3 Ways to Buy More House for Less Money
April 25, 2011
When you buy a house, you are making a major purchase, probably one of the largest in your lifetime. Although buying a home will never be “cheap,” there are ways that you can get a little more for less.
Why does it seem like the place you want most when house hunting is often the one at the top of your budget? Only you can determine how much house you can afford. However, if you’re getting frustrated and having trouble finding homes that meet all your criteria and are in your price range, here are a few tips that can help lower the price of your home.
First we’ll look at lowering the cost of borrowing money to pay for your home. Then we’ll move on to finding the square footage and features you want at a price you can better afford.
1) Lower Your Credit Score & Interest Rate
One of the best things you can do is work to improve your credit so that you get a better interest rate. The interest that you pay on a home purchase can make a big difference in how much you pay over the life of the loan. Indeed, you could pay tens of thousands of dollars more over the life of your mortgage just by having to pay an interest that is 1% higher.
The reason it makes such a big difference is because you’re often borrowing large amounts of money and then paying it off over 15 – 30 years. Due to the way that banks amortize your mortgage payments, you’re paying mostly interest and only a small bit of principal during the first half of your home loan term. Here’s more info about how your credit score affects your interest rates.
Credit Score
Your credit score is only of the factors that goes into determining your mortgage rate but it’s one that pretty universal for borrowers so it makes sense to work on it. Improving your credit is a great way to reduce what you pay in interest.
Work to boost your credit score by making on time payments, reducing your debt, and being choosy about the new debt that you apply for. Remember, when you apply for a home loan it shows up on your credit report, so it’s best to check your credit first before just applying for a loan and seeing what rate you’re quoted. If it’s lower than you’d like, you can work to raise your score before filling out any loan applications.
When you have a good score, you should be able to qualify for a lower interest rate. So this should help you buy more house with less – since less of your payment will be going to interest. Saving up for a sizable down payment can also help, since you will be financing less of the home’s purchase price, and you will pay less in interest over time.
Credit score & Mortgage Rate Resources:
- How to Find the Best Mortgage Rates
- 12 Steps to Improve Your Credit Score
2) Home Bargain Hunting
All you have to do is drive around a few subdivisions and you’ll see the toll the housing market crash took on people who borrowed more than they could afford or who lost their job in the bad economy.
This has led to many foreclosures and short sales, which sometimes give you a chance to buy more house for less. Obviously this is bad news for existing home owners but can be an opportunity if you’re looking to buy a house for a bargain. According to CNN Money, foreclosures and short sales accounted for 26% of the total homes sold last year. Based on a recent RealtyTrac report, their statistics show that foreclosures save you an average of 36% off regular home prices – and short sales typically get you a discount of 15%.
How to Use Home Savings
A 15–36% discount on a $100K-$200K house can certainly save you a lot of money. The question is do you use that discount to spend your existing budget on a bigger home, or get a smaller house and pocket the savings? One thing to keep in mind is that if you’re buying a home that’s bank owned or in the process of foreclosure you’ll likely have to invest some money into it on top of the sales price.
Often home like these have been sitting empty for a while, which can cause problems for you as a new owner. For example, if the utilities have been turned off then there’s nothing to power a sump pump and spring rains can mean wet and moldy basements. Unfortunately, lack of care and maintenance isn’t the only concern. Sometimes previous homeowners that are being kicked out by the bank will take their anger out on the house and intentionally damage the property before leaving.
How Much Will a Bargain Cost You?
There can be some unexpected costs when buying a foreclosed home, however, there are ways to anticipate some of them. If you’re buying a house on the courthouse steps, which is an option right after a home has been foreclosed on, then it’s often sight unseen. You have to bring cash to the auction and when you buy the house you may not know all it’s potential issues.
However, if you buy a home from the bank that foreclosed on the property then you have more time to do some research and anticipate your costs. You can setup a time with the seller’s agent to bring in contractors to assess the damage and give you bids on what it would cost to get the house back into shape. Not only does this information help you figure out how much you can afford to pay for the home and still do repairs, you can also include the estimates in your offer to the bank to justify the price that you offer.
Non-Foreclosure Bargains
If you don’t want to deal with a foreclosed home, there are still ways to save money on a house. Start off by searching for homes that have been on the market for a while. What you’re looking for are listings that indicate that the seller is motivated to sell since that gives you room to negotiate.
One frequent cause of this are home owners who are moving to a new home and don’t want to be stuck with two mortgage payments. They may be more likely to give you a discount on price and get it sold than risk owning two houses for an extended period of time.
Some companies that relocate their employees will actually guarantee them a sales price for their home if they’re willing to move. Many of these companies work with re-location services to help sell homes and these can be a source of good deals for you. The company isn’t in the real-estate business and doesn’t want to hang on to mortgage debt, they’re motivated to sell the house quickly, which gives you an opportunity to negotiate the price.
Short Sales
As I mentioned earlier, short sales are another alternative to foreclosures. In these cases the bank hasn’t repossessed the property but the homeowner has asked the bank to let them sell the house for less than the amount owned on their loan.
The downside to short sales is that any offer you make has to be approved by both the home owner and the bank. Banks are so swamped with short sales that it can take forever for you to get a response on an offer. However, you can check the public records on a home and if you can find date it’s scheduled to go into foreclosure, this can give you leverage.
It’s often in the best interest of the property owner and the bank to get the home sold before going through foreclosure. So if the home owner is coming up against a foreclosure deadline they may be willing to approve a pretty low offer, simply to avoid foreclosure. Of course the trick is the bank also has to approve your offer so don’t make it so low that they simply dismiss it.
3) Know the Market
Understanding the local real estate market is a huge advantage when you’re trying to buy a house at a bargain. For example, anyone who comes to buy in my neighborhood is likely to pay $20,000 less than what the owner originally paid because there are so many homes for sale — and those that have sold have done so at a discount.
Real Estate Agents
One way to tap into market knowledge is to work with a buyer’s agent. It’s best if you can work with someone who specializes in a certain area. For example, if you really like a specific neighborhood and can find a buyer’s agent who actually lives in the neighborhood then you’re more likely to have access to property insights that you wouldn’t find with a random real estate agent you found in the phone book.
Technology
Whether you use an agent or not, you still want to do your own research. The Web makes it pretty easy to keep your eye on developments in areas that you’d like to buy. There are websites that allow you to save search critiera with your desired price range and house features. They’ll send you emails when new properties are listed or when prices change on existing homes. If you subscribe to a service like that for a few months you’ll have a decent feel for what’s available and what it will cost you.
Something else to consider is making use of a mobile device when you’re out “in the field” doing your research. A lot of information about real estate is now accessible via your smart phone so if you run across something new or unexpected while out looking at homes you may be able to do your research and get your question answered while you’re in a house or sitting out front in your car.
Buying More House For Less
If you can lower your borrowing costs and find real estate that’s “on sale”, it’s definitely possible to get more home for your money. Both of these require research, planning, and doing a fair amount of work before the actual purchase of a home. However, the money you’ll save will make your efforts well worth the time you invest.
All posts by Miranda
Excellent article as always Miranda! Making sure your credit report and scores are in order are critical when it comes to buying a home. As you suggest, a 1% difference in interest rates can cost the homebuyer $10,000’s over the term of the mortgage!