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 are low but inching upward—which means the clock is ticking for buyers to lock in an affordable home loan today.
This pressure cooker situation has completely changed the rules of financing a home, and savvy borrowers can’t just do things the way they have in the past. To help, we asked lenders to share the new rules for getting a mortgage today, as well as the old rules to ditch.
Heed the following advice, and you’ll gain the edge in this ultracompetitive market.
Old rule: Get a pre-approval before submitting an offer
New rule: Ask for a mortgage commitment instead
If you are at all familiar with the homebuying 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,” explains Robert Killinger, a senior loan officer with inside sales at Mortgage Network in Boston. “It allows the transaction to move more seamlessly and for the seller to receive their money faster.”
That said, Killinger warns that 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.
According to Nicole Rueth, senior vice president and producing branch manager of the Rueth Team with Fairway Mortgage in Englewood, CO, you should 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,” she advises. “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.”
Jerry Koors, president of Merchants Mortgage, a division of Merchants Bank of Indiana in Carmel, cautions that buyers today will also need to factor rising interest rates into their budget.
“Lenders should be able to estimate what their clients can afford by interest rate,” he says. “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 crazy market, the better.
Old rule: Nab the best rate without paying points
New rule: Purchase points for a lower rate
In recent years, with mortgage rates at historic lows, there was no need to use points to buy down that percentage of interest charged. But now, “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,” says Daniel Osman, head of sales at Balance Homes. “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: 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 huge financial undertaking, especially in competitive markets like the one we’re experiencing,” says Sean Grzebin, head of consumer originations with Chase Home Lending in Jacksonville, FL. “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.
According to Rick Robertson, a certified mortgage planning specialist with Axia Home Loans in Bellevue, WA, buyers should opt for conventional financing whenever possible in order to give themselves a leg up in this tough market.
“If there are multiple offers, conventional financing usually wins,” he says. “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, 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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