Information for Home Buyers & Sellers
Your credit score is a simple number that tells a complicated story. A huge part of your financial history — from long-term debt to a few scattered missed payments here and there — can be summarized by this number. This little figure can have a big impact on your life, as it is one of the major factors that your lender uses to determine what loan terms you can qualify for.
You should always be working to improve your credit score, but it’s particularly critical as you start considering homeownership. A better credit score can be a huge factor in determining what types of loans you may qualify for, how low of an interest rate you can get, and even how low your down payment can be.
If you are looking to buy a home in the future, or are already house hunting, increasing your credit score will help you get the loan you need in order to close on the house you want.
What Minimum Credit Score Do You Need for a Home Loan?
A higher credit score is always better, but a less than perfect score typically won’t prevent you from getting a mortgage. The minimum credit score you must have to get a loan will depend on the type of home loan you are looking for. Here are the minimum scores lenders may require to be eligible for the four common types of mortgages:
- FHA Loan: 580+ credit score (500-579 score can be eligible)
- VA Loan: 620+ credit score (some lenders may go down to 580)
- USDA Loan: 640+ credit score
- Conventional Loan: 620+ credit score
However, when it comes to eligibility requirements, check with your lender for more specific information before you apply.
If your credit isn’t quite at these minimums, don’t worry — there are a number of ways you can raise your score and take the next steps towards homeownership.
How to Improve Your Credit Score to Get a Home Loan
There are many different elements that go into creating your credit score. Things like your credit account limits, the amount of secured and unsecured debt you carry, how long you have had each account and your payment history are all recorded as entries on your credit report and these factors contribute to the final number. Since your credit report contains numerous types of information, there are several approaches that you can take toward improving your overall report and score.
1) Pull Your Credit Reports and Fix Any Errors
Your score is determined by the entries on your credit report, so it’s essential to make sure that you know what is on your report, and that the entries are correct. Incorrect, negative entries can drag your score down by no fault of your own. It’s important to check your credit report for accuracy, at least annually. Common credit report errors include:
- Debts or accounts that don’t belong to you being listed on your report
- Accounts that do belong to you not being listed on your report (accounts in good standing help your credit, and you should make sure they are included)
- Accounts being listed more than once
- Old debts that should have been removed but are still listed
If there are errors on your credit report, one of the best ways to improve your credit score is to work with the companies that report errors to get them corrected. You will typically need to contact the credit bureaus with a description of the issue and the evidence you have to support your request. It’s important to start this process as soon as you notice the error, as it can take a month or more to get a response. Your loan officer may be able to help you build a strategy to determine which errors to work on first.
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2) Pay Down Credit Card Balances
Paying down balances may help you in two ways. First, doing so can lower your monthly payments, which can make your debt-to-income (DTI) ratio look more attractive. Your DTI ratio is calculated by dividing your total monthly debt payments by your monthly gross income. DTI is expressed as a percentage, and a lower number is more attractive to lenders: with fewer competing bills, you should be able to repay your loan easily.
Second, it lowers your credit utilization rate, which can make your credit score go up. Credit utilization measures how much of your available credit you are using. For example, if you have a credit card with a $5,000 limit and are carrying a balance of $2,500, you are utilizing 50% of the credit available to you. If you are utilizing nearly all of the credit available to you, there is a good chance that you are struggling financially and may also struggle to repay a loan. This is why lenders prefer borrowers with a lower credit utilization rate.
3) Bring Past-Due Accounts Current
If you have accounts that are late but have not yet gone into collections, making them current can stop them from doing more damage to your credit report. As they transition back into on-time status, your score may stop incurring new damage from those late bills. Address this as soon as you are able.
4) Use Your Credit Cards Less Frequently
Another way to show lower credit utilization is to simply use your credit cards less, unless, of course, you consistently pay off the charges prior to the end of the monthly billing cycle. You can simulate lower usage of available credit by paying them down in the middle of the month. That way your statement shows lower balances.
5) Pay on Time
As always, pay your credit card obligations and any other bills on time. Do not miss any payments during your loan application. Even if you were previously pre-approved for a mortgage, one missed payment could bring your application process to a sudden halt or abrupt end.
A solid history of paying bills on time is a very important part of your credit score, and one of the patterns that lenders look for during the loan application and underwriting process. If you are having financial difficulties now, how will you manage the additional obligations of a mortgage payment, insurance, property taxes and more?
6) Do NOT Close Any Current Credit Cards
This may seem counterintuitive, particularly when compared to the previous advice of using your credit cards less frequently. It’s complicated, but when you close an account, you are reducing your amount of available credit. As a result, you may be raising your debt-to-available-credit ratio. For example, if the total of all your credit card limits is $10,000, and the total of the balances equals $2,000, your ratio will be 20 percent. But, if you decided to close a line of credit with a limit of $6,000, your ratio will be raised up to 50 percent.
It’s also best to avoid closing any current credit account because having open accounts in good standing over a long time helps your credit history and your credit score. Closing long-term, current accounts reduces the amount of positive information on your credit report, and can actually lower your score.
7) Increase Your Credit Limits
Another way to make your credit utilization score look better is to call your credit card lenders and ask for a higher credit limit. If you owe $1,000 on a $2,000 limit, you’re using 50% of your limit; if you can get an increase to $3,500, your utilization drops to 28.6%.
However, be careful doing this as your credit card lender may perform a “hard inquiry” that shows up on your credit report. Each time that you apply for more credit, whether it is a card limit or a loan, the lender will check your credit as a part of their evaluation process. This records a “hard inquiry” or “hard pull” on your credit report.
Ask your lender if this will be the case with your request, and consider it carefully before you proceed. Too many hard inquiries in a short amount of time can lower your score, and it can also make you look unreliable to lenders: Are you struggling to pay your bills and searching for help anywhere you can find it?
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What to Do if You Have No Credit
Improving your credit score is always beneficial, but where do you start if you truly have no credit? Will you be able to get a home loan if you have little to no credit history? If you have no loan repayment history, lenders may consider you too big of an unknown risk. If you have no credit history, or what may be called a nontraditional credit history — no credit card debt or any other loans — it is still possible to get a home loan, although you may have to investigate a few different options.
Even if you never had a credit card, most people have a history of paying at least some bills, such as rent and utilities, or a car payment. Having a strong payment history with these types of bills can be used to show that you are a reliable borrower, and may even be reported to the bureaus as a part of your credit score.
How to Start Building Credit
Although the options above can provide a viable path to homeownership for many people, you will have more loan products to choose from if you work towards building your credit. Here are three low-risk ways that you can start building a strong credit history.
- Apply for a secured credit card: Secured credit cards are different in that they require a deposit. Like regular credit cards, (and unlike debit or prepaid cards) they can help you build credit by reporting your activity to the major credit bureaus.
- Apply for a credit-builder loan: Typically issued by credit unions, these small loans generally have short (6-24 month) terms. Making these payments on time allows the credit union to make positive reports to the credit bureaus on your activity.
- Apply for department store credit cards: Obtaining a department store credit card may be another way to start building your credit, as some will approve applicants with scores considered far less than ideal, or those with no credit at all. Bonus: you may also receive additional discounts and benefits through holding such an account.
What to Do Once You’re Pre-Approved
You may have done a lot of work improving and building your credit to get pre-approved for your home loan, but your work is not over yet. Your lender approved your specific financial situation, including your credit score, income, debt, amount of credit, and bill paying history. Any changes to these factors can impact the viability of your loan, so keeping them all stable throughout the home buying process is very important. Following the tips below will help during the home buying process:
- Don’t change jobs: If you must make a change to your employment, tell your lender right away. A promotion or lateral move within the same industry may not be a problem, but it’s impossible to know for sure. It’s best to put your job search on hold during the home buying process.
- Don’t take on new debt: Although you may have the desire to go on a shopping spree to furnish your new house as soon as possible, try to avoid large purchases during the process. Taking on any new debt can seriously impact your debt-to-income ratio, which can alter the terms you qualify for on your loan.
- Don’t apply for new credit cards: This can impact your credit score via hard inquiries, and changes your overall financial picture.
- Continue to pay your bills on-time: Missing payments can hurt your credit score, and cause your lender to reconsider making your loan.
A Small Number with a Big Impact
Your credit score is the single summary of countless diverse actions. Each time that you pay a bill on time or resist the urge to go into unnecessary consumer debt, you are making one of many small choices that add up to a big difference in your score. In turn, a high credit score can help make some of life’s biggest financial decisions, such as buying a home, much easier.
Whether you’re in a buyer’s market or a seller’s market, once you find a house that feels like home, you’ll want to buy it as soon as possible. However, it’s not quite that simple. Many financial issues will determine whether you’ll be able to purchase the house, as well as the terms of your mortgage. Knowing this information in advance will help you make better decisions and will make your mortgage approval process go smoothly and quickly.
Financial Prerequisite #1: Have a Sufficient Down Payment
Your dream of home ownership can quickly get dashed if you can’t provide an adequate amount of money for your down payment.
“Lenders have tightened the requirements since the economic crisis in 2008,” says Karen R. Jenkins, a certified mortgage banker who’s the president and CEO of KRJ Consulting in Columbia, South Carolina. “As a result, prospective borrowers seeking to purchase a home must have some ‘skin in the game’ to qualify for a home,” Jenkins says most loan programs require a minimum 3.5% down payment.
You may have known people who purchased homes in the past without a down payment – or you may have even been one of those people. That’s a much less likely scenario today, as banks are trying to limit the risk of borrowers defaulting. “A borrower with skin in the game is less likely to default when the going gets tough,” says Stacey Alcorn, owner and Chief Happiness Officer at Boston-based LAER Realty Partners. For example, when real estate values go down, a borrower who has put their life savings into that property is more likely to hang on and ride out the storm, waiting for property values to rise again, Alcorn says. On the other hand, “a borrower who has put zero money down is likely to just walk away from the property and let the bank take it through foreclosure.”
Financial Prerequisite #2: Have a Minimum Acceptable Credit Score
Your FICO score will reflect if you are maxing out your credit cards and late paying your bills, which can be another financial stumbling block for potential homeowners needing a mortgage. “FICO scores tell the bank your ability to pay your bills monthly and how much overall debt you have. If you are maxed out on all your credit cards, your FICO score will be low, and this will hurt your chances of getting financing because banks don’t want to lend to someone who is living off credit cards,” Alcorn says.
What’s considered an acceptable FICO score? Amy Tierce, Regional Vice President of Wintrust Mortgage in Needham, Mass., notes that although the FHA offers financing to borrowers with a credit score as low as 500, most lenders have added their own requirements. So it will be a challenge to find a lender who’ll work with a borrower with a credit score below 640. (For more, read: What Is A Good Credit Score?)
However, maxed-out credit cards aren’t your only concern. “If you are consistently 30, 60, or 90 days late on your other bills, your credit scores will again be low, and banks don’t want to lend money to someone they will have to constantly beg for their money,” Alcorn says, adding that “collections, bankruptcy, or foreclosure on your credit tells the bank that you have no problem reneging on your debt commitments and, to put it simply, they don’t want to be next.”
Financial Prerequisite #3: Have a Debt-to-Income Ratio Less Than or Equal to 43%
Homeowners who overextend themselves may end up eating Ramen noodles every day in a house that they may eventually lose. It’s important to be realistic about what you can afford.
“Banks use a debt-to-income ratio to determine if a borrower can afford to purchase a home,” Alcorn says. “For example, let’s say a borrower earns $5,000 per month. The bank doesn’t want your total debt, including new mortgage payment, plus your car payments, credit card payments, and other monthly obligations, to exceed a certain percentage of that income.” In January 2014, the Consumer Financial Protection Bureau introduced rules stating that the debt-to-income ratio cannot exceed 43%. (For more, see: What’s Considered to Be a Good DTI Ratio?)
However, Alcorn warns that just because the bank feels that you can afford a particular mortgage payment doesn’t mean you actually can. “For example, the bank doesn’t know that you have a large family, or child care costs, or aging parents that you’re caring for. It’s important to have a candid conversation about your monthly payments with your mortgage team so that you don’t get in over your head.”
Jenkins agrees, adding that “there are additional expenses involved with owning a home that you may not incur while renting. Be sure to calculate all monthly expenses and debts and let your budget make the final decision regarding what you can comfortably afford to pay.”
Financial Prerequisite #4: Have the Ability to Pay Closing Costs
There are numerous fees associated with a home mortgage, and you could be in for a rude financial awakening if you don’t know in advance what to expect.
Although closing costs vary from lender to lender and state to state, “borrowers pay for the appraisal, credit report, attorney/closing agent fees, recording fees and processing/underwriting fees,” Alcorn says, adding that closing costs are usually 1% of the loan amount.
However, Jenkins says that fees could be as much as 3%. “Lenders are now required to provide you with a comprehensive ’good faith estimate’ of the fees you will incur on a specific loan. The rules are also more stringent on lender’s estimates, and there is very little room for the fees quoted to change at the closing table.” She advises homebuyers to review the good faith estimate and ask questions if you’re unsure what a specific fee represents.
Financial Prerequisite #5: Have Required Financial Documentation
Insufficient documentation can delay or even stop the loan approval process, so you need to find out what you have to bring to the table.
“Your lender should have a full and complete checklist of required documentation to support your loan application depending on your employment and income situation,” Tierce says. “If you are starting with a pre-approval, be sure that the lender asks for all documentation for the process since a pre-approval without thorough documentation review is useless. Something can be missed that could result in your loan being declined later if the pre-approval process is not extremely well documented.”
What is pre-approval? As per Jenkins, it’s “preliminary approval based on what the borrower ‘stated’ on the application (income, debt, assets, employment, etc.). The actual approval process validates the income, assets, and debt using various methods such as pay stubs, tax returns, bank statements, W2s and employment verifications.”
Tierce adds that “in competitive markets, sellers and realtors won’t even consider an offer without knowing that the buyer is pre-approved.” Additional documents could be requested at a later date or throughout the process. “The underwriting process is exhaustive, and some documents may bring up questions or concerns that require additional documentation. Just take a deep breath and give the lender everything they ask for, as quickly as possible, to get your approval completed.”
The Bottom Line
Before you can think about buying the home of your dreams, you need to be sure that your finances are in order and that you’ve prepared wisely and thoroughly before the mortgage-approval process even begins.
While there are many factors that impact your ability to qualify for a conventional mortgage, your FICO credit score not only makes a difference for an approval but also affects your mortgage rate. Lenders use risk-based pricing for conventional mortgage rates, which means the lowest mortgage rates are reserved for people with the highest credit scores. For example, on April 15, the MyFico.com calculator showed a 30-year fixed-rate mortgage for borrowers with a FICO score of 760 or higher averaged 3.8 percent, while borrowers with a credit score between 620 and 640 would pay 5.4 percent for the same loan. The monthly principal and interest payments for a $400,000 loan would jump from $1,864 to $2,246 with the lower credit score.
Improving your credit score takes time, but it can make a major difference in the affordability of a home. Rod Griffin, director of public education for the Experian credit bureau, suggested the following ways home buyers can improve their credit score:
- Bring any past-due accounts current, and make all future payments on time.
- Pay off any collections, charge-offs or public-record items such as tax liens and judgments.
- Reduce balances on revolving accounts.
- Apply for credit only when necessary.
There are also more-subtle ways to improve your credit score:
- Try a secured credit card. If you do not qualify for a traditional credit card account, consider applying for a secured credit card. With a secured card, you give the lender a deposit in exchange for use of a credit card account. As long the lender reports secured accounts to the credit reporting agencies and all payments are made on time and balances kept low, a secured credit card can help you build positive payment history.
- Get a co-signer or become an authorized user of a family member’s credit card. As a joint account holder, you are fully and equally responsible for payments on the account, so be aware that any late payments made on the account will affect you. As an authorized user, you will not be financially responsible for making payments. Not all lenders report authorized user accounts to the credit reporting companies, so check with the lender first to make sure the account will appear on your credit report once you are added.
- Get credit for on-time utility and cellphone payments. You can ask credit bureaus to include utility and phone payments in your credit file to improve your score. For example, the Experian Boost program allows you to connect your bank account to the credit bureau to automatically include those payments.
A down payment on a house is a key first step in buying and owning your own home. If you’re new to the housing market, you might be completely lost and not know where to start.
Buying a house doesn’t have to be scary. As long as you come in knowing the basics, like how much payment is expected up front, how it will have an impact on your credit and more, you’ll be ahead of the crowd.
What is a Down Payment?
By definition, a down payment on a house is the money a home buyer gives to a home seller to lock in the home purchase deal.
In most cases, the remaining cash owed on a home purchase is paid via a mortgage loan obtained by the buyer. In that regard, the lender views a down payment as proof you’re invested in the home purchase, and that you’re committed to buying the home and making all your mortgage payments.
In financial terms, a home down payment is calculated as a percentage of the total home purchase. For example, if you’re buying a home for $200,000 and you pay $20,000 as a down payment, your down payment is 10% of the entire home purchase.
Your down payment has a significant impact on the total cost of your home. For instance, your interest rate on the home is calculated, in large part, based on the amount of your down payment. The larger your down payment on a house, the lower your interest rate will be, and the less you’ll wind up paying for your home.
The link between home down payments and interest rate aids lenders in calculating what mortgage industry professionals call the “loan-to-value” (LTV) ratio of the home. Loan-to-value, along with the debt-to-income ratio (i.e., the amount of money you owe weighed against the amount of income you earn) and your credit score are the primary factors a mortgage lender considers when making a home loan.
The loan-to-value ratio is basically defined as the percentage of the home’s value you owe after making a down payment on a new home. It’s calculated by taking the mortgage loan amount and dividing it by the appraised value of the house you’re buying. So if you’re buying a house that costs $100,000, you put down $10,000 and you’re borrowing $90,000, your LTV ratio is 90 percent.
Minimum Down Payments and the 20% Rule
Conventional wisdom usually says that you need 20% as a down payment to get the deal done. That’s not so, as home buyers can buy a home with 3.5% down a U.S. Federal Housing Administration (FHA) loan on a 30-year fixed-rate home mortgage.
3.5% FHA down payments are usually capped at $417,000 home mortgage loans, although there are exceptions to that rule depending on where the home for sale is located. Higher-incoming areas like San Francisco and New York City may see higher FHA loan down payment ceilings well beyond the traditional $417,000 limit.
Even conventional bank loans are often approved with down payments as low as 5% for loans up to $417,000. If the loan size is higher than $417,000, banks and other mortgage lenders usually ask for another 5% down.
Still, there is an upside in making a 20% down payment on a house. These benefits are at the top of the list:
- You’ll pay less for your home: Let’s say you’re buying a home for $100,000 with 20% down versus 5% down. With the 20% down payment, you’ll only have $80,000 left on your mortgage loan, plus interest. At 5%, you’ll have $95,000, with interest that only adds up with higher mortgage loan obligations.
- You’ll get a lower mortgage loan interest rate: Banks and lenders are highly likely to give a mortgage borrower a lower interest rate if they put 20% down on a home, versus 5% down on a home. Making a higher home down payment is a sign that you’re stable financially, and thus are a good credit risk.
- You’re more likely to get your dream home in a crowded market: Home sellers prefer a buyer who brings 20% down or more to the table. That’s a signal that the buyer’s finances are solid and that the mortgage loan is more likely be approved. That could prove to be a big differentiater if there is competition to buy the home.
- You won’t have to pay PMI: By making a larger down payment, you can also avoid paying private mortgage insurance (PMI). With a smaller down payment — say 3.5% — your mortgage lender will want some financial insurance that you’ll pay the larger loan off on time, and in full. That increases the monthly mortgage payments you’ll make if you make a smaller down payment – and that’s a problem a homebuyer who makes a 20% down payment doesn’t have.
How Much Should Your Home Down Payment Be?
The size of your down payment on a house depends upon multiple variables, including your personal financial situation, your age, your marital status, your income, your credit health and how much you’ve been able to save a home purchase.
Americans don’t usually put down 3.5% or 20% on a home purchase. In 2016, the average home down payment as 11% according to the National Association of Realtors. Younger home buyers aged 35 and under, who usually have lower incomes than people in their 40’s and 50’s, put down 8% on average for home down payments in the same time period.
When you’re figuring out how much you aim to save for a home down payment, know that it’s perfectly acceptable to steer any cash gifts from friends, family or business partners toward a down payment. Setting aside any workplace bonuses or financial windfalls (like an inheritance) can also curb the impact of having to save money for a down payment.
Types of mortgages
To best gauge the amount of money you’ll want to make in a home down payment, it’s helpful to know what to expect from various mortgage lenders.
Regular 30-Year Fixed Mortgage. Conventional mortgages, like the traditional 30-year fixed rate mortgage, usually require at least a 5% down payment. If you’re buying a home for $200,000, in this case, you’ll need $10,000 to secure a home loan.
FHA Mortgage. For a government-backed mortgage like an FHA mortgage, the minimum down payment is 3.5%. For a home that costs $200,000, you’ll need to save $7,000 to get a home mortgage loan.
VA Loans. A U.S. Veteran’s Affairs loan (VA) offers U.S. military members and veterans home loans with zero money down loan approvals. The U.S. Department of Agriculture (USDA) also has a zero-down payment loan guarantee program for specific rural areas.
Both the VA and the USDA don’t actually make the loans, but they do guarantee the loan through a regular mortgage loan provider. That doesn’t mean you can’t make a down payment, which will cut your mortgage burden. It simply means you don’t have to when you qualify for a VA or USDA loan.
Homebuyers seemed undeterred by last week’s turnaround in interest rates, or perhaps they were spooked into action.
Strong demand from buyers easily offset the drop in demand from those wishing to refinance.
Total mortgage application volume was flat for the week, down a slight 0.1%, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was still 67% higher than the same week one year ago, when rates were much higher.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) increased to 4.01% from 3.82%, with points decreasing to 0.37 from 0.44 (including the origination fee) for loans with a 20% down payment. That is the highest level in seven weeks, although still 87 basis points lower than a year ago.
Applications to refinance a home loan, which are highly sensitive to weekly rate moves, fell 4% for the week but were 148% higher annually. Overall volume has been strong since July, when rates began falling sharply, and is therefore still elevated, despite the one-week drop.
Mortgage applications to purchase a home increased 6% for the week and were a strong 15% higher annually. Buyers have been coming back to the market in the past few weeks, despite the low supply of homes for sale. Higher interest rates and overheated home prices last spring held buyers back, so some of that demand may be showing up now.
The average loan amount for purchase applications rose to the highest level since June, suggesting that most of the buying now is on the higher end of the market. The supply of homes for sale is leanest on the low end, and builders are still focused on the move-up market.
Mortgage applications to purchase a newly built home jumped 33% annually in August, according to a separate report released Tuesday by the MBA.
“New home purchase activity was robust in August, as both mortgage applications and estimated home sales increased from a year ago,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Recent increases in new residential housing permits and housing starts, lower mortgage rates, and a still-strong job market all bode well for the new home sales outlook.”
Selling your home—especially if you’ve never done it before—can be surprisingly time-consuming and emotionally challenging. Strangers will come into your home and poke around in your closets and cabinets. They will criticize a place that has probably become more than just four walls and a roof to you, and then, to top it all off, they will offer you less money than you think your home is worth.
With no experience and a complex, emotional transaction on your hands, it’s easy for first-time home sellers to make lots of mistakes, but with a little know-how, you can avoid many of these pitfalls altogether. Read on to find out how you can get the highest possible price for your home within a reasonable timeframe—without losing your mind.
Mistake No.1: Being Emotionally Involved
Once you decide to sell your home, it can be helpful to start thinking of yourself as a businessperson and a home seller, rather than as the home’s owner. By looking at the transaction from a purely financial perspective, you’ll distance yourself from the emotional aspects of selling the property that you’ve undoubtedly created many memories in.
Also, try to remember how you felt when you were shopping for that home. Most buyers will also be in an emotional state. If you can remember that you are selling not just a piece of property but also an image, the American Dream and a lifestyle, you’ll be more likely to put in the extra effort of staging and perhaps some minor remodeling to get top dollar for your home. These changes in appearance will not only help the sales price but also help you create that emotional distance because the home will look less familiar.
Mistake No.2: Not Hiring an Agent
Although real estate agents command a hefty commission (usually 5 to 6% of the sale price of your home), it’s probably ill-advised to try to sell your home on your own, especially if you haven’t done it before. A good agent will help you set a fair and competitive selling price for your home that will increase your odds of a quick sale. An agent can also help tone down the emotion of the process by interacting with potential buyers so you don’t have to and by eliminating tire-kickers who only want to look at your property but have no intention of writing an offer.
An agent will also have more experience negotiating home sales than you do, potentially helping you get more money than you could on your own. Further, if any problems crop up during the process—and they commonly do—an experienced professional will be there to handle them for you. Finally, agents are familiar with all the paperwork and pitfalls involved in real estate transactions and can help make sure the process goes smoothly.
Mistake No.3: Minimizing What Agents Do
Some people do sell their homes themselves. You’ll need to do your research on recently sold properties in your area and properties currently on the market to determine an attractive selling price, keeping in mind that most home prices have an agent’s commission factored in and you may have to discount your price as a result.
You’ll be responsible for your own marketing, so you’ll want to make sure to get your home on the Multiple Listing Service (MLS) in your geographic area to reach the widest number of buyers. Also, you’ll be the one showing the house and negotiating the sale with the buyer’s agent, which can be time-consuming, stressful and emotional for some people.
If you’re forgoing an agent, consider hiring a real estate attorney to help you with the finer points of the transaction and the escrow process. Even with attorney’s fees, though, selling a home yourself can save you thousands. If the buyer has an agent, they’ll expect to be compensated. This cost is typically covered by the seller, so you’ll still need to pay 1 to 3% of the home’s sale price to the buyer’s agent.
Mistake No.4: Setting an Unrealistic Price
Whether you’re working with an agent or going it alone, setting the right asking price is key. Remember the comparable market analysis you or your agent did when you bought your home to determine a fair offering price? Buyers will do this for your home, too, so as a seller, you should be one step ahead of them.
Absent a housing bubble, overpriced homes generally don’t sell. Don’t worry too much about setting a price that’s on the low side because, in theory, this will generate multiple offers and bid the price up to the home’s true market value. In fact, underpricing your home can be a strategy to generate extra interest in your listing. And you can always refuse an offer that’s too low.
Mistake No.5: Expecting the Asking Price
Any smart buyer will negotiate, and if you want to complete the sale, you may have to play ball. Most people want to list their homes at a price that will attract buyers while still leaving some breathing room for negotiations—the opposite of the underpricing strategy described above. This can work too and will allow the buyer to feel like he or she is getting good value while allowing you to get the amount of money you need from the sale.
Of course, whether you end up with more or less than your asking price will likely depend not just on your pricing strategy but on whether you’re in a buyer’s market or a seller’s market and on how well you have staged and modernized your home.
Mistake No.6: Selling During Winter Months
Winter, especially around the holidays, is typically a slow time of year for home sales. People are busy with social engagements, and the cold weather makes it more appealing just to stay home. Because fewer buyers are likely to be looking, it may take longer to sell your home, and you may not get as much money. However, you can take some consolation in knowing that while there may not be as many active buyers, there also won’t be as many competing sellers, which can work to your advantage.
Mistake No.7: Skimping on Listing Photos
So many buyers look for homes online these days, and so many of those homes have photos, that you’ll be doing yourself a real disservice if you don’t offer photos as well. At the same time, there are so many poor photos of homes for sale that if you do a good job, it will set your listing apart and help generate extra interest.
Good photos should be crisp and clear, should be taken during the day when there is plenty of natural light available, and should showcase your home’s best assets. Consider using a wide-angle lens if possible — this will allow you to give potential buyers a better idea of what entire rooms look like. Ideally, hire a professional real estate photographer to get top quality results instead of just letting your agent take snapshots on a phone. Consider adding a video tour or 360-degree view to further enhance your listing.
Mistake No.8: Not Carrying Proper Insurance
Your lender may have required you to acquire a homeowners insurance policy, but if not, you’ll want to make sure you’re insured in case a viewer has an accident on the premises and tries to sue you for damages. You also want to make sure there are not any obvious hazards at the property or that you take steps to mitigate them (keeping the children of potential buyers away from your pool and getting your dogs out of the house during showings, for example).
Mistake No.9: Hiding Major Problems
Any problem with the property will be uncovered during the buyer’s inspection, so there’s no use hiding it. Either fix the problem ahead of time, price the property below market value to account for the problem, or list the property at a normal price but offer the buyer a credit to fix the problem.
Realize that if you don’t fix the problem in advance, you may eliminate a fair number of buyers who want a turnkey home. Having your home inspected before listing it is a good idea if you want to avoid costly surprises once the home is under contract. Further, many states have disclosure rules. Many require sellers to disclose known problems about their home if buyers directly ask, while others decree that sellers must voluntarily disclose certain issues.
Mistake No.10: Not Preparing for the Sale
Sellers who do not clean and stage their homes are throwing money down the drain. If you can’t afford to hire a professional, that’s okay, there are many things you can do on your own. Failing to do these things will not only reduce your sale price but may also prevent you from getting a sale at all. For example, if you haven’t attended to minor issues like a broken doorknob, a potential buyer may wonder whether the house has larger, costlier issues that haven’t been addressed either.
Have a friend or agent, someone with a fresh pair of eyes, point out areas of your home that need work. Because of your familiarity with the home, you may have become immune to its trouble spots. Decluttering, cleaning thoroughly, putting a fresh coat of paint on the walls and getting rid of any odors will also help you make a good impression on buyers.
Mistake No.11: Not Accommodating Buyers
If someone wants to view your house, you need to accommodate this person, even if it is inconvenient for you. And yes, you have to clean and tidy the house before every single visit. A buyer won’t know and care if your house was clean last week. It’s a lot of work, but stay focused on the prize.
Mistake No.12: Selling to Unqualified Buyers
It’s more than reasonable to expect a buyer to bring a pre-approval letter from a mortgage lender (or proof of funds for cash purchases) showing that he or she has the money to buy the home. Signing a contract with a buyer whose purchase of your home is contingent on the sale of his or her own property may also put you in a serious bind if you need to close by a particular date.
The Bottom Line
Even if you make none of these mistakes when selling your home, it’s best to prepare mentally and financially for less-than-ideal scenarios. The house may sit on the market for far longer than you expect, especially in a declining market. If you can’t find a buyer in time, you may end up trying to pay two mortgages, having to rent your home out until you can find a buyer, or in dire situations, in foreclosure. However, if you avoid the costly mistakes listed here, you’ll be a long way toward putting your best foot forward and achieving that seamless, lucrative sale every home seller hopes for.
REALTORS® aren’t just agents. They’re professional members of the National Association of REALTORS® and subscribe to its strict code of ethics. This is the REALTOR® difference for home buyers:
- An expert guide. Selling a home usually requires dozens of forms, reports, disclosures, and other technical documents. A knowledgeable expert will help you prepare the best deal, and avoid delays or costly mistakes. Also, there’s a lot of jargon involved, so you want to work with a professional who can speak the language.
- Objective information and opinions. REALTORS® can provide local information on utilities, zoning, schools, and more. They also have objective information about each property. REALTORs® can use that data to help you determine if the property has what you need.
- Property marketing power. Property doesn’t sell due to advertising alone. A large share of real estate sales comes as the result of a practitioner’s contacts with previous clients, friends, and family. When a property is marketed by a REALTOR®, you do not have to allow strangers into your home. Your REALTOR® will generally prescreen and accompany qualified prospects through your property.
- Negotiation knowledge. There are many factors up for discussion in a deal. A REALTOR® will look at every angle from your perspective, including crafting a purchase agreement that allows you the flexibility you need to take that next step.
- Up-to-date experience. Most people sell only a few homes in a lifetime, usually with quite a few years in between each sale. Even if you’ve done it before, laws and regulations change. REALTORS® handle hundreds of transactions over the course of their career.
- Your rock during emotional moments. A home is so much more than four walls and a roof. And for most people, property represents the biggest purchase they’ll ever make. Having a concerned, but objective, third party helps you stay focused on the issues most important to you.
- Ethical treatment. Every REALTOR® must adhere to a strict code of ethics, which is based on professionalism and protection of the public. As a REALTOR®’s client, you can expect honest and ethical treatment in all transaction-related matters.
All homebuyers have one thing in common: they don’t want to get ripped off. Whatever the state of the housing market, but especially if it’s frothy, it’s especially important to make sure you get the right price. Yet, how do you know that you’re getting a fair deal—even in a tight market—before you make an offer?
Here’s how to evaluate the price of any home, so you could make a sound investment decision.
1. Recently Sold Properties
A comparable property is one that is similar in size, condition, neighborhood, and amenities to the one you’re buying. One 1,200-square-foot, recently remodeled, one-story home with an attached garage should be listed at roughly the same price as a similar 1,200-square-foot home in the same neighborhood. That said, you can also gain valuable information by looking at how the property you’re interested in compares in price to different houses. Is it considerably less expensive than larger or nicer properties? Is it more expensive than smaller or less attractive houses? Your real estate agent is the best source of accurate, up-to-date information on comparable properties (also known as “comps”). You can also look at comps that are currently in escrow, meaning that the property has a buyer, but the sale is not yet complete.
2. Comparable Properties on Market
In this case, you can actually visit other homes and get a true sense of how their size, condition, and amenities compare to the property you’re considering. You can then compare prices and see what seems fair. Reasonable sellers know that they must price their properties similarly to market comparables if they want to be competitive.
3. Look at Unsold Comparables
If the house you’re considering is priced similarly to homes taken off the market because they didn’t sell, the house in question may be overpriced. Also, if there are many similar properties on the market, prices should be lower, especially if those properties are vacant. Check out the unsold inventory index for information about current supply and demand in the housing market. This index attempts to measure how long it will take for all the homes currently on the market to be sold, given the rate at which homes are currently selling.
4. Market Conditions, Appreciation
Have prices been going up or down recently? In a seller’s market, properties will likely be somewhat overpriced, and in a buyer’s market, properties are apt to be underpriced. It all depends on where the market currently sits on the real estate boom-and-bust curve. Even in a seller’s market, properties may not be overpriced if the market is on the upswing and not near its peak. Conversely, properties can be overpriced even in a buyer’s market if prices have only recently begun to decline. Of course, it can be difficult to see the peaks and valleys until they’re history. Also, consider the impact of mortgage interest rates and the job market on the economy.
5. For-Sale-by-Owner Properties
A for-sale-by-owner (FSBO) property should be discounted to reflect the fact that there is no 6% (on average) seller’s agent’s commission, something that many sellers don’t take into consideration when setting their prices. Another potential problem with FSBOs is that the seller may not have had an agent’s guidance in setting a reasonable price in the first place, or may have been so unhappy with an agent’s suggestion as to decide to go it alone. In any of these situations, the property may be overpriced.
6. Expected Appreciation
The future prospects for your chosen neighborhood can have an impact on price. If positive development is planned, such as a major mall being built, the extension of light rail to the neighborhood, or a large new company moving to the area, the prospects of future home appreciation look good. Even small developments, such as plans to add more roads or build a new school, can be a good sign.
7. Real Estate Agent Opinion
Without even analyzing the data, your real estate agent is likely to have a good gut sense (thanks to experience) of whether the property is priced appropriately or not, and what a fair offering price might be.
8. Does the Price Feel Fair?
If you’re not happy with the property, the price will never seem fair, even if you get a bargain. Even if you pay a little over market value for a home you love, you won’t really care in the end.
9. Test the Waters
Even in a seller’s market, you can always make an offer below list price, just to see how the seller reacts. Some sellers list properties for the lowest price they’re willing to take because they don’t want to negotiate, while others list their homes for higher than they expect to earn, because they expect to negotiate downward, or they want to see if someone will make an offer at the higher price. If the seller accepts your price or counteroffer, you’ll get an indication that the property probably wasn’t worth what it was listed for, and you have a good chance at getting a fair deal.
On the other hand, some sellers may underprice their properties in the hope of generating lots of interest and sparking a bidding war. Unlike on eBay, however, the seller doesn’t have to simply sell to the highest bidder; sellers can reject any and all offers that don’t meet their expectations. If you have your heart set on the property, be warned that some sellers could be offended by lowball offers, and may refuse to work with you should you choose to employ such a tactic. Also, when you offer less than the list price, you may increase your risk of being outbid by another buyer.
Once you’re under contract, the lender will have an appraisal of the property done (typically at your expense) to protect its financial interests. The lender wants to make sure that if you stop making your mortgage payments, it’ll be able to get a reasonable amount of its money back when it forecloses on your home. If the appraisal comes in at considerably less than your offering price, you may not be getting a fair deal. In fact, the lender may not even let you purchase the home unless the seller is willing to bring the price down.
A home inspection, which is completed after you’re under contract, will also give you a way to gauge your offering price. If the home needs many expensive repairs, you’ll want to ask the seller to make the repairs for you or discount the purchase price so you can make them yourself.
The Bottom Line
When you’re shopping for a home, it’s important to understand how homes are priced, so you can make a sound investment and reach a fair agreement with the seller. Using these tips, you’ll be able to make a confident and well-informed offer on any home in any market.