How to Finance Your Next Home Purchase
This 8-week series, How to Find the Perfect Home for You and Your Budget, will show you how your next home can match your wants, needs and, most importantly, your budget. There’s no reason you can’t dream big with this next purchase, all the while working within your budget. Even though you may feel more financially secure if you plan to use funds from the sale of your current home, moving up to a new home requires some self-evaluation of what’s next, a mortgage strategy to make it affordable, and then putting it all together for a successful purchase of your “perfect” home.
If you’re ready to move on to a new home, it’s important to consider your financing strategies for this purchase. I can’t emphasize this enough even if you have bought and sold homes before!
When you are buying and selling a home at the same time, understanding the financing part correctly is so crucially important — it will literally make or break this entire process.
Don’t Do This
First and foremost, I must tell you what you must not do!
Whether it’s your first, second, or 10th home purchase, you must not decide on a price point for a home before you talk with a lender.
Don’t come up with a guesstimate yourself and say — “We are going to buy a home for $500,000” and then they head out to open houses in that price range without any guidance and knowledge.
Many people do this since they’re so excited and ready to look at homes.
I understand the urge—it’s fun to look at houses. However, without completely understanding the financing side of buying your next home, you could hurt the process of getting the best home possible and to stay within your budget.
I know this goes against every urge we all have and what you might be hearing elsewhere, but I can’t tell you how many times I’ve gotten calls from people (none of my clients of course!) who didn’t follow this advice and who made a huge mistake buying the wrong home.
The steps below will help you answer all the financial questions you might be having about how to buy and sell at the same time, such as:
• Should I buy first or sell first?
• How do I do both at the same time?
• How do buy a home if I haven’t sold my home?
• Will I have to move twice to make this happen?
• And so much more
Do This Instead
If you follow the four steps below, you’ll be all set on determining a price range or price point that works for the house budget you have in mind.
Once you have this information from a lender, we can start looking at homes! And please contact me if you need referrals for lenders, especially those who have good options for buyers who are also selling a home.
1. Stop fixating on price range right away and decide what you want to pay PER MONTH before you talk to the lender.
This is the most important decision you’ll make when it comes to buying your next home. Once you decide what you want to pay per month for your next home, your lender and I can work together to make sure everything else falls into place to get you the home you want for the monthly payment you’ve set.
Whatever amount you’re approved for by a lender is irrelevant. Most people are approved to buy way more house than they actually want to spend.
Tell your lender what you are comfortable paying per month for your next home (inclusive of condo and/or HOA fees, if any, taxes and insurance), and they can work backward to determine a correlating sales price and let you know if you would be approved for that amount.
They’ll also need to know what type of funds or cash you’ll have for this transaction since that will impact the amount you need to finance. See #3 below.
Keep in mind that when buying a condo or anything else with a monthly HOA fee, your correlating purchase price will need to include this amount, making its price point different than for a home with no HOA or condo fees.
Not sure what monthly amount to tell your lender? Since most of us budget for monthly expenses, you should look at your monthly budget to compare future home expenses to your current home expenses. Can you handle more each month? Don’t have a comprehensive monthly budget — time to get one done!
For some additional guidance, conservative advice says you can spend about 30 percent of your income on housing. In areas that have high costs of living such as New York, San Francisco and the DC area, that number can creep up to 40 percent and still be okay.
Ask yourself if what you want to spend per month is in that range. If it is, you are okay and not overspending.
2. Determine which loan program options will work best for you to buy and sell at same time.
When it comes to buying and selling at the same time, there are great loan options available that make doing both at the same time easier.
But many people get caught in the “real estate catch-22” and are not sure how to time things logistically and financially.
For example, do you wait until a house comes on the market to then sell your home? But then the house that just came on the market might go under contract before you’ve sold your home!! So how do you time it all and have the funds to be able to pull this all off if you haven’t yet sold your home?
Well, that’s where certain financing options come in to save the day.
One option is a “bridge” loan. This is a certain type of mortgage product that gives you the funds the buy your new home before you’ve sold your current home. It allows you to qualify for your new home without factoring in the debt you owe on your current home since you are about to sell your current home.
Another option is to do a home equity line of credit on your current home. This way you'll have cash to buy your new home without having to sell your current home first. This is a temporary “loan” from your current home so you have the funds to put down on your next home. You then sell your current home and pay off the line of credit with the proceeds of the sale.
These are just two examples of the many options that are available. Depending on your financial situation, some loan programs are going to be better options than others. It’s best to talk through the options first before making any decisions.
3. Get a better understanding of the market in order to adapt your financing where necessary.
Depending on what the market’s doing, there are different financial strategies we could use when buying and selling at the same time.
For example, when the market is slower, we might be able to skip all the financing fancy footwork and simply make an offer contingent on selling your current home. There are pros and cons to this strategy that we can discuss.
Even the time of year can impact what the market’s doing. Be in touch with me well before you are ready to make a move so we can discuss the best strategy for you based on your goals, the time of year, and what to expect from the market.
4. BONUS SECTION – Know these mortgage tips so you know what to expect and what to do.
Getting a mortgage from a lender can be confusing with all the different options and strategies. That’s why this Bonus Section brings together some helpful tips for navigating the lending process — what to consider and what to watch out for!
• Understand how mortgage payments are determined by your lender.
You want to keep your mortgage affordable and there are certain factors to keep in mind when working with your lender.
Every $10,000 change in your loan amount will only change your monthly payment by about $65-$75 per month. And that’s whether you’re increasing or decreasing your price point or increasing or decreasing your down payment.
Remember that your credit score will impact your mortgage interest rate and loan options. Your credit score is a major factor for lenders when determining your risk. That means your score plays a big part in the type of loan you will be offered and its interest rate. The higher your score, the lower your rate.
Remember, a credit score has nothing to do with your income or investments. It’s based on how you’ve handled your credit card payments and other loan payments, like your car or student loan. It also takes into account if you’ve declared bankruptcy, have a tax lien, or you’re being sought by a collection agency.
• Try to determine how long you plan to own this home.
Consider your current and future finances and also where you will be in 5 or more years. There are several loan products that may be better for you than a “go-to” 30-year fixed loan.
If you don’t plan on owning for more than 5 or 6 years, you might want to consider an adjustable-rate mortgage (ARM). Today’s versions are much more straight-forward, conservative, and safer for homeowners than the ones in the past.
• Carefully consider options if you need to pay points to get a lower interest rate.
Your lender may tell you that if you pay one point, your interest rate will be lower than if you pay zero points. And even lower, if you pay 2 points.
A point is equal to 1% of your mortgage amount (or $1,000 for every $100,000). So points are basically an “upfront payment of interest” at closing for usually 30-year fixed loans. Rather than pay it over the life of your loan, you can pay a large chunk when you get the loan.
This allows you to lower your monthly payment by paying a fee at settlement. Sometimes this fee can even be negated to be paid by the seller of the house you are buying.
As a buyer, you will need to weigh the pros and cons in getting the lower rate and paying for points upfront. However, if you plan to live in your home for many years, then the benefit of the lower rate will kick in and save you money in the long run.
• Keep an eye out for hidden fees or additional costs along the way.
Don’t be fooled by advertised rates! Behind that rate could be a long list of fees, points, or closing costs. Ask the lender to break down the fees and give you the total amount for closing the loan.
Avoid penalties for lock-in extensions. Some lenders will increase your interest rate slightly if you need to lock in your loan for 60 days or more. Make sure you know any requirements before signing any paperwork. It’s another reason to get all of your finances and paperwork in order before you apply for a loan.
I’m Here to Help!
You’re off to a great start now that you know the best way to go about the financing your next home.
The most crucial thing is to be in touch with me well before you want to make a move because there are a lot of options and moving parts we need to get clear on when it comes to your budget and goals. That way you we can figure out how to find the perfect home for you and your budget!
Hope you’re finding my series, How to Find the Perfect Home for You and Your Budget, helpful and informative. Next week, you’ll see how you can align the big three — budget, location, and your home’s criteria — and buy a home you will love and afford. This article, Putting It All Together, provides the perfect roadmap to get there!