Home prices may be up, but in many markets they’re still below where they were seven years ago. And mortgage interest rates are still low: The National Association of Realtors predicts that 30-year fixed rates will rise from their recent 4.29 percent national average to about 5 percent by the end of 2014. So the housing market will stay affordable for many people at least for the next year or so, says Steve Cook of RealEstateEconomyWatch.com. Here’s how to close the deal on the home you want.
Check your credit. Years ago you needed a FICO score of 680 or more to get the best mortgage rate. By 2008 that number climbed to 720. Now buyers need a score that’s at least 760. Banks cut losses by tightening lending to home buyers during the recession, and no one knows when they’ll relax their standards, Cook says.
Scores have a big impact on the total amount you’ll pay for a loan. If your score is 760 and you apply for a $300,000 30-year fixed mortgage, you could recently qualify for a 4.25 percent interest rate, with monthly payments of $1,476. But if your score was below 620, your interest rate would have been 5.84 percent and your monthly payment $1,768. Over the 30-year life of the loan, that would cost you more than $105,000.
Even if you have good credit, you might pay more than you should if there are errors on your credit reports. Five percent of consumers who checked their reports from the three major credit bureaus found errors that were serious enough to affect their credit scores, according to a recent study by the Federal Trade Commission. So examine your reports from all three—Experian, Equifax, and TransUnion—at Annualcreditreport.com. Report any errors, and check to make sure they are corrected.
Get pre-approved. That was always a good idea, but now it’s a must, says Ron Phipps, a real-estate agent in Warwick, R.I. Sellers tend to take buyers who are pre-approved for a mortgage more seriously, a competitive edge over those who fail to take this step.
Do some digging to find out where you can get the best rates. Check several lenders, including national, local, and online banks as well as credit unions. We generally don’t recommend that you hire a mortgage broker to do this for you because he may be more focused on selling you a mortgage than getting you the best deal.
Knowing your monthly payment amount isn’t enough. Also get an estimate of the closing costs and all the additional fees you’ll owe. Many of the fees involved are negotiable, such as the home inspector’s fee, the cost to do a title search, and your attorney’s fee, so get the best deal you can.
Use an agent. Working with your own real-estate agent can be helpful in a seller’s market, when competition is high and homes sell quickly. An agent can clue you in to market conditions and will know which homes will cost you more than you might think because, for example, flood insurance might be required. You might also pay less for a home. A survey conducted a few years ago by the Consumer Reports National Research Center asked readers about their experiences buying and selling homes. It found that 66 percent who used a real-estate agent to buy paid an average of $5,000 less than the listing price. The buyers who negotiated their own deals without an agent (34 percent) paid close to the asking price.
Consider going right to contract. If the market in your area is especially hot, buyers should skip making an offer and write up a contract for a seller to review, says Robert Bailey, co-owner of Bailey Properties in Santa Cruz, Calif. Just make it contingent upon a home inspection. Also try to find out why the owner is selling, and add something to the deal that reflects his needs. If he wants more time to live in the house, for example, say you’ll postpone the close. “I sold one house because a buyer agreed to take care of the family’s pet until they were settled in their new home,” Bailey says.