There is much to consider when it comes to buying a home, especially a first house, and advice often pours in from well-meaning family and friends as well as professionals seeking business — real estate agents, escrow agents, and lenders, especially with the market red-hot due to a surge in pandemic buying. To debunk the myths and learn what buyers really need to know, we talked with academics, CEOs, and other experts in real estate and finance.
Home renovation TV shows give viewers false expectations about how easily, cheaply, and quickly a home can be rehabbed. "Those shows don't reflect reality," NerdWallet home expert Holden Lewis warned. While tricky editing can play a role, the difficulty and expense of a project can also look very different without the cameras on. "Imagine you're a producer and you call a cabinet maker and ask if they can do a project. The tradesman is probably going to offer a rock-bottom price in exchange for being mentioned on national TV."
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People who are active-duty military or veterans eligible for VA loans can see minimum down payments of zero, Lewis said. (And VA loans especially "are one of the safest and most affordable options to finance a home, with the lowest foreclosure rates," said Samantha Reeves of Veterans United Home Loans.) Rural homes may be eligible for USDA loans, which also have minimums of 0% down. Some buyers may be eligible for Federal Housing Administration loans, which include mortgage insurance and have minimum down payments of 3.5%.
Buyers looking for bargains should "consider the higher real estate taxes for the 'best' neighborhoods. Such neighborhoods also often have stricter homeowner associations and rules regarding everything from home additions to exterior paint colors," said Bobby Montagne, CEO of private lender Walnut Street Finance. And improving a "worst" house takes time and money, with renovations often involving surprises and unexpected costs.
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True, there is a lot of available inventory in the spring, but also a lot of buyers, and competition can drive up prices. Look in the fall and discover that "sellers often price listings to sell, so that they are under contract before the holidays," Montagne said. "Additionally, there are often listings left over from the spring selling season that have come down in price."
Capping the home and mortgage you can afford at 36% of income isn't always necessary. Housing ratios taking into account taxes, insurance, and loan principal and interest divided by monthly qualifying income can be as high as 49.99% for conventional loans and 46.99% for FHA loans, said Matt Hackett, operations manager for Equity Now. "The ability to repay a loan is what matters," he said, though "pushing these ratios to the maximum is not something we would recommend."
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No — you need to know a home's problems before buying. "But here's what you can do," Lewis said. "Say that you'll pay for a mutually agreed-on amount of repairs that the inspection uncovers. This assures the seller that you're not going to walk away from the deal because of minor problems."
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Paying thousands of dollars in points for a super-low or adjustable-rate mortgage can cost you thousands if you sell or refinance a loan in only a few years, "and even cause a foreclosure," said Todd Huettner of Huettner Capital. "I always tell clients that shopping for a rate will save them hundreds, but shopping for the right lender can save thousands."
So-so credit is not a dead end for buyers, said CEO Than Merrill of Fortune Builders, because lenders vary their minimum credit score rate. Still, check your credit report and pay off credit debt above all other debts. "Most experts suggest keeping your debt-to-credit utilization ratio at 30% or below, and requesting an increase in your credit limit may help you to achieve this metric," he said.
People misunderstand how adjustable-rate mortgages work — they are simply mortgages that start with a locked-in interest rate, then fluctuate. David Reiss, professor of law at Brooklyn Law School, gave an example: "Some people think that a 7/1 ARM must be paid off in seven years, but it's the interest rate that is fixed for seven years; the mortgage itself lasts for 30 years. The interest rate can go up or down after those seven years, but 30 years is how long you have to pay back the loan."
Sometimes getting a house comes down to a personal plea to the seller, often in the form of a letter, and that's when it may make sense to reach to the seller's agent, said Alex Young of Keller Williams. "Call and speak with the agent personally to learn what's important to the sellers," Young said. "If the lender is known for getting deals done, have them make a call to the listing agent explaining the offer and the buyer."
Instead of waiting for homes to come on the market, work with agents who aren't afraid to knock on doors, said Realtor Scott Syme Jr. "We can come up with creative solutions in how to find ways into getting people to sell their homes."
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Don't insult the seller with a lowball offer just because you think the seller is setting the price high for negotiation, said Nathan Garrett of Garretts Realty in Louisville, Kentucky. "If the house is the perfect fit for you, do not risk losing the house," he said. "Find out if there has been multiple offers and be competitive."
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Prices probably won't keep rising forever. But a market crash isn't likely, based on who's buying homes now: people with low debt-to-income ratios who put a lot of money down after losing out on a few homes to other buyers. "They will not be the first to abandon their homes if there is a downturn in the economy," said California real estate agent Kenneth Er. "These homes are owner-occupied and not highly leveraged like in the run-up to the last crash."
It is possible to buy a home for the wrong reasons. Christian Stewart of Do Better Financial had a list of questions buyers should ask themselves before making an expensive mistake. "Am I buying because of peer pressure? This is a bad reason to buy a house. Do I plan to stay in one place for at least three to five years? If you're in the military or have a job that transfers you every couple years, buying a home can become more of a burden," Stewart said. "Am I doing this primarily for the tax break? U.S. tax law allows homeowners to deduct the interest they pay on their mortgage — not the full mortgage payment. A tax deduction should not be your main reason for buying a home."
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Renting makes sense for some people when they think about total housing payments when buying — it's not all principal, said agent Roger Ma, of Life Laid Out. "In a sense, you're throwing away money when you buy ... in the form of interest payments, taxes, and maintenance/common charges," Ma said. "In the early years of your mortgage, interest rather than principal payments actually make up the majority of your payment."
The real estate marketplace Zillow is widely used but not always 100% accurate. "Even Zillow clearly states that," said Glenn S. Phillips, CEO of Lake Homes Realty, "and that for properties with any unusual aspects it may even be grossly inaccurate." Zillow also acknowledges it lacks sufficient data in some communities to provide reasonable estimates of value.
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Homes that are for sale by their owners, instead of through a broker, get fewer showings, fewer offers, and fewer closed deals, Phillips said. "Sellers expect to pocket that commission. Meanwhile, buyers think, 'The seller is not paying an agent commission; they should reduce the price.' These buyers and sellers each think they should get any savings, not the other guy," he said.
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Rates can vary by as much as a percent depending on the lender, so talk to several before committing — and look at third-party reviews for the lender you are working with, not just the company they work for, advised Jennifer Beeston, vice president of mortgage lending for Guaranteed Rate. There can be huge differences in education and experience that can affect a loan process and rate.
This is a great example of the danger of focusing on a single detail when it's the complete picture that's important. "Homes bought by older people may have an advantage if they have fewer floors," Phillips said. "However, in markets where land is limited and expensive, homes with more floors may be more affordable for families. The home can be larger on the smaller lot."
You can negotiate commissions with real estate agents, said Simon Ru, chief executive of UpNest, whose company makes agents compete for customer business. It's possible to squeeze out anywhere from $2,000 to $12,000 — money that can go into closing costs or a bigger down payment.
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Don't base real estate expectations on nationwide trends or data. There's too much variability. "You must remember that there is no such thing as the national housing market … a bubble can happen regionally," said Gordon College professor of finance Alexander S. Lowry. "All that matters is local and regional."
Actually, despite the adage, real estate is not always about location. "Some clients settle for a mediocre house in the best neighborhood because they believe it is a better investment," said Evan Roberts, with Dependable Homebuyers. Here's what he tells his clients to do: "Focus on functional homes that will appeal to the largest buyer pool, and then buy in the best neighborhood that they can comfortably afford."
Considering that the median monthly mortgage is around $950, and median monthly income in the 25-to-34 age group is around $3,000, millennials are reasonably positioned to afford mortgages on starter homes. "Millennials, who are not ones to carry much debt outside of their student loans and car payments, would have an acceptable debt-to-income ratio of 32%," said California finance consultant Richard Best.
It's smart to have a broker looking out for you. "Without representation, you're likely to end up paying more for the property in either outright or in hidden costs from overlooking or ineffectively negotiating details," said agent Allison L. Chiaramonte of Warburg Realty. "This can end up costing you far more than any savings that may be passed along from a slightly reduced commission."
Look beyond bad furniture, a run-down bathroom, and other fixable problems to see what really matters in a home — factors such as functional square footage, layout, location, proximity to conveniences, and natural light. "These constants are what should be used to determine a property's potential. Everything else is negotiable at the right price. Looking beyond 'grandma decor' takes time, but it can pay off in spotting a hidden gem," Chiaramonte said.
