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How Homebuyers Can Still Get a Great Mortgage Today

How Homebuyers Can Still Get a Great Mortgage Today

August 6th 2022

This real estate market is unlike anything we have ever seen before. With too few homes for too many buyers, bidding wars are common, driving up prices. Adding to the pressure, mortgage interest rates have increased as predicted during 2022.

Rates averaged 4.99% for 30-year, fixed rate loans in the week ending in August 4, according to Freddie Mac. For a 15-year fixed mortgages—with a weekly average of 4.26%.

This situation has changed the unwritten rules of financing a home, and savvy borrowers can’t just do things the way they have in the past.

Heed the following advice, and you’ll gain the edge in this ultra-competitive market.

Old rule: Nab the best interest rate without paying points

New rule: Purchase points for a lower rate

In recent years, when mortgage rates were lingering at historic lows, there was no need to use points to buy down that percentage of interest charged. But now, with interest rates having increased, buying mortgage points is a simple way to lower your mortgage’s interest rate and save money long term. If you have the extra funds at the time of closing, it can be worth it to buy mortgage points.  This will lower your monthly house payment and save you money long term.

Let’s spell out how this works in a little more detail: Points are an upfront fee you pay to get a lower rate over the life of your home loan. Typically, 1 point lowers your mortgage rate by 0.25% and it costs 1% of your loan amount. So if the current interest rate is, say, 4% on a $500,000 loan, if you pay 1 point, or $5,000, upfront, your interest rate will be reduced to 3.75%.

But does it really save me money, you might be asking? It sure does. Here’s some math for you: If you obtain a mortgage for $500,000 on a $600,000 home at a 4% lending rate, then pay 1%, or $5,000, to lower your rate to 3.75%, you’ll pay $71.50 less per month and save over $25,000 over the loan’s life. That’s a wise move, says our math.

Old rule: Get pre-approved before submitting an offer

New rule: Ask for a mortgage commitment instead

If you are at all familiar with the home buying process, you are probably aware that getting a pre-approval is essential before submitting an offer. After all, a pre-approval tells the seller that a lender believes that you will be eligible for financing once your application has been reviewed by an underwriter.

However, to get an edge in today’s market, you may want to ask your lender for a mortgage commitment instead.

A mortgage commitment is granted by an official underwriter. This means that there will be fewer conditions on the buyer’s financing.  It allows the transaction to move more seamlessly and for the seller to receive their money faster.

That said, getting a mortgage commitment takes a bit longer than simply asking your lender for a pre-approval.

Borrowers typically need to supply all supporting income and asset documents to the lender. Those documents then have to be reviewed and signed off on by a member of the underwriting team.

In other words, if you’re going this route, you need to plan in advance.

Old rule: Target homes at prices you can afford

New rule: Target homes at prices below your top budget

In the past, buyers were able to let list prices reflect how much they would probably pay for a property. However, these days, inventory is so limited that prices are rising quickly. Buyers are offering well over the listing figure in order to win. In this environment, it’s incredibly easy to spend more than you can afford on a home.

To avoid getting in over your head, work closely with a mortgage lender (or broker) well before you start making offers.

Collaborate with your lender to set a budget as you seek pre-approval.

Buyers should have very honest conversations with their lender about what they can and cannot afford.  They should make sure to factor in that they will most likely have to offer above each property’s list price. Then, once they have a better idea of what they can realistically afford and they know their limits, they’ll be ready to make a strong offer when they find the house they want.

Lenders should be able to estimate what their clients can afford by interest rate.  Sharing that information will ensure that borrowers know what to expect if rates continue to rise and how an increase will affect their buying power.

Put simply, no matter what your budget ends up being, the more information you can gather before entering this hot market, the better.

Old rule: Don’t bother with down payment assistance

New rule: Take all the help you can get

Traditionally, down payment assistance programs were meant to help first-time homebuyers and those with lower incomes access homeownership. Many of these programs still have requirements that must be met in order to receive the funds. Given how tight and tough the housing market currently is, you may want to investigate whether or not you qualify.

Buying a home is a significant financial undertaking, especially in competitive markets like the one we’re experiencing.  Buyers who are having trouble coming up with the cash for their down payment and closing costs should ask their lender about available down payment assistance programs. Often, these programs can help cover those costs by providing grants or other forms of financial assistance.

Bottom line: It never hurts to ask! With home prices going through the roof, every little bit of assistance helps.

Old rule: All loan programs are created equal

New rule: If possible, choose conventional financing

Offers with financing used to be viewed as all pretty much the same. It didn’t matter whether you were using a Federal Housing Administration loan, a Veterans Affairs loan, or a conventional loan to buy the property. In each case, you had roughly the same amount of bargaining power as everyone else who needed a mortgage.

These days, however, the game has changed. Sellers are definitely revealing their preferences.

If there are multiple offers, conventional financing usually wins.  Conventional financing typically offers more flexibility and latitude than FHA and VA loan programs. For example, satisfying the appraisal requirements on a government-backed loan can be more challenging than a conventional financing appraisal. Certain types of properties, particularly condominiums, may also impose additional financing requirements if an FHA or VA loan is involved.

Unfortunately for buyers, bidding wars are more common than not these days. In order to put yourself in the best possible bargaining position, you’ll need to make things as easy as possible for the seller. While a conventional loan program may not be an option for every buyer, if one is available to you, you should consider that first.

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