In a seller’s market, it’s easy to get so caught up in competing for available and affordable listings that you get tunnel vision — and miss out on opportunities to pay less at every stage of the buying process. But you can reduce your stress and costs by deploying these proven money-saving tactics before starting your house hunt.
Get Your Mortgage First
Unless you’re paying cash, line up your financing before shopping for a home. That means comparing mortgage quotes from several lenders, choosing a lender, and applying for mortgage pre-approval. Nailing down your money first gives you several advantages:
- Save thousands in closing costs: Researchers at Stanford University found that comparing quotes from multiple lenders saved borrowers a median $2,664 in closing costs on a $200,000 mortgage.
- Pay less for the home: It’s not uncommon for sellers to choose lower offers with pre-approved loans over higher offers from unprepared buyers.
- Less pressure: Do you really want to be worrying about mortgage approval when you have 21 days to close or lose the home?
Having a pre-approved mortgage gets you more respect from sellers and their agents. In fact, many won’t even allow buyers without pre-approved mortgages or cash to close or tour homes. Clearing the financing hurdle also speeds and smooths the rest of the transaction.
Apply for Down Payment Assistance
Down payment assistance, or DPA, is one of the best-kept secrets in real estate — it’s basically free money. You owe it to yourself to see if you or the property qualify for DPA:
- DPA is not just for first-timers, low-income buyers, or cheap houses.
- The average DPA savings, according to a 2016 RealtyTrac survey, is just under $18,000.
- Buyers with moderate income or those buying in redevelopment areas meet the criteria for many programs. Other DPA providers require you to be a first-timer and complete a homeownership course. And HUD’s Good Neighbor Next Door program allows teachers and first responders to buy at a 50% discount with just $100 down.
DPA can take different forms — low- or no-interest loans, outright grants, or forgivable loans that go away after a few years. Federal and local governments, charitable organizations, and even employers may offer DPA to eligible buyers.
Your first home is almost certainly not your last. You’re trying to get a foot in the door and start building home equity. So don’t get too set on a “dream” home the first time you buy.
It could pay to consider other types of houses when you shop. Multifamily homes — duplexes, triplexes, and four-plexes don’t usually generate as much competition as single-family dwellings. And you’ll have tenants helping you cover the mortgage!
Mortgage lenders determine your rental income (or potential rental income) from an appraisal or existing leases. They’ll take 75% of the gross rent and add that to your qualifying income. You can buy a multi-unit home with as little as 5% down (Fannie Mae) or 3.5% down (FHA). VA-eligible buyers can buy with zero down.
You’ll also gain valuable property management experience, which will come in handy if you decide to invest in real estate with 1031 exchanges in the future.
Negotiate Closing Costs
Closing costs often surprise first-time buyers. They can even exceed your down payment! However, many prices are negotiable. One of the main costs is your loan fees. Comparing offers from several mortgage lenders is an easy way to find the cheapest combination of loan fees and interest rates.
Other costs are also negotiable. Depending on your state, you may be able to shop your title insurance, escrow fees, and other charges. Your lender should provide a Loan Estimate (LE) form within three days when you apply for a mortgage. This form lists the closing costs that you can negotiate if you choose.
Get a Rebate
Not all real estate agents charge a full commission. You’ve probably heard how a discount brokerage can save sellers money. But did you know that some agents routinely rebate some of the commission on the sale to the buyer?
Suppose the seller’s contract allows a 5% commission split between their agent and the buyer’s agent. In that case, your agent can choose to rebate some of his or her 2.5% commission to you for closing costs, your down payment, or even cash to you (it depends on local laws and your lender’s policy).
Ask Your Seller or Lender
Did you know that you can save money by paying more for your home or by accepting a higher interest rate for your mortgage? You can if your lender or home seller covers your closing costs in exchange.
It makes little difference to sellers if they accept an offer that’s, say, 3% lower than their list price or one that’s full price but contains concessions totaling 3% of the purchase price. The proceeds they receive will be about the same. But using a 3% concession to cover closing costs or get a lower mortgage rate can save you more upfront and in the long run than a slightly lower price. Your lender or real estate agent can help you run the numbers.
Similarly, your lender may be able to cover some or all of your closing costs if you’re willing to accept a slightly higher mortgage rate. This is called “rebate pricing.” The lender can offer you a rebate upfront in exchange for paying more over the life of the loan. Rebate pricing can be valuable, especially if you move in just a few years.
The word “customary” gets thrown around a lot in real estate. Customary cost splitting between buyer and seller streamlines the process and limits the number of points the parties have to cover. But what’s customary may not work for you. It’s okay to go outside what’s customary if it’s reasonable and you ask nicely.
Always remember that in real estate, almost anything is negotiable.