Shopping for a home can be far more exciting than obtaining a mortgage. Therefore, it is only natural when a buyer wants to shop first. However, this can lead to a letdown if the buyer’s desired home is not within their budget. We are going to prevent this letdown by explaining how to purchase a home with the mortgage payment you want.
This starts with reversing the buyer’s thought process from find the home first and then get the mortgage next. Therefore, we explain the most significant factors that affect the mortgage. Ending spoiler alert – It is not the rate.
Reverse Your Thinking. Focus On This to Get the House Payment You Want.
Many believe finding a lender that is 1/8 or even 1/4% lower in rate will make the most significant difference in their housing payment. Not true! Rate does play a key role, but the biggest factor is the home itself. Choose a home that will meet your budget. This is the part that a buyer can control for the most part. No one can control mortgage rates and their direction. There is nothing we can do about today’s rate compared to yesterday or what they will be tomorrow. Although you can lock what the rate is right now to protect against the uncertainty of tomorrow, next week, or next year.
Well, since the house is so important, wouldn’t that mean a buyer should find the house first? No, because this would be like shooting in the dark. Without correct preparation, the home purchase results may turn into a mess. Collectively, the tips discussed may make up to hundreds of dollars difference per month. A rate will make a difference, but usually not as much as these strategies.
How to Buy a House Within Your Budget
We recommend buyers reverse the typical home purchase process. Just think about this. Realtors are generally handed a “want list” from the buyer, and often the buyer’s wants without lender guidance exceed the budget. So, the results of this process include wasting time and maybe excitement on homes outside the budget. We highly suggest a more successful plan – Get approved, know how much you are approved for, and then go house hunting. A buyer with qualified confidence is a powerful thing!
Let’s discuss how choosing a home with the right purchase price, insurance premium, property taxes, HOA dues, and don’t forget maintenance, play a huge role in the housing payment and budget. Sure, you can find an interest rate that may save you $15 a month but finding the right house with the right mix of these factors can make dreams more affordable. Even though that makes the right home pretty important, and it is, but it still starts with the mortgage discussion with an expert adviser.[/vc_column_text][/vc_column][/vc_row]
How to Buy a House – Payment Factors Other Than Rate
Let’s discuss the most significant factors which directly influence the mortgage payment but isn’t the rate. An approved buyer who understands how these factors can help a buyer find the right house within their budget. These factors are key to not breaking the bank.
Mortgage Insurance Definition
Also known as PMI (private mortgage insurance), annual fee (USDA), or mortgage insurance premium (FHA). Often the term mortgage insurance is mistaken for life insurance. Mortgage insurance protects the lender and lending agency against losses in the case of foreclosure. Although, it isn’t just a benefit to lenders. Buyers benefit significantly by not having to bring 20% of the purchase price to closing. In many cases, we are talking about low down payment to no down payment. Depending on the loan program and sometimes the borrower’s choice, mortgage insurance may be paid monthly, financed into the loan amount, or both. This can make a big difference in a buyer’s payment.
Mortgage Insurance Strategies
A successful plan for low down payment buyers includes discussing mortgage insurance options. How to buy a house with minimal or no cash to closing includes many options. Military service members, Veterans, and surviving spouses have an excellent, no money down option. VA home loans are tough to beat because it does not charge a monthly mortgage insurance premium. When VA is not an option, buyers have potential opportunities that could also make a difference.
FHA charges both an up-front, financed and monthly mortgage insurance. For buyers with less than 5% down payment, the fees are static, but with a little more down payment or shorter term, the monthly amount decreases.
When USDA is an option, it usually beats FHA. Believe it or not, USDA requires no down payment (beating FHA by 3.5%), and the monthly PMI is over 40% less expensive than FHA. No down payment and cheaper payment? Many buyers do not know about or consider this powerful option. Imagine a lower payment and keeping funds in the bank.
With a down payment of 3% or more, conventional loan options come into play. The cash to close may even be a gift, allowing buyers to become a homeowner without adding their funds to the deal. Conventional PMI options allow buyers a lot of flexibility to choose the right option to meet the buyer’s goals.
Property Taxes Explained
Every property has county property taxes, possibly city taxes as well (unless the owner qualifies for property tax exemption or discounts). Additionally, South Carolina property taxes vary based on occupancy too. Understanding the effect taxes have on payment will be explained by the loan officer.
FHA, VA, and USDA loans require escrows for property taxes. Buyers with 20% or more down payment along with a conventional loan have the option to pay their property taxes. Taxes are typically due once or twice per year. The escrow account balance builds up monthly so that once the property taxes are due, the lender pays the tax bill from the borrower’s escrow account.
Property Tax Strategies
Property taxes don’t come to mind when payment strategies are being discussed, but taxes can play a huge role. Part of the discussion includes buying in or out of the city limits. Buying outside the city limits eludes the city property tax. In some areas, the city taxes are just about as much as the county taxes. Although, it isn’t so cut and dry. The choice to live in the country may mean no public water or sewer, but the savings of avoiding city taxes usually makes a much more significant difference than interest rate choices.
Buying in low property rate counties can make a huge difference as well. When a buyer’s choice includes 2 – 3 county choices, considering the low tax rate county could save more than just a few bucks.
Finally, there are property tax discounts and exceptions available for certain buyers. Tax discounts depend on the state, borrower age, disability status, and more. The discovery of these discounts could help a buyer reach their home goal.
Homeowner’s, Flood, Wind & Hail Insurance
Property Insurance Explained
Buyers who borrow a home loan will be required to have sufficient hazard insurance, commonly called homeowners insurance. Furthermore, any required insurances such as flood insurance (when in a high-risk flood zone) or wind & hail (high wind areas) are required by lenders. Just like property taxes, the same escrow requirements apply for insurances. Also, insurance premiums are due once per year, and the escrow account will pay for it.
Before having a property, the insurance must be a guess, but as soon as there is a property of interest, it is best to determine an actual amount. After discussing in general how insurance works and how it affects the mortgage payment, a conversation with an insurance agent is key.
This is an area where many savings strategies lie. Of course, this is not an area to skimp on coverage, but there are ways to make a significant difference in the monthly insurance premium and mortgage payment. Ideas include:
- Higher deductible
- Home safety features such as an alarm
- House condition
- Combining hazard plus wind & hail into one policy
- Assuming grandfathered policy
- Flood insurance strategies – Check out how to lower a flood insurance quote.
Experienced loan officers explain how to buy a house using insurance strategies, but involving a knowledgeable insurance agent in the puzzle is key. The buyer, lender, and insurance agent can develop a plan to provide sufficient coverage while also lowering the payment.
Paying Own Property Taxes and Insurance
As mentioned, conventional loan borrowers with 20% or more down have the option of waiving escrows. This means the borrower may pay the property taxes on his/her own. Although it is not included in the mortgage payment, it should be factored in the housing expense budget.
Waiving Escrows Strategy
Some buyers prefer a lower monthly payment during the year. Although, buyers must remember and feel confident about paying the full tax amount when due. That means paying the amount once or twice per year, depending on the county requirement. This decision comes down to borrower preference and ability to pay the tax.
Don’t Forget the Homeowner’s Association Dues (HOA dues)
HOA Dues Explained
This fee only applies for properties in a planned development with shared amenities. These amenities may include common areas, pool, landscaping/yard maintenance, master insurance policies, road maintenance, and more. To live in neighborhoods with such shared amenities, the owner must share in the cost. The amount of the HOA dues depends on the total costs divided by the number of homeowners. Even though many of these costs are due once per year, the HOA may charge the homeowner monthly, quarterly, semiannually, or annually.
Although, a housing expense, it is paid directly to the association and not in the mortgage payment. Anyway, these costs must be factored into the housing budget if applicable.
Although dues are not in the mortgage payment, it is part of the housing expenses. There is no flexibility in the dues within a subdivision. They are what they are, but they differ from neighborhood to neighborhood. If a lower payment is needed, consider a subdivision with lower dues, but always make sure to research the HOA just like a lender would. Maybe, the buyer has skills that he/she could join the board and streamline the budget. It is possible.
Owning a home comes with an expense that usually doesn’t come with renting a home or apartment. Property maintenance! This varies widely based on the size, age, climate, and type of home. For instance, buying a home with an old roof, appliances, or HVAC means planning for eventual replacement. Purchasing a condominium or townhouse typically requires less maintenance, yet they come with HOA dues.
Home Maintenance Strategies
After the monthly housing expenses are in check, future expenses must be considered. Protecting against future expenses involves thorough inspections. Buyers should consider purchasing a home, termite, and other applicable inspections before the purchase. If issues arise, the seller may agree to remedy the situation. If not, the buyer must consider the cost and risk of the issue.
Another “how to buy a house tip” involves insuring the house systems. A home warranty cost could make sense for a buyer. Paying a fee, at least for the first year, could offset potential budget-busting repairs down the road. Even though this is not a monthly payment item, repairs would affect the total budget. So, buying a home with a high risk of repairs versus low risk should be in the thought process.
How to Buy a House With the Right Price
We have discussed strategies for how to buy a house, but do not forget the purchase price. First of all, every purchase price is not the same. Two equally priced homes may have different house payments. As mentioned, one property could have much higher property taxes, insurance, HOA dues, or maintenance, but part of the equation is comparing price.
Once all of the other areas have been considered, negotiating the purchase price makes a difference. A purchase price difference of $10,000 could make a $50 or more per month difference towards the monthly budget.
How to buy a house with a higher price could work out well with using other strategies mentioned in this article. Guess what? These strategies not only help the buyer’s payment but using these strategies allow a buyer to compete better with other buyers. Another buyer with blinders on and just focused on a lower price could be at a disadvantage compared with our informed buyer.
OVM Financial Buyers Get More Than a Good Rate
Yes, the principal and interest payment is important. We work hard for our buyers on this end as well. Yet, we look for all ways to help our buyer gain a competitive advantage with a payment that meets a budget. Thinking outside the box and creating a plan for our buyers is just a couple of the ways that we stand tall for our buyers.
Realtors should easily recognize how these strategies would provide a competitive advantage on top of being a successful buyer. Knowledge is power! To experience this first hand, contact an OVM Financial loan officer. Following these strategies as a team, not only results in a new homeowner but one within a budget that should make homeownership more friendly on the pocketbook.
Let’s reverse the “how to buy a house” process for a more successful and affordable home buying experience.