bank/lender doesn’t make money by lending money. They’re in the business of wholesaling loans and collecting a fee for their efforts. Your “lender” makes money on origination fees and the incentives they are paid by larger lenders. Let’s use a simple example. Suppose your local bank has $1,000,000 to lend. How many home loans can they make with a limited amount of cash? Maybe three or four home loans. However, what if they could sell your loan, replenish their money and receive a few thousand dollars for their efforts? — Robert Taylor, The Real Estate Solutions Guy In most cases, your lender will sell your loan to a large mortgage company like Fannie Mae or Freddie Mac, two U.S. government-sponsored entities that buy loans from banks and lenders. Loans are also frequently sold between private mortgage lenders and banks. Whether your loan is sold to Fannie Mae, Freddie Mac, or another private mortgage lender, you don’t get to choose to whom your loan is sold. For the most part, who your loan is sold to won’t make a difference, but for some borrowers this can be cause for frustration if their loan is sold to a company or lender that they aren’t familiar with. When you get a mortgage loan, there is a high chance that it will be sold, creating a cycle that has a significant impact on the availability of mortgages to other homebuyers and the economy as a whole. What does it mean for me that my loan has been sold? When your mortgage is sold, not much should change on your end. If your mortgage has been sold, resist the need to obsess. The loan's terms, such as the interest rate, monthly payment, and remaining debt, will remain constant.The primary responsibility you should prioritize is data management. Keep an eye out for reminders regarding the need to update your payment details. You may need to reroute an ACH withdrawal or mail a check to a new address. And you will not be penalized if you recently made a payment to the former owner of the mortgage. There is a 60-day grace period following the sale of service rights. — Jennifer Harder, CEO and Founder of Jennifer Harder Mortgage Brokers Your loan rate and term will remain the same. The only change you may need to worry about is if your loan servicing has been transferred. search If your mortgage loan is sold, two payment scenarios may occur: You continue making payments to your original lender You begin making payments to your new loan servicer If you neglect to confirm where you’re making payments moving forward, you run the risk of sending payments to the wrong place and then incurring late payments. If your payment circumstances change, requiring you to either mail payments to a new address or set up an online account elsewhere to make direct payments, your lender will alert you and provide direction on how to proceed. In addition, your new loan servicer is also required to notify you within 30 days of the service transfer. When you receive notice that your mortgage has been sold, the most important thing you can do is check — and double check — the information provided. When you receive notice that your loan has been transferred, double check the loan details, such as the loan number, to make sure it’s not a scammer trying to dupe you into sending them money. You can (and should) call your previous lender as well, to confirm the loan transfer. Beyond that, just start making your monthly payment to the new lender each month. — Brian Davis, Founder of SparkRental It's important to remember that when your loan is sold to a different lender, your interest rate and loan terms always stay the same. The only thing that can actually change is when and where to send your monthly payments, which is why the first thing you should do after receiving the ownership transfer notice is to read it very carefully; make sure that all your personal information and loan terms are correct. You should also look for the date from which your new lender will take over as well as the new billing information so that you can set everything up for your next payment. Overall, there's nothing major or negative that you should worry about when having your loan sold, just make sure all the information is correct and you can continue paying your mortgage as normally do. — Chris McGuire, Owner of Real Estate Exam Ninja search When you receive notice from your new loan servicer, look out for the following details: Name, address, and phone number of the new loan servicer Loan details (loan type, loan number, etc.) Date of loan sale Date of when the new loan servicer takes possession of the loan New loan billing information Contact information for the party who can resolve loan disputes and receive legal notices Your contact information — make sure it is all correct If you take the time to carefully read your mortgage transfer notice, and contact your previous and new lenders, your payment transition should be smooth, and you will continue making your mortgage payments as before. Which mortgage companies don’t sell loans? Most mortgage companies buy and sell loans — there is no guarantee, no matter your lender, that your loan won’t be sold. However, some lenders strive to service all loans that they underwrite and process. We analyzed the more than 4,600 mortgage company reviews on BestCompany.com and took a deep dive into 114 reviews mentioning a customer’s loan being sold or bought. From this analysis we learned that two companies stand out from the rest for being more likely to fully service your loan without selling. Quicken Loans On BestCompany.com, 3 percent* of customers mentioned in their review that they chose/like Quicken Loans because the company doesn’t sell loans: Quicken Loans, via Rocket Mortgage, states that it is proud to service the majority of loans that it originates. However, there is no guarantee that your loan will not be sold if you choose this lender. *Taken from a sample of 114 customer reviews on BestCompany.com. New American Funding In mortgage company reviews left on BestCompany.com, 3 percent* of customers mentioned that they chose/like New American Funding because the company doesn’t sell loans: While New American Funding can’t guarantee that it won’t sell your loan, the company strives to service the majority of loans that it originates. *Taken from a sample of 114 customer reviews on BestCompany.com. Additional company review insights From our customer review analysis, we also discovered the following insights about the customer experience when a loan is sold: 31% of customers don’t like their new loan servicer — due to a variety of reasons including, but not limited to, poor customer service and difficulty in making payments. 19% of customers are happy with their new loan servicer. 10% of customers mention that their loan was sold almost immediately after closing, which was often unexpected. 10% of customer reviews are for the mortgage company, Better.com. 3% of customers mention that they didn’t receive notice that their loan was sold. Fifty percent of reviews remark on whether or not a customer likes their new loan servicer after their loan was sold. Although you can’t necessarily control who your loan will be sold to, there are some things you can do to help prevent your loan being sold to a servicer that you don’t like or trust: Take time to research mortgage companies and ask about their servicer/investor networks. While companies aren’t obligated to disclose this information, it never hurts to ask. Better.com, for example, states on its website that it has a robust network of banks, government-sponsored entities, and publicly traded companies. In addition to this, Better.com states that it collects third-party reviews on the service their partners provide to ensure a quality experience for customers. Carefully read your mortgage agreement. Mortgage companies are required to disclose whether or not they’ll sell your loan in your mortgage agreement. While this may not provide you with specific information on your lender’s servicer/investor network, it gives you an opportunity to approach the subject with your lender. One of the most important things you can do to secure a more enjoyable mortgage experience, whether or not your loan is sold, is to do your research and ask your mortgage lender as many questions as you can before signing on the dotted line and closing on a loan. The bottom line It is very likely that your mortgage loan will be sold at least once during your mortgage term. But, there's no reason to worry. If your loan is sold, carefully read the notice sent to you by your lender and make sure you understand where you will be making payments. And if you have further concerns, speak to your original lender and new servicer to make sure that you’re all on the same page. Frequently asked questions How quickly will my loan be sold after closing?What do I do if I don't like my new loan servicer?What if I don't receive notice that my loan has been sold?Can my new loan servicer charge me additional fees?How many times can my loan be sold?Can I do anything to prevent my loan from being sold?Can I choose who my loan who is sold to?Are there mortgage companies that don't sell loans? How quickly will my loan be sold after closing? Your loan can be sold at any time — immediately after closing to 10 years after the fact. From customer reviews on BestCompany.com, many customers mention that their loan was sold much faster than they anticipated. It is worth preparing yourself for this reality, especially if you are borrowing from a small broker or lender. What do I do if I don’t like my new loan servicer? You don’t have any control over who your loan is sold to, which can be problematic if your loan is sold to a servicer that you don’t like or trust for any reason. If you don’t like your new servicer, there is the option to refinance with a different lender, which will change the rate and term of your original loan. Refinancing is a good idea if you can secure a lower interest rate and/or more favorable loan term, helping you save money on your mortgage overall. If you won’t be able to secure more favorable loan terms, it might not be worth refinancing just to get out from under your loan servicer. What if I don’t receive notice that my loan has been sold? Mortgage companies are required to give you notice if your mortgage loan is sold. In addition, your new loan owner is required to notify you within 30 days of the service transfer. Ensure that your contact information — mailing address, email address, and phone number — are correct before closing on a loan to make sure that the company can reach you for any reason. If you don’t receive any notice or you have any questions about the mortgage selling process, speak with your original mortgage lender and new servicer. You also have a 60-day grace period when your loan is sold in case you send payments to your old lender instead of the new one, allowing time to take care of any discrepancies in the loan transfer process. Can my new loan servicer charge me additional fees? In most cases, no, you will not be charged any fees when your loan is sold. How many times can my loan be sold? There isn’t necessarily a limit to how many times your loan can be sold. In many cases, homeowners don’t experience their mortgage being sold more than once or twice. Can I do anything to prevent my loan from being sold? The short answer is no, there isn’t anything you can do to prevent your loan from being sold. Can I choose who my loan is sold to? Mortgage companies have specific servicer/investor networks from which they buy and sell loans, and you don’t get to choose which company your loan is sold to. Are there mortgage companies that don’t sell loans? There aren’t any companies that never sell loans. However, some companies strive to service a majority of the loans they originate, such as Quicken Loans or New American Funding. However, even these companies sell loans, so there is no guarantee that your loan won’t be sold
At Best Company, we believe better data leads to better decisions. We recently performed an analysis of more than 480 1-star mortgage lender reviews, and have determined common themes and complaints from customers, providing you with reliable data to navigate choosing the best mortgage lender. The most common customer complaints include the following: Poor customer serviceLack of transparencySlow process or delaysLender errorsHigh rates or feesBorrower didn't qualify Because this is an overview of general complaints, all specific company and reviewer names are removed. To better understand a specific company’s feedback, read its reviews. Poor customer service — 56% Fifty-six percent of 1-star reviews mention poor customer support. What are the common complaints about customer service? 1. Company representatives were difficult to reach. Calls and/or emails weren’t returned. Delayed response to calls and/or emails. Automated, rather than personal, responses. No response after an application was completed. No response after the applicant was denied a loan. Communication was poor between loan officers and underwriters. Communication was poor to other vendors like title companies and real estate agents. 2. Consumers didn't have a consistent contact point. Point of contact changed multiple times. Point of contact went on leave or vacation without telling the customer and failed to provide an alternate contact. 3. Company representatives weren’t on the same page. Customers continued to receive loan offers after their loan was denied. Customers were bombarded with loan offers, but communication was halted when an offer was pursued. Delays in re-verifying information over the phone. Multiple representatives within the same company asked for the same documents several times. 4. Company representatives were unhelpful. Lacked training and knowledge. Provided incorrect or vague information. Rude communication. Local support was good; corporate support was bad — difficulties in escalating issues to higher ups. How can you avoid bad customer service? Test the system. You can test out more than one lender's customer service before committing. Call or email multiple lenders with your questions and see who responds first. If you’re having a hard time getting in touch with company representatives, this could be a good indication that you won’t have good experiences with customer service later on. Some things to consider: Which companies send you a personal response rather than an automated one? Which companies are available over the weekends? Which companies are willing to work with you on a holiday? Be upfront. Define and share your communication boundaries and expectations as you shop for a lender. If you know how you’d prefer to be communicated with, don’t be afraid to look for it and ask for it. Some things to consider: How would you like to communicate? How would you like to be communicated with? How often do you want to be notified throughout the mortgage process? How quickly do you expect responses to emails, calls, or text messages? Be understanding, within reason. Though you may want to close as quickly as possible, keep in mind that your loan officer is a person too, and typically someone who is trying their best to do their job. Just like you, loan officers get sick, take vacations, and have families. Plus, they have other clients to assist. While this doesn’t excuse miscommunication or lack of communication, patience and understanding can go a long way. Provide all of your documents as quickly as possible. Often, loan officers are waiting to complete the underwriting process because the borrower has not returned documents the loan officer has requested. The faster you can provide your loan officer with the required documentation, the faster you can get to closing. You should be prepared to provide the following documents: Tax returns W-2s or pay stubs (or any other proof of income) Bank statements Proof of assets Credit history Employment verification Lack of transparency — 41% Forty-one percent of 1-star reviews mention a lack of transparency. What are the common complaints surrounding lender transparency? 1. The lender didn't follow through on a promise. A special offer was advertised but wasn’t honored. A company guarantee wasn’t backed. A lender credit amount at closing was promised, but it was decreased without notice. A waived payment option was offered, but was later denied. 2. The lender didn't adequately inform the borrower. Private mortgage insurance (PMI) was added to a loan without explanation. Closing costs changed without notice. Loan requirements weren’t explained. Exact fees weren’t communicated upfront. 3. The lender was dishonest. The agreement of sale was changed without notice. Fees were hidden or miscommunicated throughout the loan process. A prepayment penalty was hidden within the loan. A home was under appraised. A home was over appraised to approve a more costly refinance. More was charged for escrow even when taxes went down. How can you find a transparent and reliable lender? Do your research. Read the terms and conditions under any guarantees listed on a company's website. Generally, lenders reserve the right to change guarantees and promotions at any time. Ask about fees or prepayment penalties. This may not seem like a big deal up front, but you probably won’t like being hit with a fee at closing that you didn’t think you knew about before. Be transparent. You may not be able to control the transparency of your lender, but you can control the details you give them. In your loan application and moving forward, share all relevant details that may impact your eligibility for a mortgage. Many borrowers are disappointed that their lenders don't identify problematic information until it's too late to resolve the issue before the initial closing date. You can avoid such situations by disclosing student debt, tax debt, and all other financial obligations upfront. Get a second opinion. An appraiser decides how much your home is worth, and, in turn, the maximum amount the bank is willing to loan you. As the borrower, you are responsible to pay for the appraiser, but you don't have a lot of control around who does it since your mortgage broker hires the appraiser (often through a third-party appraisal management company). The bank's chosen appraiser is the authority on that particular loan. However, you can hire your own appraiser to serve as a second opinion. Slow process or delays — 18% Eighteen percent of 1-star reviews mention a slow mortgage process or delays. What are the common complaints about delays in the process? 1. Too much paperwork was required. The loan application was too long. The lender required irrelevant information. The lender required information to be notarized. The lender required information that took too much time to get. 2. Loan approval and closing took too long. The lender blamed the delay on underwriting. The process should have taken 30–45 days but took 60 days or more. The original closing date was postponed. The lender was slow to pay property taxes via escrow. The seller walked and the buyer lost the earnest money. How can you ensure that your loan closes on time? Gather paperwork ahead of time. Get a head start on your mortgage by gathering some of the information you'll need before being approved for your loan, including the following, where applicable: Tax returns Bank statements SSNs Auto loans Student loans Credit card debts Current mortgage(s) Rent payments Divorce documents Retirement accounts Recent income statements Down payment gift statement Lock your rate strategically. Many lenders offer rate lock options in case rates rise. If a rate lock appeals to you, look for a lender that doesn't charge you for this service and that has an extended rate lock period. Realtor Daniele Kurzweil asks her clients to consult with her before locking their rate. "From start to finish, the whole process of buying in NYC takes roughly 90 days. What inevitably happens is that a mortgage broker hears that we have an accepted offer and tells the buyer to lock their rate that day.” "However,” Kurzweil explains, "that doesn't take into consideration the time it takes to finalize the loan" in her local market, including the following steps: 10 days for the contract to be reviewed and the financials of the building to be verified 30 days to gather and submit paperwork 2–3 weeks for the building representative to review the paperwork Kurzweil describes the disappointment that can come when things take longer than expected: "All of a sudden, the 60-day rate lock has come and gone and my clients are stuck paying for an extension." Expect delays. Some loans will close within a month, but in many cases it can take much longer. If you keep your expectations low, you create space to be pleasantly surprised if the process goes quickly. Lender errors — 12% Twelve percent of 1-star reviews mention lender errors. What are the common complaints about lender errors? 1. Important financial details were missed. A partner's income was left out of a loan. The borrower was told that they needed more money down when they didn’t. The lender omitted to inform a borrower that a cosigner was needed. A student loan account was overlooked. 2. The lender had a typo or misclick. Monthly mortgage payments were processed more than once. A late payment was charged after a refinance. Multiple hard credit pulls were performed in one week. Bank account information was recorded incorrectly. Names were recorded incorrectly. 3. The lender incorrectly handled escrow funds. Funds were misplaced into escrow. Property taxes were assessed incorrectly. Communication with the city was executed poorly. How can you avoid errors in the loan process? Repeat yourself. Be willing to share and re-share important details relevant to your loan, even if you've already included them in your loan application, including names, birth dates, assets, and debts. Don't assume your lender will catch any discrepancies because they might not, or they might not catch it until it's too late. Audit paperwork. Where possible, look over the paperwork before it's sent to underwriting and again before closing documents are finalized. Work with your loan officer to do this face to face if there's a branch location near you, or over email, video chat, or a secure document sharing platform. Verify your taxes and insurance. To make sure your property tax payments from your mortgage servicer are going through, call the city or visit the property appraiser’s website yourself to confirm. You may also want to contact your home insurance provider, as yearly home insurance premiums are usually bundled in your escrow payments. High rates or fees — 8% Eight percent of 1-star reviews mention high rates or fees. What are the common complaints about rates and fees? 1. The lender charged too many fees. Fees and closing costs were higher than quotes from other lenders. The lender's title company charged more than others. Escrow fees were increased after acquiring the loan. A fee was charged for locking into a rate. The lender charged borrowers to submit a payment. Certain fees weren’t reimbursed when a loan didn’t close — building survey, appraisal, and home inspection fees. 2. The rates were too high. Interest rates were high despite a borrower's excellent credit. Interest rates jumped arbitrarily while market rates went down. The lender didn't offer a rate lock or guarantee. New terms required a higher interest rate. How can you secure low rates and fees? Be aware of standard fees. It's the norm for buyers to pay for some services out of pocket before obtaining a loan. You'll be responsible for some or all of the following fees, most of which are non-refundable: Appraisal Title insurance Home inspection Credit report Documentation Land survey Some fees, such as origination fees, escrow fees, and home insurance, are generally bundled within your loan amount to be paid off over time. Plan to spend anywhere from 2 to 5 percent of the purchase price of the home in closing costs. Prepare financially before you buy. To improve the interest rates for which you qualify, take steps to improve your credit. Pay off your other loans and debts where possible. Shop around. You can compare quote estimates from several mortgage lenders before initiating a hard credit pull and before committing to one. Getting multiple quotes from multiple lenders can help you explore how your mortgage terms may change based on down payment, credit score, location, and home value with online financial calculators. Borrower didn’t qualify — 5% Five percent of 1-star reviews mention instances where a borrower didn’t qualify for a mortgage loan. What are the common complaints about being denied for a loan? 1. The borrower "should have" been approved. The lender didn't accept 1099 income (self-employment or independent contractor income). A manufactured home didn’t qualify for financing. The lender advertised that borrowers with bad credit would get approved, but they were denied. 2. The borrower was given false hope. Pre-approval was offered but the borrower was denied upon applying. The borrower was approved all the way to closing, including signing and submitting final disclosure and closing costs, then denied due to an employment gap. What do you do if you're denied for a loan? Don't take it personally. If you've been turned down for a mortgage purchase, even at the last minute, it doesn't mean the lender doesn't like you. These decisions are almost all about numbers. Reapply. Your eligibility for a particular loan type can improve over time as you improve your credit and debt-to-income (DTI) ratio, among other factors. Plus, sometimes lenders change their standards or add additional mortgage products that may better fit your situation. Lenders often approve applicants with subprime credit for FHA loans. Don't let a loan rejection from one lender stop you from applying elsewhere. Focus on your credit. Credit scores are probably the single most important factor in what rates and mortgage programs a borrower will be offered, according to Terence Michael of Omni-Fund Mortgage Brokerage. "Make sure that you do not owe more than 30 percent of the total available credit on any one of your credit cards, even for a day," Michael advises. "This is one of the best hacks for either boosting your credit score or keeping it from dipping right when it’s checked by a lender or bank." If you are denied for a mortgage, taking the time to build or repair your credit can help ensure an approval next time. "Keep in mind that you cannot fix your credit overnight," explains credit industry analyst Greg Mahnken at Credit Card Insider. "It takes time to build a strong credit file and demonstrate your worthiness as a borrower. You’ll need to demonstrate that you can make payments on time, keep your utilization low, minimize your applications for new credit, and have a healthy credit mix. The age of your credit accounts is also a factor, so keep that in mind before closing any credit card accounts." Other ways to build your credit include using a credit builder loan and adding rent and utility payments to your credit reports. Your loan officer should also have resources to help you improve your credit score. Top-Rated Mortgage Lenders Compare top-rated mortgage lenders on BestCompany.com, based on customer reviews. Compare
According to a recent Bankrate survey, millennials (age 25–40) are the most likely group to experience home buyer's remorse. In fact, the data shows us that nearly 64 percent of millennials experience regret or remorse after a home purchase. What is home buyer's remorse? Home buyer's remorse is a deep regret felt after buying a house. Because homes are large purchases, if not one of the largest purchases many consumers will ever make, feelings of remorse or regret are common. While these feelings typically fade over time, you can avoid some common mistakes, which can help you feel more at ease after buying a home. What are the most common home buying regrets? According to Bankrate, the biggest finance-related regrets that millennial home buyers have include some of the following: High maintenance costs (not accounted for) (21%) High mortgage payment (13%) Displeased with mortgage rate (12%) Don’t think buying a home was a good investment (9%) Overpaid on a home (13%) Additional regrets include physical characteristics of a property, including millennials who felt they bought a house that was too big (14 percent), a house that was too small (14 percent), or a house in a bad location (15 percent). Multiple factors contribute to these common home purchase regrets, including a competitive market with record-low mortgage rates, not shopping around for a mortgage, and skyrocketing lumber prices. The competitive market provides a sense of urgency in putting an offer on a home and closing as quickly as possible, which can result in more unfavorable payments and costs, compounded with the fact that materials are just more expensive today than in the past. 13 common mistakes and how to avoid them Underestimating the commitment level involved Not shopping around for a mortgage Neglecting to consider all costs Forgetting about your emergency fund Assuming "new" means "better" Visiting your potential property only once Not taking time to see the neighborhood Buying a fixer upper you can't afford to repair Skimping on a quality home inspection Not taking one last look at the property Not getting a home warranty Making renovation decisions independently Not tracking project costs 1. Underestimating the commitment level involved A house is a big purchase, and that typically comes with increased responsibility. For example, when you get a mortgage to buy a house, you are committing to make subsequent payments on that home loan for the next 15 to 30 years, which is a large financial investment. Tip: Analyze, strategize, and counselApproach your home purchase like the large investment that it is — a house should never be an impulse purchase. Take time to establish what you want and need in a property and its location, analyze all the pros and cons of purchasing, and speak with friends, family, and real estate professionals to assess whether or not you’re ready to become a homeowner. 2. Not shopping around for a mortgage Shopping around for a mortgage is one the most important steps in the homebuying process, but a step that is frequently overlooked by the majority of home buyers. Yes, it might take you more time to pre-qualify with multiple lenders, and rates are fairly similar across the board, but saving even the smallest margin of a point in interest could save you thousands of dollars over the life of your mortgage loan. And you won’t know what rates are available to you if you don’t shop around and pre-qualify with multiple lenders. Tip: Read customer reviewsRates and fees will be entirely dependent on your personal finances, including your credit score and debt-to-income ratio (DTI). But if you want an idea of what the rates and fees are like with a specific mortgage lender, reading customer reviews can be a game-changer. Since mortgage products and services and fairly similar among lenders, it’s important to get an idea of whether or not a company is trustworthy and if they provide reliable customer service — a mortgage is a large investment, so you wouldn’t want to be locked in with a lender that you can’t get a hold of or that can’t answer any of your questions. Read Mortgage Company Reviews [From Real Customers] Compare rates and fees, and see what customers have to say about the mortgage process experience with specific companies. Read Reviews 3. Neglecting to consider all costs There are a lot of homebuying costs to consider, and that’s just a fact. The down payment is the big one that’s usually on the top of mind, but don’t forget about closing costs, moving expenses, home furnishings, and home maintenance costs that will inevitably come up. Crunch some numbers before you get too far in the homebuying process, or to simply map out the costs that might arise. Tip: Don’t just focus on the down paymentLuke Babich, CSO/Co-founder of Clever, recommends the following: “I'd recommend anyone considering buying a house to make a balanced analysis of whether or not they can actually afford to buy a house. There's a common saying that just because you can afford the down payment does not mean you can afford the mortgage! Make sure you factor in important variables: house maintenance (which is on average $13,000 a year), mortgage payments, home insurance, and security.” 4. Forgetting about your emergency fund The homebuying process includes many large upfront costs, not to mention that you will need to budget out your monthly mortgage payments throughout the life of your loan. Thus, it can be tempting to save up all money necessary to cover your home purchasing costs, but if you neglect to save up some money for emergencies, you may find yourself in deep water later on. Therefore, when you’re saving up to buy your dream home, also save up for your emergency fund. Tip: Buy less house than you can affordJohn Grimes, Realtor at BHGRE Metro Brokers, recommends the following: “It is very important that they draw the line at a level they're comfortable with going forward with no rosy assumptions of increased income. Ideally, a dual income couple should buy a house that either one of them can swing on their one income. That almost never happens, but it would reduce stress in the household. Buying below one's means leaves room for savings, vacations, entertainment, charitable giving, and other priorities.” 5. Assuming “new” means “better” Daniele Kurzweil, the Friedman Team at Compass, explains how a new home doesn’t necessarily mean it’s “better”: “Everyone loves walking into a home and seeing that there is no work to be done. Bring your toothbrush and you are home. Many developers and home flippers are catering to people who want new new new and design their projects to conform to whatever the latest trends are. Our clients walked into an apartment and fell in love with the open concept look with very modern finishes. Fast forward six months and our clients realized that while an open concept floor plan might be wonderful for a two-story house, in an apartment it poses its own unique challenges. Sound travels, and when you have one big open room you have nowhere to escape to. The modern finishes were beginning to look dated, and since everything was out in the open, it was the only thing they could focus on.” Tip: Consider the pros and cons of a new buy or build Kurzweil continues: “Design trends are just that — trends. When purchasing a home, be sure to consider what your needs are. Is this for starting a family? Empty nesters? First-time home purchase? Think of buying a new construction home kind of like buying a car: the second you drive it off the lot, it starts depreciating in value. You are buying new construction because it has never been lived in, and as such you are paying a premium. But when you go to sell, one of the biggest draws will no longer be there. . .it will no longer be new.” 6. Visiting your potential property only once Imagine that you find a property that you can just feel is the right one. The neighborhood is beautiful and quiet. The neighbors seem nice. You’re ready to put down an offer right there and move in the next day. While this can happen and your gut feelings shouldn’t necessarily be ignored, you might want to visit the property again on another day. When you only visit a property once, you might miss out on important factors, such as after school traffic, that might not actually be ideal. Additionally, a one-time visit might not provide you with enough time to take a close look at the property, which could cost you in the future if there were repairs or issues that you missed on your one and only visit to the property. Tip: See the property at different times on different daysGerard Splendore, Broker at Warburg Realty, recommends the following: “I sold a one-bedroom apartment to a first-time buyer and we only viewed it when school was in session, not at the beginning of the day for drop off or end of day for pick up. At the walk through the day before closing the street in front of the building was clogged with school buses and parents in cars. This came as a complete surprise to the buyers.I always suggest seeing properties during the week at various times, in the evening, and on weekends. This is a great way to avoid any surprises about the surrounding area.” 7. Not taking time to see the neighborhood Alison Bernstein, founder and CEO of Suburban Jungle, was the first of her friends and colleagues to leave the big city to live in the suburbs. She and her growing family found an area that seemed perfect on paper, but it turned out, after they moved, that the area wasn’t what they had anticipated at all and they realized that they really wanted something different. The trouble is that real estate agents don’t always know neighborhood and community nuances, so it can be hard to get a complete picture of an area. For this reason, Bernstein started The Suburban Jungle, a company committed to helping families make the move to suburbia by making connections in the communities they’re interested in. Tip: Meet people and make connections Bernstein recommends the following: “Talk to as many people that live [in the neighborhood] and try to get the real, non-sale pitch to understand what their day is like. Maybe meet them and run a few errands with them and see if you can see yourself there. You know, like even going to the school pick-up if you have kids, or going to some preschools and being there at the time of drop-off or pick-up. Those things go a long way because a lot of people see community on a Saturday and they're like, "oh, this looks fabulous," but it tells a different story on like a Tuesday afternoon.” 8. Buying a fixer upper you can’t afford to repair Perhaps you’ve spent some time watching HGTV and have been entranced by shows like Fixer Upper or Good Bones. Maybe you think that buying a run-down home could be a fun and easy project. This could be true if you have a background in construction or home renovation, but for the average individual, buying a fixer upper home could cause more headaches and stress than you really want or need. Tip: Don’t get in over your headAlison Bernstein from Suburban Jungle explains: “If you have the appetite for fixing up and you don't get in over your head, and that's what you're excited about, then great. It's important to make sure that people have enough time because a lot of people are working full-time or have kids, and it is definitely a very time-consuming process. So as long as you can enjoy it and take it on, and like I said, more importantly, enjoy the process, then it's great. If you don't have a choice, you're stuck and you're renovating because you have to, I think it takes on a different light, but hopefully it's well worth it.” 9. Skimping on a quality home inspection One of the best ways to induce remorse or regret is by skimping on a home inspection. In many cases, this might be a required part of your mortgage process. But if it isn’t, that doesn’t necessarily mean that it should be optional. Tip: Pay more for a highly qualified inspectorWally Conway, president of HomePro Inspections, recommends the following: “The single best way to avoid buyer’s remorse is to have clarity on what you are buying and have protection for the unexpected. Your home inspection should be performed by the most experienced and technically competent home inspector that money can buy. Most buyers are taking on a 30-year mortgage, and that’s a long time to live in regret. It's also 360 mortgage payments! Wouldn't it seem wise to invest a mortgage payment to ensure that you have done as complete a job in due diligence as is humanly possible? Consider protecting your home after the inspection is done by choosing a home inspection that includes protection to cover the cost of the unexpected problems that will come up with home ownership, such as live sewer line failures, mold, and roof leaks.” 10. Not taking one last look at the property David Pipp, Personal Finance Blogger at Living Low Key, shares his experience not noticing an issue that could have been avoided: “Shortly after we moved into the house, we had a massive rain storm and ended up with water in our basement. It wasn't until that issue arose that we noticed there were no gutters on the back side of the house where water got in. $2,000 later we had new gutters on the house and our water problem was fixed. Since we moved in, we have had to add a water filtration system to the well, replaced both of the decks on the house, replaced a leaking toilet, and countless other small fixes totaling close to an additional $10,000. Next summer we plan to have the house re-insulated because it gets really cold during the Minnesota winters.” Hire a second home inspector One way you can ensure that nothing is missed, or any issues are overlooked, is by hiring a second home inspector. This might be an additional upfront cost, but having a second opinion at the start, and a comparison to your initial home inspection, could save you thousands of dollars later on. 11. Not getting a home warranty After putting money into a mortgage, a home inspection, and more, you may want to shrug off getting a home warranty — after all, it would just be one more expense, right? However, you never know what could happen once you close on your home. Perhaps, just days after closing, your water heater breaks or your air conditioning stops working. Without a home warranty, you could be spending a large amount of money out of pocket, whereas a home warranty could save you from some of these expenses in the long run. Tip: Understand how a home warranty worksJlyne Hanbak, REALTOR® Keller Williams Realty, explains: “A home warranty is a relatively inexpensive way to protect the major appliances and systems of a home for a specific period of time after the home is purchased. A home warranty can — and should — be negotiated into the contract on behalf of the buyer so that they are protected after their home closes.” 12. Making renovation decisions independently When renovation decisions come up, it can be helpful and important to have a second, professional opinion on your next steps. While you might think that you could save more money by doing a Google search or seeing what other people have done on YouTube, these options may not be the best for your specific situation and could cost you more overall. Tip: Hire a professional When buying a fixer-upper home you need to get advice from a home improvement professional on its overall potential for making the improvements you're expecting to make. 13. Not tracking project costs John Bodrozic, co-founder of HomeZada, explains: “When you don’t budget and track costs on home remodel projects, you can end up way over budget. Plus, you don’t have a record of costs that can help you adjust the tax basis of your home at tax time.” Tip: Budget and record expenses from day one Keep a record of your home expenses from the very beginning, it’s really as simple as that. Move forward without regret The answer to avoiding home buyer’s remorse really comes down to three things: financial preparation, education, and awareness. Learn about the different mortgage products available to you. Get loan offers with interest rates from multiple lenders. And before settling on a particular lender, read customer reviews about the top-ranked mortgage lenders. Are there hidden lender fees? Are the loan officers prompt to return calls and emails? Are other borrowers pleased with their experience? Remember that a professional opinion could be a big money and time-saver. While it may seem like a hassle to get a contractor, home inspector, or other home professional to take a look at your property, it could save you from stress later on. Buying a home, unfortunately, can often come with some buyer’s remorse — it is a large purchase after all. But if you prepare properly and learn from the mistakes of others, you can make the best decision possible without looking back. Compare Top-Rated Mortgage Lenders Read verified customer reviews and find the best mortgage lender for your needs. Compare Article updated by Kalicia Bateman Contributors: Luke Babich, CSO/Co-founder of CleverJohn Grimes, Realtor at BHGRE Metro BrokersDaniele Kurzweil, the Friedman Team at CompassGerard Splendore, Broker at Warburg RealtyAlison Bernstein, founder and CEO of Suburban JungleWally Conway, president of HomePro InspectionsDavid Pipp, Personal Finance Blogger at Living Low KeyJlyne Hanbak, REALTOR® Keller Williams RealtyJohn Bodrozic, co-founder of HomeZada
According to a recent survey, the top three barriers to homeownership are — Cost of a down payment Cost of monthly payments A lack of overall savings Money, money, and more money. Enter tiny homes. With 91 percent of single-family home buyers favoring homes 2,000 square feet or bigger, living large is still king, and tiny homes are the exception rather than the norm. But they’re becoming more popular, and finances play a role. Say what you want about the lifestyle aspects of this “trend,” but tiny houses — especially DIY ones — are dirt cheap compared to the typical single family home or condo. The financial barriers to tiny home ownership simply aren’t as daunting.Still, a professionally built tiny house costs around $60,000 on average — far more cash than many potential buyers have on hand. And tiny home financing can come with unique challenges. So, how can (and can’t) you finance a tiny house? Can I finance a tiny home with a mortgage? The short answer is no. There are a few exceptions, but you should assume you won’t be able to finance your typical tiny home with a mortgage. Why not? The bank wouldn’t make enough from the arrangement While there’s not a universal minimum loan amount, banks generally won’t fund mortgages under $50,000. It’s not cost-effective for lenders to do the work with less than that because they only charge origination fees of 0.5 percent to 1 percent of the total loan amount. It’s not considered real estate A mortgage cannot finance anything mobile, including a mobile or manufactured home, a titled trailer, or a tiny home on wheels. It requires a permanent, foundation-affixed home. Shawn Breyer, owner of We Buy Houses Chattanooga, describes the distinction: “Not all tiny homes are considered real estate. If a tiny home has wheels, then it is considered personal property. To be considered real estate, there must be property taxes on the asset. Without a recorded title and plat [a map showing the divisions of a piece of land], there are no property taxes and it is not considered real estate. There's a difference in financing options for personal property versus real estate.” The property can’t be appraised An appraisal is primarily based on comparing a home to homes with comparable square footage that have sold within the previous year. And since tiny homes are relatively new, there generally aren’t enough homes for a meaningful comparison to take place. Matt Hackett, operations manager of Equity Now, expounds on the roadblocks to appraisal: “Fannie Mae doesn't have a minimum square footage requirement for a home, unless the property is a condo, coop, or a manufactured home. In that sense, there is nothing in the standard underwriting guidelines preventing the financing by mortgage of a very small home, but the home needs to conform to the neighborhood and there have to be enough similar sales for an appraiser to be able to determine an opinion of market value.” There are exceptions to the ruleHowever, you may be able to secure a mortgage in certain regions if specific conditions are met. Joe Toms, president of FreedomPlus explains how: “Mortgage loans are offered only for homes that are built on permanent foundations. While most tiny homes are built to be mobile, if someone is building a tiny house on a foundation — and complying with local building codes and requirements — they may be able to qualify for a mortgage.” Buildings Guide is a good resource to check out the requirements and codes in your area. Can I finance a tiny home with an RV loan? Yes. Some tiny home manufacturers, such as Tumbleweed Tiny Houses, provide financing to purchasers through RV loans. To obtain an RV loan, the home must first be certified to meet manufacturing and safety standards by the Recreational Vehicle Industry Association. Adele Alligood, financial advisor for EndThrive, says the benefits of using an RV loan include the relative simplicity of the process compared to that of a mortgage and the fact that you generally aren’t required to put up collateral. However, this solution isn’t perfect. Alligood explains that “to secure an RV Loan, you need a steady income, good credit, and somewhere else that you can call your primary residence.”An RV loan works if your tiny house will be your traveling home, your second cottage, or getaway. But if you intend for your tiny home to be your primary residence, you need another answer. Can I finance a tiny home with a personal loan? In almost every case, yes. A personal loan can help you pay for the costs of building a new tiny home or purchasing a pre-owned one. Typical personal loan amounts range from $2,000-$50,000, but some companies will lend borrowers up to $100,000. It offers flexibility The main advantage to a personal loan is that it can be used for any purpose the borrower wants, whether that’s paying for materials for a DIY build, labor costs for a professional builder, a plot of land, or a F-350 sized truck, which you’ll likely need to pull a movable tiny home. It may be easier to qualify Independent personal loan companies use different criteria than a traditional bank or credit union to evaluate a person’s repayment liability. According to Toms, “This can be especially helpful for someone whose credit profile may not reflect his/her ability to repay, or for someone wanting to use the loan for a non-traditional purchase such as a tiny home.” Conditions still apply However, that doesn’t mean personal loan standards aren’t stringent. The higher your credit score, the better interest rate you’ll qualify for. Conversely, a personal loan can be a disadvantage if your credit is poor. Alligood warns, “If your credit is less than ideal, a personal loan could cost as much as a credit card loan or more.” Plus, some personal loans come with prepayment penalties. Can I finance a tiny home with my home equity? With a home equity line of credit (HELOC), you can use your home as collateral for a loan amount, which could go towards a tiny home build or purchase. You can draw on that line of credit for a certain draw period, then repay the amount you borrowed along with interest. A different home equity option is a “co-investing” model like that offered by Unison. With Unison, a homeowner can get paid up to $500,000 or 17.5 percent of the home’s value as a one-time payment to be used at the consumer’s discretion, such as building a small or tiny home as an Accessory Dwelling Unit (ADU) on their property. Then, when the homeowner decides to sell or buy Unison out, Unison gets a share in the appreciation of the home. Both parties benefit if the home increases in value and both share in the loss if the home decreases in value. Unison strategist Amin Mirzadegan says that Unison’s model is different than a home equity loan or line of credit in that homeowners don’t garner any added debt, monthly payments, or interest. “Additionally,” Mirzadegan explains, “Unison customers who increase the value of their home by building an ADU also benefit from the Remodeling Adjustment feature, which allocates 100 percent of the value attributable to a home improvement project to the owner, so Unison doesn’t share in any value gained from the project itself.While an ADU is not considered an independent piece of real estate on its own land or personal property like a mobile tiny home, it’s becoming an increasingly popular option for multi-generational or caregiver households. Thinking outside the box Of course, it would be ideal to pay for your tiny house out of pocket. Or to procure the money you need without dealing with the complicated technicalities of loans from financial institutions. Consider these additional ideas as you make your financing decision. Regardless of the option you choose, be clear on the nitty-gritty of all terms and conditions. Borrow from friends or family. Come up with an agreement that benefits you both, such as an interest payment that compensates them well, but is less than what you’d pay a bank. Save aggressively. Forego as many non-essentials as you possibly can. Live like no one else now, so you can live like no one else later. Build as you go. If you’re not in a time crunch, purchase materials for your tiny home in waves as you have the money, and not all at once. Consider manufacturer financing. Some manufacturers have their own financing options set-up so you don’t have to worry about working with a third party. Look into peer-to-peer lending. There are tiny home communities online that are invested in the tiny home movement. And some individuals will invest in a borrower’s tiny home. Try a chattel mortgage. Similar to a car loan, the lender owns your home until you finish paying off the loan. This is a good option if you park your tiny home on leased land or you move frequently. Don’t forget about using credit cards. Proceed with caution! But if your credit limit is high enough to cover your costs and you’ll be able to pay your bills off quickly, this can work.
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.