The home-buying process was the second-most stressful time of my life to date (proposing to my now-wife still definitely ranks first). For me, it was a powerful combination of known stressors: Spending lots of money (20% downpayment, anyone?), quick timeline (we closed about six weeks after starting to look for a house), and lots of decisions (this house or that? This insurance company or that? The list goes on).
I couldn't do much about two of those three stressors -- the timeline was the timeline once we found a house, and the decisions needed to be made. So, I focused my energy on finding ways to save money and lessen the financial strain of purchasing. Here are three things I did, each of which saved us at least $5,000.
Use a discount realtor
Typical buyer-side agents are paid a 2.5% or 3% fee (payable by the seller in Virginia -- ain't the real estate market weird?) for their work. Most cheerfully pocket that cash and pass along some of it to you in the form of fruit baskets and annual calendars. Some, known as discount realtors, give some or most of it to you in the form of cash or credits you can apply toward closing costs. Now, not all discount real estate agents are created equal, but the value proposition is clear if you find a discount agent you like. The extra cash (usually between half and two-thirds of the fee they're paid by the seller) can make a big difference.
Ours kept one percentage point of whatever fee he was paid by the seller and cut us a check for the remainder. That worked out to a little over $8,000 that we saved in closing costs -- money we were able to spend instead on furniture and repairs.
Shop around for the home loan
Before you can make an offer on a house, you should get pre-approved by a lender -- which is basically the lender saying they're willing to issue you a loan for the price you're going to offer on the house. Pre-approval requires a bunch of paperwork (paystubs, account balances, things like that) and a credit pull. An offer accompanied by a pre-approval letter lets the seller know that you have the financial fortitude to follow through.
During pre-approval and as you're negotiating a purchase price with the seller (which usually requires some offer-counteroffer), a local lender is fantastic to work with. These folks usually work in small banks, have strong relationships with local agents, and hustle to make the process as smooth and easy for you as possible.
Once your offer is (hopefully) accepted, you can change lenders if you want to. (Our real estate agent recommended we settle on a final lender within five business days after our offer was accepted.) That's when it makes sense to contact a few different local lenders and maybe even a few of the national folks to see what their prices are. When you get an offer that's better than all the others, contact everyone else and see whether they can match or beat it. All things being equal, I'd recommend going with a local lender since the customer service is just so unbeatable.
But in our case, all things weren't equal. We went with a national lender who came in almost one-half of a percentage point below the local lenders. At our loan amount, that worked out to just shy of $36,000 saved in interest over the course of a 30-year fixed-rate mortgage. The closest any of the local folks were able to get down to was $20 extra per month more over the lifetime of the loan -- or $7,200 in extra costs. Shopping around can save you big bucks.
Go during the low season and negotiate
When buying a house, there are some inherent trade-offs between supply and price. If you shop during the high season (in our corner of Northern Virginia, February to June), there are a ton of houses on the market -- because that's when most buyers hop on the market. Sellers know they'll get a better price. In fact, potential buyers often end up duking it out over a particular house, leading to situations where they're paying $10,000, $20,000, or even more over asking price. Keep in mind, Northern Virginia isn't representative of the rest of the country -- it's a relatively affluent area with high turnover, which means there are a lot of transactions, and people can throw a lot of money around.
We didn't want to go through that experience -- in part because we're nowhere near the top of the income pyramid here, and we didn't want to be outbid. So, we got on the market in October, when sellers were a bit more desperate and there were so few buyers that price wars were relatively infrequent. The house we wanted had been on the market for over 120 days, and the seller was willing to negotiate. We bought for $5,000 under asking price, and the seller made a few repairs free of charge.
Keep your eye on the ball
The tactics I just highlighted are useful ways to save money if you're able to find what you want. But don't focus so much on saving money that you give up other things that might be even more important. If you find the house you want during the high season, and it's within your budget, why wait six months in the hopes that it might still be on the market and a little cheaper? If you hate working with your real estate agent, it's going to add more difficulty to an already-stressful situation, and saving a few thousand in closing costs may not be worth that.
The key point here is: The home-buying experience's financial components can certainly be improved with the tips I've highlighted above, but make sure you keep your eye on the ball. After all, with any luck, this is where you'll live for the next 30 (or more) years!
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