It's almost spring, the traditional start of the homebuying season. Whether you are in the market for your first house or your fifth, the process can be complicated. With paint swatches and tile samples a ways away, what should you be thinking about now? Here are five tips.
1. Attend orientation and mortgage counseling
Attending orientation and mortgage counseling at the beginning of the home-buying process could be the difference between buying an affordable home and getting into financial trouble, says Michelle DiBenedetto, the director of public outreach and special projects for the nonprofit Long Island Housing Partnership in Hauppauge.
It takes an hour-and-a-half and, through the partnership, she says, it costs nothing.
At an orientation, prospective home buyers find out about grants for which they might qualify.
DeBenedetto's colleague Carol Yopp, director of counseling, says prospective buyers should attend orientation and counseling before even contacting a real estate agent. Some agencies charge for certain services, Yopp says, but the Long Island Housing Partnership is a federal Housing and Urban Development-approved housing counseling agency, and it does not. For information about other agencies that offer counseling, visit hud.gov.
Participants in homeownership education and counseling are less likely to default on their mortgages, according to the federal Department of Housing and Urban Development’s Office of Policy Development and Research. Some banks, Yopp says, are “encouraging and even requiring” loan applicants in certain programs to participate in home-buyer education.
The Long Island Housing Partnership also offers online housing counseling through the home-buyer education course "Framework" for a fee. To receive a certificate of completion, students must attend a one-on-one counseling appointment at the end of the program, Yopp notes.
2. Have a mortgage contingency clause, and know what it means for you
Protect yourself — or, more specifically, your down payment, with a mortgage contingency clause, advises attorney Reza Ebrahimi of Long Island law firm Twomey Latham. A mortgage contingency clause allows a prospective buyer who cannot get a mortgage to back out of the deal within a specified time period. Typically, that time period is 30 to 45 days.
When it comes to financial protection throughout the home-buying process, Ebrahimi says a mortgage contingency is “probably the single most important thing.” Otherwise, a prospective buyer who backs out of the deal will lose the down payment.
“The mortgage contingency is the only realistic, practical way to get out of that deal,” Ebrahimi says.
Keystone Realty agent Ryan Tanacredi in East Northport advises clients not to make any substantial purchases from the time they apply for a mortgage to the time they close on the house.
"I've had a client buy $11,000 worth of furniture on credit because their mortgage broker advised them that they would be OK to do so, and then just days before closing they were ordered to pay off the entire balance from the bank," Tanacredi says. "Substantial purchases can alter a buyer's debt-to-income ratios significantly enough that their financial snapshot goes from stable to an unwanted risk in the eyes of a lender."
3. Consider a seller concession
Tiffany Rivera, 29, bought her Patchogue home in the "dead of winter" and with a seller's concession — an agreement that allows a buyer to borrow a bit of extra money from the bank, usually in order to cover closing costs.
"We put down like a bare minimum on this house, but we got in," said Rivera, a Patchogue Chamber of Commerce vice president living with her two children.
If a buyer and seller agree to a $400,000 purchase price but the home appraises for $410,000, the buyer can take a mortgage for $410,000. The bank gives the seller $410,000, and the seller agrees to give the extra $10,000 to the buyer. “At the closing table, the seller gives you a $10,000 check,” explains Stephen King, a real estate agent from Realty Connect USA in Patchogue who represented Rivera. “That way their profit is the agreed-upon $400,000, but you’re taking a mortgage based on the $410,000 purchase price.”
On paper, Rivera, who works as a restaurant manager, put down $4,000 and purchased the house in 2018 for $205,000, she says. The seller accepted a $5,000 concession, so Rivera actually got the house for $200,000.
A seller’s concession can make a huge difference when it comes to keeping some money in your bank account, King says, sometimes covering the purchaser's closing costs. Be aware, though, that some sellers may not accept a concession. If the deal is contingent upon a seller concession going through, the buyer is a risk for the seller, King says.
4. Be wary of short sales and foreclosures
While short sales and foreclosures may look appealing to buyers on a budget, both King and Ebrahimi warn against them.
During foreclosure, the bank that issued the mortgage to the owners of a property is trying to reclaim that property because the owners have not made the necessary payments. A short sale is an alternative to foreclosure — instead of trying to take the property back, the lender gives the owner permission to sell the house for less than what is owed. And each of these situations is sticky.
“Short sales are anything but short,” says King, who has seen people buying a home in a short sale in contract for eight to 10 months before the deal fell through. “The key to short sales is having a great attorney, honestly. Dealing with a bank is a headache.”
And if buying a foreclosure is the only option for you, make sure you do not have time constraints, he says.
Ebrahimi says houses in those situations, while their prices are often appealing, are really only good for investors because of the drawn-out process.
Tanacredi advises a buyer interested in a short sale to consider putting down the least money possible. "I would advise not more than $1,000 if possible," he says "It pains me to witness short sale buyers putting 5 to 10 percent down and [have] it sitting in escrow for three to six months, or longer, not gaining any interest, and then the short sale falls through."
5. Use your student loans to your advantage
DiBenedetto suggests buyers whose student loans are in a deferred period visit the financial institution that gave them the loan.
"Say to them, 'When my deferment period is up, what is my monthly payment going to be?'" she says. Have the bank put it in writing. Take that written amount with you when you apply for a mortgage, she says.
"When you go to get your mortgage and you work with your financial institution, you can say, 'OK, while I owe $100,000, I am only going to be paying — based on the letter — $350 or $500 a month," she says.
Beyond that, DiBenedetto stresses the importance of going over all financial options with an expert (this happens during a mortgage counseling session). Certain grants are available to first-time buyers, for instance, and a "first-time buyer," she notes, is not someone who has never owned a home. Anyone who has not owned a home over the past three years is considered a first-time buyer, she says.