How Much House

Before you start looking for a home, it’s important to know how much you can afford. The best way to do this is to have a lender pre-qualify you. You’ll have to qualify for a mortgage eventually, but it’s best to do it up front for a couple of reasons. First, you’ll know the price range of homes you should be looking in. This keeps you from finding a home you love but can’t afford. Second, when you find the right home, the seller will know you’re a serious buyer and that the sale won’t stall out after the sales agreement is signed because you can’t get the loan you need.

Keep Your Financial Picture Clear
As you’re looking for a new home, keep this in mind. Because buying a home is such a large financial commitment, lenders care about your finances in the weeks and months prior to your obtaining a mortgage. Don’t make any big purchases, keep your financial picture as clear as possible by not transferring funds around from various banking and investment accounts, and don’t change jobs, unless, of course, you’re moving to take a new job.

What Lenders Look At
How much you can afford is dependent on more than just your total income. It's also dependent on the type of mortgage financing you choose as well as your monthly debt payments. Lenders look at your total household income, your debt-to-income ratios and your net worth (your total assets minus your total liabilities). From these numbers they determine your maximum loan amount, your maximum monthly mortgage payment and minimum down payment.

The greater your net worth, the more house you can afford and the smaller your interest rate and down payment will be. There are two debt-to-income ratios: one tells a lender how much of your gross monthly income goes toward paying your housing costs, and the other tells them how much goes toward paying both your housing costs and your monthly bills. These ratios tell a lender how much you can afford on a monthly basis.

It may sound terribly complicated, but the process of pre-qualifying yourself is fairly painless. The lender does most of the work. You just provide them with the information they need.

Shop Around
Once the lender has done the math, there are different lending products they can offer you. The guidelines that lenders follow are more flexible than they used to be, especially with regard to the debt-to-income ratios. In recent years, you’ve probably noticed that the lending business has become very competitive. Television ads show lenders lining up at your door to offer you a better deal. In reality, they won’t line up at your door, but they’ll be extremely receptive when you walk through theirs.

Don’t be afraid to shop around for the best loan. Make these lenders sharpen their pencils. Working with a local bank or lending institution has its advantages, but there are also many options on the Internet. You’d be surprised what just a small amount of research can save you. For a list of local lenders, visit our Buyers Resources page.

Down Payment
Depending on your financial picture, the down payment on a home could be as high as 20% or as little as nothing down. If your lender gives you the option of nothing down, they’ll most likely require you to take out private mortgage insurance to protect them in the event you’re unable to make your monthly mortgage payments some time down the road.

Something else to keep in mind. If you have the money to make a larger down payment than the lender requires, it’s not necessarily a good idea to do so. While you’d be borrowing less and your interest payments would be smaller, you’ll have less interest to deduct from your taxes. Which means you’ll have less cash on hand. That extra money can come in handy when you consider moving expenses or new furniture and fixtures for the home.

Pre-qualifying Summary
Once you’re pre-qualified, you know exactly how much house you can afford. Being pre-qualified by a lender makes it easier to negotiate with a seller because the seller will know there’s no risk of you not being able to get a loan once the sales agreement is signed.

"But wait. Don't I need a real estate agent?"

Not necessarily. Many home sellers turn to real estate agents because it is the de facto method for selling a home. While working with a real estate agent is right for some sellers, increasingly sellers are discovering they really can do it on their own and save thousands in commissions. When you choose to sell your own home or property is much easier than you think, even though it may seem intimidating at first.

It comes down to just a few things:

1. You need to price your home correctly and to find a qualified buyer for your house, which is why you've come to DwellWell.com, the fastest growing For Sale By Owner site in North Carolina. Here you'll learn how to work with an appraiser and with online listing services to determine the fair market value of your home, and you'll learn how a lender can help you pre-qualify buyers.
2. You need to work with the buyer as they schedule their inspections, such as the appraisal, the home inspection and the pest inspection. (You'd have to do this even if you had an agent.)
3. You'll learn how to work with your own attorney who can help you with the sales agreement and preparation of all of the required legal documents, including the title and deed. Legal fees for a real estate closing are usually between $300 and $500, and they're worth every penny.

For more on selling your own home go to DwellWell's Home Seller Resources page.

Commissions and Your Bottom Line

The economist Stephen D. Levitt and co-author Stephen J. Dubner wrote recently in their book Freakonomics (HarperCollins Publishers, Inc.) of Levitt’s study showing that when real estate agents sell their own homes, those homes stay on the market an average of 10 days longer than their clients’ homes. The same study shows that the selling price of real estate agents’ homes is on average 3% greater than that of their clients.

Here’s why. A couple who lists their home with a real estate agent for $250,000 may hear from the agent that someone has offered $240,000 for the home. In many cases, the agent will insist that the offer is good and that the sellers should take it. Why would the real estate agent be so eager to accept a price that’s $10,000 below the seller’s asking price?

It could be that the home was priced too high to begin with, and when this happens it's usually because the seller has insisted on the high selling price. But Levitt's study showed something interesting. Typically, agents split their commissions: half goes to the buyer’s agent, half to the seller’s agent. Then it’s usually split again: each agent gives half of their commission to the agency they work for. So the agent representing the seller is only getting 1.5% of the sales price of the home (6% ÷ 4). With a $240,000 offer, the price of the home is reduced by $10,000, but the commission is reduced by only $600. The real estate agent’s cut of this is $150. It will cost the seller’s agent only $150 to accept the low-price offer. What does it cost the seller? An additional $9,400.

This situation happens every day. There is a strong incentive for real estate agents representing the seller to entice their sellers into accepting offers well below their asking price. You've got to price your house correctly from the beginning so that your confidence won't let you come down too far in price.

Sell Your Home in 5 Days?

If you're selling your home or just thinking about selling your home -- or dreading selling your home -- you owe it to yourself to check out George Cappony's real estate classic, "How To Sell Your Home In 5 Days." It's hugely popular, and it'll be that little book that changed an industry. Cappony's ideas are truly iconoclastic. The real estate auction is nothing new, but after cutting it down to its bare and most expedient essentials, Cappony has turned this method into a mantra. Sell your home in five days! Why not?