How To Buy A Home And Pay The Least Possible Amount
When you purchase property, everything’s up for negotiation. That includes the price, contingencies, closing costs, inspections, timing, financing, repairs and other considerations. It isn’t always easy knowing how to buy a home and what to push for when negotiating.
Focusing solely on the price may not always be the smartest strategy.
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If you’re a cash-strapped buyer, closing costs are not welcome. In fact, for some programs, closing costs can outstrip your down payment!
There are two ways to avoid paying closing costs out of pocket — getting the lender to cover them, in exchange for paying a higher interest rate, or getting the seller to pay them.
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Closing costs include lender charges, third party fees for things like inspections and appraisals, and homeownership expenses like prepaid property taxes and homeowners insurance. They range, according to many experts, between two and five percent of the property value.
Lets assume that your seller is willing to discount the sales price by four percent to $192,000. Using today’s rate sheet, we’ll analyze the savings of a price cut and having the lender cover your costs vs seller-paid closing costs and a full-price offer.
Loan Amount Rate Payment Down Payment Total Cost
Full Price With Seller-Paid Closing Costs $190,000 3.625% $866.50 $10,000 $321,939
Discounted Price With Lender-Paid Closing Costs $182,400 4.625% $937.79 $9.600 $347,205
The bottom line is that your monthly payment and lifetime cost are all higher if you choose a 4.0 percent price discount over the same amount in closing cost help. And the seller’s bottom line is nearly identical either way, so he or she should not have a problem with this.
Mortgage Insurance (MI)
Mortgage insurance, if you put five percent down, runs .37 to 1.37 percent of your loan balance each year. Your rate depends on your FICO score.
You can also pay MI upfront at a cost of about two to four percent, depending on your credit rating.
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For this analysis, we’ll assume that your credit rating is not-so-good (costing four percent), and we’ll compare the benefit of seller-paid mortgage insurance with that of a four percent price cut. Because you don’t have additional money for closing costs, we’ll assume the lender is covering them in exchange for you accepting a 4.625 percent rate.
Loan Amount Rate Payment Monthly MI Total Payment
Full Price With Seller-Paid Closing Costs $190,000 4.625% $977 $0 $977
Discounted Price With Lender-Paid Closing Costs $182,400 4.625% $938 $208 $1,146
Your monthly payment is much lower if the seller pays your mortgage insurance upfront. That can help you qualify for a larger home loan and a more expensive property than you’d otherwise be able to.
Before shopping for a home, if you put less then 20 percent down, ask a lender what your monthly MI would be, and also what upfront seller-paid MI would cost. This way, you know what you’re negotiating for.
Seller-provided financing can be a major benefit for those who don’t have at least 20 percent down or qualify for the best rates and terms.
Suppose you have a seller willing to finance 15 percent of the sales price so you can avoid mortgage insurance. He or she will probably want a slightly higher interest rate than you’ll pay for the first mortgage. We’ll say six percent in this case.
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Again, we’ll assume the lender covers other costs because you don’t have the money to do so. So the rate is 4.625 percent.
1st Loan Payment 2nd Loan Payment MI Total
With Seller Financing $823 $180 $0 $1,002
No Seller Financing $977 0 $80 $1,057
Notice that the cost with seller financing is still lower than that of no seller financing, even with a four percent price reduction.
That’s a total of a first and second at $1,057 a month, versus a total of $1,146 with a smaller price but carrying mortgage insurance.
There are many ways a seller can help you afford the home you want. If your seller wants anything special from you, like a long escrow, an early closing date, contingencies waived, or other conditions, you may want a favor of your own.
If you don’t ask, you don’t get.
Seller Concessions: How Much Can They Give You?
Most mortgage programs limit the amount of seller concessions you can have without reducing your loan amount. Here’s a quick run-down of most common loans, from conforming (Fannie Mae and Freddie Mac) to government-backed.
Program Use LTV Costs Allowed
Conforming Primary & 2nd Home >90% 3%
Conforming Primary & 2nd Home 75% – 90% 6%
Conforming Primary & 2nd Home <75% 9%
Conforming Rental Any 2%
FHA Primary Home Only Any 6%
USDA Primary Home Only Any 6%
VA Primary Home Only Any Customary + 4%
What Are Today’s Mortgage Rates?
Today’s mortgage rates, as you have probably figured out, depend on the pricing structure you choose, as well as the strength of your application and the program you select.
If closing costs are an issue, or if you’d like to buy yourself a lower interest rate, run some numbers and see if a full-price offer with some seller concessions is a better deal for you.