Mortgage Closing Costs: 3 keys to successful shopping

Getting a mortgage is a complex transaction. Behind the scenes, the process of completing a mortgage requires services from a range of different providers.  Mortgage lending guidelines state that any company providing a service on your loan (and charging for it) must be accounted for and documented within your loan file.

Where can you find your closing costs?

Your mortgage company will typically collect the necessary documents pertaining to these charges and deliver a Loan Estimate.  By law, a Loan Estimate is provided to you within three days of your loan application.  This will be your first opportunity to see a detailed breakdown of the closing costs you can expect for your purchase or refinance. While some charges shown can change by up to 10 percent or more, other charges must be exact and cannot change between the time you make your application and your closing date.

When you first view the Loan Estimate, it may seem a bit confusing as you’ll find charges from numerous third parties – and you may not recognize the names or services they offer.

Fortunately, taking a short amount of time to understand the different categories of closing costs, fees and points will vastly improve your chances of getting a great deal because you will be an informed consumer. So read on!

1. Recurring vs. Non-Recurring Costs

When it comes to the costs of your mortgage loan, certain costs will occur again (recurring), while others are associated with the transaction only and are simply one-time charges (non-recurring).

Why is this important? It is important to differentiate these costs, as recurring costs will typically be associated with owning the actual property (regardless of which mortgage company closes your loan) and should be factored into your ongoing budget. Non-recurring costs are associated purely with the transaction and will not come up again.

Recurring Costs

Recurring costs include prepaid interest charges which are, in reality, your very first mortgage payment! (Wasn’t that exciting!) Normally, mortgage payments are made in arrears, which means that on the first day of every month, you are paying for the previous month’s interest accumulation and a bit of the principal balance.

When it comes time for your closing, you’ll see an amount listed as prepaid interest.  Prepaid interest is a “per diem” (per day) charge of interest between the day your loan closes up to the first day of the following month. This is the one and only time you will pay for interest ahead of time when it comes to your mortgage loan.

Example: Suppose your settlement date is on the 20th of a given month. Your settlement agent will collect ten days of interest (assuming 30 days in the month) at the time of closing. Again, this is your very first mortgage payment, and it is collected in advance just this one time.

Another form of recurring costs involves your property taxes and homeowners insurance. A full year of homeowners insurance premium is typically collected and paid to your insurance company at the time of closing.  Also, you’ll need to pay some amount of property taxes that may be due in the coming year. Property tax collection times and frequency will vary by state or county and include funds paid to the local school district, county and city.

Property taxes and homeowners insurance are recurring costs because you must continue to pay them as long as you are in your home – even if you pay off your mortgage balance completely!

If you decide (or are required to) escrow for these two items, your first regularly scheduled mortgage payment after closing (and all others) will include one-twelfth (1/12th) of your yearly tax and homeowners insurance amount.  These incremental payments will be accumulated by the mortgage company and paid when due.  If you receive a tax bill or insurance bill when you are escrowing these items it is always a good idea to forward to your mortgage company immediately.

Non-Recurring Costs

Non-Recurring costs are those costs associated with the closing of your mortgage loan which will not occur again.  Typically, these are referred to as transaction costs. Examples include a lender/broker fee (could be called “Origination Fee”), an appraisal fee, and document preparation fees.

In some states, you may also be required to pay a state-mandated transaction fee at closing. In the state of Pennsylvania, for example, a two percent (2%) transfer tax is charged by the State for each home purchase. This amount is typically split between the buyer and seller and is not a lender charge.

2. Lender Fees vs. Non-Lender Fees

When it comes to shopping for the best mortgage deal between lenders, you’ll want to pay attention to fees payable to the lender versus fees payable to third parties. Why? Lender fees and interest rates are the true “apples to apples” numbers you can compare when shopping for your mortgage provider. Accordingly, lender fees should be considered separately from third party fees which are payable to different companies and cannot be “padded” by the lender.

Note: You can always shop for third party services such as appraisal services, title companies and home inspectors, after you select a mortgage lender. 

Lender Fees

A lender or broker fee will appear in black and white when you are comparing offers or when you are viewing a Loan Estimate. This may also appear as a percentage of your loan amount.  In either case, this amount will be paid directly to the lender or broker in exchange for providing their services.

When two separate lenders provide the same interest rate, the offer that includes lower lender fees is the lower cost option of the two. 

Providing an interest rate above a “par rate” to earn yield spread (YSP) is another way money is generated for mortgage lenders or brokers.  Similar to a retail store owner sourcing and purchasing clothing at wholesale prices and then selling at a retail markup price, the mortgage lender or broker sources your loan on the wholesale market and charges a retail markup interest rate.

Non-lender Fees

Non-lender fees include charges for services such as title insurance, an appraisal or abstract. On your Loan Estimate, as well as on your Closing Disclosure, the lender charges will be located at the top of the document and all non-lender fees will be detailed below. Remember that you can shop for these third party services – just as you would a mortgage lender.

3. What are Points?

A point (discount point) is a percentage of the loan amount you can pay upfront to reduce, or discount, the interest rate on your loan.

Example: A loan officer might quote to you a 30-year fixed rate at 4.75% with no points, but if you want to get a lower rate, say 4.50%, you’ll be asked to pay one point, or one percent of the amount to be borrowed, at closing.

Points are a form of prepaid interest to the lender, and different from an origination fee or other fee, the lender is indifferent if you select to pay them. This is because the lender earns the same amount of interest either way. Either you pay a slightly higher interest rate over time, or you pay the interest upfront via a discount point and pay less interest over the life of the loan.

Lenders can provide an array of interest rate options based upon the number of points purchased. They can offer a particular interest rate for 0 points, another interest rate for 1 point, and so on. To determine whether or not paying points makes sense in your situation, it is a good idea to compare the total funds required at closing and the difference in monthly payments at various rate and point combinations. You may also want to think about how long you intend to be in the home and if paying interest ahead of schedule makes good financial sense.

Tip: Your lender can usually offer a lender credit toward closing costs if you elect to pay a higher interest rate over time. The higher rate generates extra revenue for the lender and they use these funds to pay some or all of your fees. When you hear about lenders advertising a “no closing cost loan,” this is how they do it.

Now that you know a bit more about the types of mortgage closing costs – be sure to compare them along with the interest rate when mortgage shopping. Your choice of a mortgage lender and loan program will have a lasting impact on your budget – so shop for a great loan and set yourself up for financial success by getting the best deal possible.

Tip: Compare mortgage lenders safely and easily at MortgageCS.com.  Once your account is set up – you can anonymously obtain detailed quotes for your exact situation.

VA and USDA Loans: 0% Down Loans For Those Who Qualify

FHA loans may be the most common government-backed loan when it comes to buying a home, but there are two others that may provide an even better fit for the right candidates: VA Loans, and USDA Loans.

VA Loans

The VA loan was created in 1944 to guarantee loans issued to veterans and their families. Many military families find it difficult to qualify for conventional loans due to tough credit standards and down payment requirements, but with a VA loan, home ownership is within their reach.

Here are some points about VA loans that may be of interest to you:

  • There is no down payment required, however, there is a funding fee of 2.15% of the purchase price (3.3% if you’ve used a VA loan before)
  • There is no private mortgage insurance (PMI) required
  • Interest rates can be better than conventional loans by up to 1 percent
  • Qualifying for a loan is easier
  • Your Basic Allowance for Housing (BAH) is counted as income
  • Closing costs can be lower

With such wonderful benefits, why isn’t everyone going for this loan? Not everyone qualifies. Let’s take a look at qualifications for the loan.

The VA Loan is designed for those who have served our country in the military.

To be considered, you must:

  • Have served 90 consecutive days of active service during wartime, OR
  • Have served 181 days of active service during peacetime, OR
  • Have more than 6 years of service in the National Guard or Reserves, OR
  • Be the spouse of a service member who has died either in the line of duty or as a result of a service-related disability

If you meet the military qualifications, you will also have some income qualifications to meet. Unlike most loans, the VA Loan doesn’t set a specific income level requirement. However, you will need to have stable, reliable income that can cover your monthly expenses including the new mortgage payment.

Instead of front-end and back-end debt to income ratios, VA loan requirements look at residual income. Residual income, also known as discretionary income, is the money that is left over after you have made all your monthly payments, including your mortgage and escrows, student loans, car loans, credit card bills, child support, spousal support, day care, and other obligations. Expenses such as food, entertainment, and utilities are not considered when determining your residual income.

USDA Loans

The USDA’s Rural Housing Service offers a program known as the Section 502 Direct Loan Program. This program provides either a direct loan or a loan guarantee to low and moderate-income borrowers wishing to buy in a rural area.

To qualify for this USDA loan, you must:

  • Have an adjusted income that is at or below the low-income limit for the area in which you are buying a home
  • Currently be without good housing
  • Be unable to get a loan from other sources
  • Plan on living in the home as your primary residence
  • Be a citizen of the United States

In addition to the borrower’s qualifications, the home itself must also qualify. It must:

  • Be less than 1,800 square feet
  • Have a market value that is less than the area’s loan limit
  • Have no swimming pool
  • Not be an income generating property
  • Be in an eligible area, which is a rural area with a population of fewer than 35,000 people

These loans have fixed interest rates based on current market rates. However, since the rates are modified by payment assistance, your rate could be as low as 1%. Additionally, most loans are for 33 years instead of the traditional 30. For those with very low income, this can be stretched to 38 years. Finally, you will not need a down payment unless your assets are higher than the predetermined limits. If they are, you may be required to use some of your assets as a down payment.

Unlike other government-backed programs, the USDA program will require that you repay all or a portion of the payment subsidy when you no longer live in the home.

When to Refinance, and When NOT To

Interest rates have been in their narrow range for some time now, after hitting record lows in late 2012. The average 30 year fixed rate hit 3.31% that year according to Freddie Mac’s weekly mortgage rate survey.

You may not be able to find a 3.31% rate today (at least without paying additional fees), but you can still get very close considering the recent few decades of interest rates. Many homeowners have taken advantage of lower rates and refinanced their mortgages to enjoy lower monthly payments, but there are still more who, for whatever reason, haven’t decided whether or not a refinance makes sense.

There are ways to know whether a refinance is a good idea, and it’s not always about the interest rate. Here are some basics to keep in mind when considering a new mortgage:

Interest Rate & Payment

This is the most common reason people refinance. When mortgage rates fall, homeowners soon see solicitations from mortgage lenders announcing the new opportunity to lower their monthly payments. While that certainly makes sense in many cases, it’s not the right solution for everyone, every time. You may have heard it’s a good idea to refinance if rates are say, 1.00% below what you currently have, but the rate is only part of the equation. If you have a 30-year fixed rate of 5.00% and rates fall to 4.00%, then that so-called “rule of thumb” would kick in. But that’s not the only consideration when evaluating a possible refinance.

Instead, you must first weigh the difference in monthly payments compared against the fees associated with getting the new mortgage, then determine how long it would take to recover those closing costs. Let’s look at a basic example. Let us suppose that you have a mortgage balance of $200,000 and a 30-year fixed rate at 4.00%. That puts your current monthly principal and interest payment at $954 per month.

Now imagine interest rates have fallen to 3.25%. The new monthly payment would fall to $870, for a monthly savings of $84 each month. That’s an attractive number, but how much will it cost to get that lower rate? Let’s say that lender fees are $1,000, and other third party charges add up to $3,000 for a $4,000 total. If you divide the monthly savings into the closing costs you get 47.62, or almost 48 months to recover those fees with the lower payment. Is that too long?

Possibly. Some think a recovery term of two to three years makes the most sense, and if you’re going to own the property for at least that long, then a refinance might be a good idea. When refinancing a mortgage because rates are lower, you must also consider the costs involved.

Note: It is also important to consider the costs of re-amortizing (or starting over) on your loan term. These details are not covered in this particular article –however here is a brief: If you are two years into a 30-year loan and refinance into another 30-year loan, you are resetting the 30-year period, meaning you have 30 more years to pay your new amount compared to just 28 years of paying the older mortgage payment.

To reduce costs, it is a popular option to obtain a lender credit at the time of closing. Mortgage companies are typically willing to increase your interest rate in exchange for lower closing costs. Using the example from above, if you increased the new rate from 3.25% to 3.50%, the monthly payment would still be $56 lower. At the same time, the lender would provide you with a credit of $2,000, or 1% of the loan amount. In this instance, the time it would take to recover your closing costs will be under three years, or 35 months- certainly a more attractive option.

If you are wondering how this works, you are not alone. In the same fashion that you can lower a 30-year fixed rate by paying discount points, you can also select to increase your interest rate and have the lender pay some of your costs in the form of a lender credit. Mortgage lenders have no preference on which option you take – so explore your options before making a final decision.

Changing Loan Terms

Another popular reason to refinance is to shorten the term of an existing loan. Reducing the term of a mortgage loan saves a considerable amount of interest, yet it also typically increases the monthly payment. Most borrowers opt for a 30-year fixed mortgage due to the lower monthly payments, even though it will take twice as long to completely pay off the balance.

Continuing our example from above, a $200,000 mortgage with a 30-year fixed rate of 3.50% will require a payment of $898 while a 15-year loan at 3.25% will require a payment of $1,405 per month. While the difference in monthly payment may be significant, so is the impact on how quickly the loan is paid down. Just five years into these loans, the principal balance remaining on the 15-year loan is nearly $36,000 lower, when compared to the 30-year loan option ($179,394 on the 30-year loan compared to $143,814 on the-15 year).

Sometimes the jump in payment between a 30-year fixed rate to a 15-year is too great, so much so that a borrower may not qualify for the shorter-term loan. Fortunately, there are other options that many may not know about. Mortgage lenders typically also offer fixed-rate terms of 10, 20 and 25 years. Compare these options if you want to shorten the term without dramatically increasing your monthly payment.

ARM to Fixed

Adjustable rate mortgages, or ARMs, offer lower introductory rates and can be attractive for buyers who don’t expect to finance a property for the long haul. Most ARM loans begin with fixed rates, which are in place for a period of time ranging between three to 10 years. After this fixed period, the interest rate can vary on an annual or semi-annual basis.

Refinancing an ARM or a hybrid takes the uncertainty out of future mortgage payments. ARMs can offer lower, “teaser” rates compared to fixed-rate products, but because they can and will change at some point, if fixed rates are low and the home owner intends to own the property for the foreseeable future, it is likely a wise decision to refinance.

When NOT to Refinance

Cashing Out

One of the worst reasons to refinance a mortgage is to pull out cash. Refinancing an existing mortgage requires closing costs, but borrowers typically pay for these with the equity in their home, while simultaneously putting some extra cash in the bank or using it for other purposes.

Refinancing for the sole reason of pulling out cash is a bad, expensive idea. If you are in need of extra cash, a home equity line of credit or second mortgage may be a better option as they are much less expensive overall.

Wasted Interest

Let’s review the $200,000 30-year loan at 3.50% from above. After five years, the amount of interest paid is $33,279. At first glance it seems like a good idea to refinance and lower the monthly payments if possible. By refinancing into another 30-year loan, you’ve lost that $33,279 and extended your loan back to its original loan term, effectively changing your original 30-year loan into a 35-year mortgage!

Important Note: In some instances, particularly those that involve low mortgage interest rates and a long-term outlook, a refinance into a longer-term loan could be an advanced and strategic financial planning decision. This is not intended to be financial advice – however, each situation is unique and you should discuss this option with your advisor in detail.

While the majority of homeowners will consider interest rate as the guiding light towards the appropriateness of a refinance, there are many other considerations worth evaluating. Take your time and consider both the short term and longer-term impacts of your refinance decision.

7 striking similarities between Mortgage & Home Air Conditioner Shopping

If you have ever shopped for a new home air conditioner, you know how time consuming and confusing the process can be. Likewise, if you have recently shopped for a mortgage, you probably spent a good deal of time learning and considering your options.

On the surface, these industries are far and apart. After all, a mortgage is a financial product and air conditioners are physical products used to increase home comfort.  Despite the difference between industries, the sales environment and process of shopping for these two products is strikingly similar.

AC vs. MTG

Here is a toe-to-toe comparison detailing 7 similarities.

Mortgage interest rate shopping?

If you are looking for a new purchase mortgage or refinance mortgage, I suggest using MortgageCS. Getting answers from live verified loan officers and saving up to 90% of the time needed to shop – ALL while protecting your personal information – is a great way to take the sting out of the process.

If you are in the market for a new air conditioner, I have to let you know that we haven’t yet created AirConditionerCS – but we’ll be sure to keep you posted!

On a serious note, we have created a few tips on how to get the best results when mortgage shopping. Check out this recent post.

Purchase Mortgages Part 3: What goes into a mortgage payment?

When it comes to buying a home, it isn’t just the loan amount and interest rate that will impact your monthly payment. Additional items such as property insurance and taxes can increase a required monthly payment by as much as 35%.  If you are planning to put down less than 20%, you’ll also want to factor in paying for mortgage insurance each month.

What goes into a mortgage payment?

The good news is that virtually every mortgage payment is made up of the same key ingredients. They are principal, interest, taxes and insurance. These four items are typically referred to as PITI – which, when spoken, sounds like “pity”.

The bad news is that certain factors of your monthly payment will not be within your control.  Namely, the property taxes and property insurance. These factors can change (likely increase) over time and will usually be paid each month along with the principal and interest on your loan.

When you are shopping for a home, keep your eye on the amount of property tax required each year.  Property tax amounts can vary between properties and across state, town or county lines.

Now that you are armed with a better understanding of PITI, be sure to understand the basics of a mortgage and learn about debt ratios.  Once you have a handle on these three topics, you’ll be well on your way to becoming a savvy mortgage shopper and homeowner.

Looking to get your mortgage shopping started (or double check your rate and program)?  Ask your Realtor for access to MortgageCS so you can shop your mortgage terms without the requirement of giving up your personal contact information (and save 90% of the time it takes to shop elsewhere!).

Related Posts in this Series

Part 1: What is a mortgage?

Part 2: What is a debt ratio?

 

Purchase Mortgages Part 2: How much can I afford?

When a mortgage lender qualifies a borrower, they will examine income and monthly debts to establish a debt ratio. If you are wondering what a debt ratio is, and how it is calculated, take a look at this graphic and read on.

Mortgage Debt Ratios

A debt ratio compares monthly debts to income and then generates a number that is usually converted to a percentage. If your debt ratio is too high, you may not qualify for certain loan programs…or worse, may not qualify for a loan at all!

Lenders will typically run two different debt ratio calculations. The “front-end” ratio will examine all debts except for your housing payment. The “back end” ratio will examine all debts and include a soon-to-be housing payment.

For the purpose of this introduction, the graphic below considers only the “back-end” ratio which includes the soon-to-be mortgage payment in the calculation.

Let’s also take a look at an example. Assume you earn $5,000 each month and have a student loan payment of $400 and a car payment of $250 each month as well.  Your front end ratio will be $650/$5,000 = 13%.  This number is far below the typical requirement of 31% for FHA loan front end ratios.

Now consider adding in your new housing payment (including the mortgage payment, taxes, insurance, and mortgage insurance) of $1,500.  Including this debt will generate a back end ratio of ($650 + $1,500)/$5,000 = 43%, the limit for most FHA back-end ratios.

Tip: Remember to use gross income when it comes to calculating a debt ratio. Gross income is the amount of income BEFORE taxes and other items, such as health insurance or 401k contributions, are taken out. 

In part one of this series, we learned a bit about the relationship between the purchase price, down payment and loan amount of a purchase mortgage. Now that we have a better understanding of debt ratios, we will take a look at what actually makes up a mortgage payment – and it may be more than you think!

Related Posts in this Series

Part 1: What is a mortgage? 

Part 3: What makes up a mortgage payment?

Purchase Mortgages Part 1: What is a mortgage?

If you are looking to purchase a home this spring or summer, you may be searching for an easy way to learn about your mortgage options. Or, you may be wondering what a mortgage is and know nothing about them at all!

Regardless of your current knowledge base, a quick primer on purchase mortgages can save time, money and quite a bit of frustration!  

In this series of posts, we’ll cover three concepts using real numbers and supporting images. The goal is to give you a clear understanding of purchase mortgage basics – so you can easily apply new learnings as you continue your journey! Now, let’s get started!

What is a mortgage?

When it comes to purchasing a home, you’ll need to pay the current property owner for the home and cover the related costs associated with the sale transaction. Understanding how the closing costs, down payment and loan amount are related to the home sale price is an important first step in understanding purchase mortgage options. 

If you are looking for a more technical definition, please read on.

A mortgage is legal document that creates a lien on a property after an agreement is reached between a lender and a borrower. The mortgage is recorded as a public record document at the local county’s office and secures the subject property as the collateral in consideration for a loan. 

Now that we know a bit more about the cash needed to buy a home and how those funds will be allocated, it is time to examine home affordability by taking a look at something called a debt ratio.

Next Up

Part 2: How much can I afford? 

Part 3: What makes up a mortgage payment? 

Prequalification letters: How they help you, your Realtor and the seller

If you are searching for a home this spring, you’ll need a prequalification letter to prove you have your finances in order. Without one, your offer to buy a home is likely to fall flat, very flat.

So, what is a prequalification letter (aka “prequal”) and why is it so important? Let’s take a look at three different perspectives to understand how this one document can play such an important role in kicking off a real estate transaction.

Prequalification letters guide the mortgage borrower

The term “mortgage borrower” refers to you. When you purchase a home, you will likely require a mortgage and therefore, you will become the mortgage borrower. So how much can you actually borrow?

While we could break out the calculators and scratch paper (or Excel), there is no need to because the lender handles it all. Said another way, the lender that prequalifies you will ask a series of questions and obtain your credit report. This process allows the lender to create a prequalification letter that includes, among other things, your maximum loan size.

Note: While the maximum loan size is great to know, please do not confuse it with being anything other than just that – a maximum. Be sure to budget your own finances to ensure you can comfortably manage your new monthly mortgage payment.

In summary, a prequalification letter for a mortgage borrower provides the confidence to know (preliminarily) that they can qualify for the mortgage amount needed to purchase a particular home.

Realtors identify serious shoppers

Having a prequalification letter in hand when first connecting with a Realtor indicates you have done your homework and are a serious shopper. Without a prequal letter, there is virtually no way for a Realtor to confirm (or deny) your ability to purchase a home.

This is important because a Realtor has just 24 hours in a day and 7 days in a week (just like you and me). Despite the fact that the best Realtors make us feel like we are their only clients, they are often juggling multiple transactions simultaneously.

Realtors need to be selective with their time. Home shoppers that show up with a prequal in-hand will always get more attention than those that show up empty-handed.

Sellers look for prequalification letters

We are currently in a seller’s market, where high competition exists for a limited supply of homes. Based on this, home sellers will likely receive multiple offers from a range of prospective buyers.

When a seller receives multiple offers simultaneously, one would think that the highest priced offer always wins. While that may typically be the case, other factors, such as down payment amount, loan program selection and other contingencies are also compared to determine the likelihood of a smooth transaction.

Tip: Contingencies are conditions that must be met prior to the sale of a property.  While many contingencies are negotiable, standard ones include a buyer’s home inspection and the buyer successfully obtaining a loan or financing to purchase the property.  

When a seller is evaluating a range of offers, any offer lacking a prequalification letter will be devalued regardless of the purchase price offered. As a matter of fact, it is virtually a requirement these days that an offer to purchase a property include a prequalification letter.

Related posts:

Wondering if all Lenders offer the same interest rate? Look here.

Concerned about increasing interest rates? Look here.

3 must do’s after a weekend of house hunting

It’s Monday…and you’ve just had an exhilarating weekend of house hunting. You’ve seen the good, the bad, and just about everything else while driving all around town. Some of the properties you just walked through may already be under contract – so you can cross them off your list!

A weekend of house hunting can be quite discouraging in a seller’s market. So how can you keep your head up when you feel like you are fighting a losing battle? Do these three things each Monday – and you’ll be ready to act when the time is right.

Catalogue the properties you viewed

Document the property address, style of home, list price, best attributes & other important details. Ask yourself this question: What kept you from being interested in the property or what made you want it?

By doing this, you’ll find that certain property features will come to the surface as most important. This will help guide your future searching and make you more confident (so you can act more quickly next time).

Check in with your Realtor

Contact your trusted Realtor to talk through the properties that were most attractive to you.  After learning of a small price change or other information, a “maybe” on your list could turn into a “yes!”

If you do find yourself interested in a property, the time to act is now. You can request a second showing or cut to the chase and get a purchase contract written up! Remember, you aren’t the only one eyeing that property in this seller’s market – so act quickly.

Stay current on mortgage rates

Interest rates change at least every day, and can swing drastically over the course of a week. A small change in interest rate can make a BIG difference in monthly payment – so staying up to date on available mortgage rates and programs is a must!

For example, the monthly payment on a $350,000 mortgage will drop by $26 if rates are just 0.125% lower! That’s a savings of $312 a year – or about one free car payment!

Just as it is important to shop lenders early in the process, it is also important to keep your knowledge level up as you hunt for that perfect home. After all, a dip in mortgage rates will make all homes more affordable.

Related posts:

What is a seller’s market? Look here.

Concerned about increasing interest rates?  Look here.

“It’s a sellers market!” What does that actually mean?

If you are looking to buy a home this spring, there is a very good chance you will be fighting an uphill battle.  That’s because we are in a “seller’s market” where homeowners looking to sell their property typically have the upper hand in negotiations. But what does it actually mean and how can you prepare for it?  Here’s a practical definition and a few key points to keep you sane while you search for your dream home.

What is a Seller’s Market?

By definition, a seller’s market is one where the number of homes sold during a period of time is equal or greater than 55% of the number of homes listed during that same time. Said another way, for every 3 homes sold in a given period of time, there are 5 new listings added. If you feel like you need to go back to your high-school statistics class to get a grasp on that, we have your covered. Here is a simple example that should put it all in perspective.

Let’s take a trip to Newtown, USA. This particular town is booming because there are great jobs close by, lots of shopping, restaurants and social life. Plus, there are great parks, schools, hospitals and activities for families. Not that many people want to move away from Newtown, USA these days. As a matter of fact, there were only 10 homes in Newtown, USA listed for sale in March of 2017.  

After being featured in a few home and community magazines, word has gotten out about how great Newtown, USA is for all types of people and families.  This has caused a large number of would-be homebuyers to consider settling down in Newtown, USA.  As a matter of fact, 8 homes in Newtown, USA were sold in March of 2017!

In this example, 8 homes were sold when only 10 homes were listed during March 2017 in Newtown, USA.  This makes the “sales-to-listing” ratio 80% (well above the 55% needed to establish a “seller’s market”).

(Note: Newtown, USA is a fictional town as far as we know.)

Best Practices in a Seller’s Market

As a would-be homebuyer, you can certainly be at a disadvantage in a seller’s market. A bit of planning and determination can help you through any short-term frustration.

Know your numbers first – While you are not on an episode of Shark Tank, you do need to know what you can afford and stick to it. Getting the best deal on a mortgage loan and working with an experienced mortgage professional will help you put in all in perspective. Using MortgageCS for mortgage shopping means you can easily compare loan terms and get your questions answered before committing to a single lender.

Go for the gold when you find the right property – When demand for property is outpacing the supply, there is no time for low-ball offers. Starting out with your first and best offer can win you the opportunity to purchase the home.  Remember that during the home buying process, you’ll have the opportunity to review a home inspection and will have certain “outs” if there are any issues.

Coincidentally, when mortgage loan originators offer you rates and loan programs at MortgageCS, they too will provide their best offer first. This saves you the hassle of any mortgage negotiations and drastically speeds up the mortgage shopping process.

Be ready to act quickly – By the time an open house is over, multiple offers may have been submitted by other real estate agents. Getting “your team” on the same page going into a weekend of open houses or showings ensures you can act when needed.

Stay focused on your end goal – Chances are that you will experience some disappointment during the home shopping process.  Remember that you will eventually find the property that best fits your needs and keep your head up as it’s the only way to see where you are going!

In a seller’s market, an experienced Realtor can truly help. Realtors who offer MortgageCS are up on the latest technology and ensure they offer the most advanced tools to their buyers. Ask for access to MortgageCS – or contact us and we’ll direct you to a local Realtor who can help.

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About MortgageCS: MortgageCS enables Financial Advisors, Realtors and their clients to compare mortgage offers from top national lenders for free, monitor market rates and shop with confidence – all without sharing personal contact information. Learn more.