Given the current housing environment, it's more important than ever to sell your existing home before you commit to a new one. Thanks to a glut of properties on the market and tighter lending standards for potential buyers, it's going to take a lot longer to find a buyer than it would have a year ago. If you don't start showing your home until after you've signed a contract for a new place, you're taking on the added risk of carrying two mortgages for an extended period of time, warns Elaine Clayman, a real estate broker with Brown Harris Stevens.
Also, the only accurate way to know the real market value of your home -- and, in turn, how much house you can afford -- is to see how much someone else is willing to pay for it. "If for some reason you've overpriced the property you already own, you'll know that after the first two or three weeks it's on the market," says Peter Comitini, a real estate broker with the Corcoran Group. Once you have a realistic picture of the amount your home will fetch, you can adjust your budget for a new home accordingly, he says.
Signing a Contract With Contingencies
Unfortunately, it isn't enough to secure financing and find a place that you're comfortable calling home. You also need to find a seller who's ready to move quickly and who doesn't want to include all sorts of onerous contingencies in the contract that would allow them to stay in their house for an extended period of time. One situation you want to avoid, for example, is when the sale is dependent on the seller finding a new home first, warns Corcoran's Comitini. The risk here is that you wait around for months only to watch the interest rate lock on your mortgage expire, thus forcing you to spend more money for the same home. Or, the deal could fall apart entirely, putting you back at square one with the real estate listings spread out on the kitchen table..
Skipping the Mortgage Preapproval Process
The days of easy money and low teaser rates are over. In this tight lending environment, it's important to shop around for a mortgage and get preapproved by a lender before you even start visiting open houses. While borrowers, even ones with very low credit scores, had hundreds of options back in 2006, that's simply not the case today. Now there are fewer lenders and many of them have stopped underwriting riskier loans in favor of more traditional fixed-rate mortgages, says Keith Gumbinger, vice president with HSH Associates Financial Publishers, a Pompton Plains, N.J.-based mortgage research firm.
Scanning the newspaper for prevailing rates won't be all that helpful since lenders will adjust your rate based on how risky they feel you are. By getting preapproved, you'll not only know the type of financing available to you, but you'll also have a better sense of what your interest rate will look like. At the moment, someone with excellent credit could qualify for a 6% interest rate on a $400,000 loan and another buyer with closer to average credit, could get charged more than half a percentage point higher, says Gumbinger.
In addition, rates are certain to fluctuate as you shop for the perfect home, so it's a good idea to check in with your bank regularly. Given the uncertain economic environment, a bank may preapprove a mortgage one month, then reject it the next
Ignoring Your Credit Score
Get a copy of your credit report as soon as you decide to move. Nearly 80 percent contain some type of error and 25% of those mistakes are serious enough to drag down your credit score, potentially disqualifying you for the most competitive interest rate on a mortgage, according to U.S. PIRG, the federation of state Public Interest Research Groups. Someone with a score of 620, for example, would pay at least one interest point higher than a borrower with a score of 720 (or may not even qualify for a loan at all), says Geoffrey Sheerar, a mortgage broker with Apple Mortgage, a New York City-based mortgage brokerage firm.
Reviewing your credit report also gives you a chance to discover and settle any delinquent accounts. "I've seen a client get a worse credit score than he should have over a $40 doctor bill that went to collection that the person didn't even know about," says Sheerar. Keep in mind, once you find a problem, it can take several weeks and a bit of legwork to have the black mark taken off of your credit report.
Not Budging on Your Budget
As we mentioned earlier, buyers have more negotiating power than ever. So don't be afraid to make an offer that's well below the asking price. That said, once you find a home you really love and you're negotiating on price, you'd be foolish to walk away from that property over just a few thousand dollars, says Brown Harris Stevens' Clayman. Think of it this way: An extra $10,000 (on a loan valued less than $417,000) will cost you just $60 more a month.
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