Whether you’re a first time home buyer needing your first mortgage or if you’re an experienced home buyer ready for your next home, knowing how the mortgage process works and how to qualify for a new mortgage is an important first step in the process of buying a home.
You’re obviously not expected to know the various acronyms and details involved in how to qualify for a mortgage, but having some general understanding of the process and expectations will put you in the best financial position for buying a new home. It’ll also simplify the process for you.
Credit scores required for a mortgage
Your credit score is really the starting point that most mortgage lenders look at in determining your mortgage qualification. While credit scores are certainly not an indicator of wealth, they do provide a baseline for lenders to determine your creditworthiness. It’s also the tool that determines all of the other ratios we’ll look at below and the interest rates which you will qualify under.
The higher your credit score, the lower the costs of getting a mortgage and the lower the interest rates will be. For the most part a minimum credit score of 640 is needed, however there are several programs available for home borrowers with credit scores as low as 580.
Income requirements for a mortgage
Your income shows the ability to repay the mortgage. Income combined with credit score make up a large portion of what a mortgage lender look at when qualifying you for a mortgage. Mortgage lenders are looking at your Gross Monthly Income. They prove this income through your W-2’s from your employer, your paycheck stubs from your employer, and your 1040 tax return from the IRS. They’ll also consider other regular income that isn’t salary based like dividends from stocks or company ownership, child support, or other income that is consistent.
Your income is the starting point in mortgage calculations for how much mortgage you can qualify for.
Qualifying limits for a mortgage
Obviously credit scores and income are important pieces in qualifying for a new mortgage. But they are only the starting pieces of the puzzle mortgage lenders look at when issuing a mortgage.
One of the most important pieces is actually your Debt-to-Income ratio (DTI).
This ratio is calculated by adding up all of your current debts like car payments, student loan payments, minimum monthly credit car payments, and other debt payment plus adding in the future estimated mortgage payment. Then you divide that monthly amount by your provable gross monthly income. This will give you a percentage of debt-to-income.
Depending on your credit score, there are different limits for this DTI ratio. The higher your credit score, then the higher your DTI ratio can be and still qualify for a mortgage. But it is fairly typical for the limit to be around 42% maximum as a good rule of thumb. There are circumstances and loan programs that will allow for this ratio to be as high as 50%.
This is process is how mortgage lenders determine how much house you qualify to purchase as a maximum. They start with your provable income, verify the maximum DTI you are allowed to have based on your credit score, and calculate the maximum amount of monthly payments you can have. Then they subtract out your existing debts, which leave them with the maximum monthly mortgage payment.
House Qualifying Limits
Loan-to-Value (LTV) is another important piece of the puzzle that determines several aspects of your qualifying limits. The LTV is the percentage of mortgage you’re borrowing against the value of the property. Your downpayment helps to determine the Loan-to-value.
An FHA mortgage will allow you to have a minimum down payment of 3.5% of the purchase price. While there are conventional programs that have various down payment options starting as low as 0%, the most common minimum down payment percentage allowed on a conventional loan is 5% down.
The LTV is a risk measure for the mortgage lender. The smaller the down payment you have, then the higher the LTV ratio is which means the higher the risk the mortgage lender is taking by issuing you a mortgage. Therefore they price their loan accordingly to the risk they’re taking.
A 20% down loan will have fewer closing costs, lower interest rates, and no Private Mortgage Insurance, whereas a 3.5% down payment will have higher overall costs associated with the mortgage.
These mortgage costs all factor into the estimated monthly mortgage payment, which ultimately carry into your DTI ratio for qualifying. Remember, your DTI ratio has to be under the maximum allowed limit as determined by your credit score and loan program.
How to Estimate a Mortgage Payment
There are 4 pieces to a monthly mortgage payment: Principal, Interest, Taxes, and Insurance. There’s a 5th piece called Private Mortgage Insurance (PMI) if your LTV is higher than 80%.
You can calculate the Principal & Interest (P&I) portion of your payment using any payment calculator. A 30 year loan (360 months) or 15 year loan (180 months) with the total amount of money you plan on borrowing for the mortgage with an average market mortgage rate. This will give you your fixed monthly payment.
Taxes are fairly simple to calculate, although they can be different for each house on the market. The easiest way is to look up the local tax rates and multiply that percentage by the sales price. Divide by 12 and that’ll give you your monthly tax bill. The more specific way is to go to your county website and find the actual tax bill for each property you want to buy and divide the amount by 12.
Homeowners insurance varies by geographic location, company, type of house, age of roof, square footage of house, and price point. It’s difficult to estimate this annual premium without knowing a specific house and receiving a quote. However mortgage lenders in your market can make an educated guess based on their knowledge of recent loans and housing types in the area. You can always ask your mortgage lender or a Realtor in your area how much you should estimate for homeowners insurance. A good rule of thumb is $200/month, knowing that it could be more or less depending on the house and time.
You take these 4 elements, P&I, taxes, and insurance and add them together for your estimated mortgage payment. If you have less than 20% down payment, then you’ll need to also add in an estimated PMI payment (Private Mortgage Insurance). There are calculators online for this and the actual amount will vary depending on LTV, credit score, and overall amount financed. A general guideline would be $130/month knowing that it could be more or less.
How to qualify for a mortgage
These are all of the primary elements that go into mortgage qualifications. A mortgage lender takes your credit score and provable income to start the process and figure out what loan program may work best for you.
They look at your down payment percentage on a specific house to determine the LTV. Based on your credit score and loan-to-value ratio they then are able to calculate mortgage pricing for origination and interest rate costs as well as PMI.
They use all of that information to determine the estimated monthly mortgage payment including taxes, insurance, and PMI.
They then add that new estimated monthly mortgage payment to your existing debts. If the total of those debts divided by your gross monthly income is under the DTI ratio requirement, then you likely qualify for the mortgage.
What options are available if you don’t qualify for the mortgage?
After all of those elements are reviewed, if you come back not qualifying then the mortgage lender reviews each of those individual elements to see where adjustments could be made.
Maybe, your credit score is 714 which gives you a 45% DTI maximum but at a 720 credit score your qualifying DTI maximum would increase to 48% under some circumstances. If you have revolving debt like credit cards that have a high utilization rate, then paying down those credit cards would increase your credit score enough to get into the better pricing bracket.
Maybe you have enough cash available for down payment to get to 20% down instead, which eliminates PMI from your calculations and would get you under the maximum DTI limits.
Maybe there’s other income you forgot to include in your application that would increase your Gross Monthly Income enough to get under the maximum DTI limits.
Maybe you have a retirement account or savings reserves that give you 6+months of reserves the lender can use to increase your qualifying ratios.
There are dozens of different things mortgage lenders can do to adjust and help you in mortgage qualifying.
Should you get a new mortgage?
Just because you may technically qualify for a mortgage doesn’t mean you should rush out to buy a home. There are guidelines out there that would allow you to buy a house where the monthly mortgage payment is 50% of your gross monthly income. There’s not a financial advisor in the world that would say that is a wise decision, even though you could technically qualify for that loan.
Your first step is to make sure your financial house is in order, that you have your consumer debts eliminated or super limited, and that you have enough cash in the bank for a down payment. Then determine how much you personally feel comfortable budgeting each month for your housing costs (20%-33% is a realistic and understandable amount for most families in the US.)
From there, you should meet with a professional Realtor to help you start narrowing in on all of the details in purchasing a home and helping you navigate the process. Your professional agent will have several mortgage lenders that will help you qualify for a mortgage and get the process started. If you’re in the DFW area, our team would love to help you get qualified for a mortgage and buy your new home. Learn more about our team and how we help home buyers here!
We are living through a massive population boom and time period where cities and metro-areas are seeing a surge in people moving inward toward urban centers rather than rural. The reasons are many, including opportunity, education, jobs, healthcare, quality of life, amenities, and affordability as well as changes in economic shifts around the globe.
Whatever the reason, more people are moving into metro-areas and the towns and suburbs on the outskirts are finding themselves right in the middle of the growth explosion.
It is certainly a change and many cities are finding their longtime residents saying, “we want to stay small and keep our hometown feel” even though they probably haven’t been a small town in quite some time.
My hometown of Mansfield, TX is one of such cities. Settled around a new grist mill in the 1850’s, Mansfield has doubled in population every 10-15 years since the 1960’s. It’s located about a 20-30 minute drive from Downtown Dallas, Downtown Fort Worth, and DFW International Airport. It’s a 20 minute drive to a Dallas Cowboys or Texas Rangers game. The city sits in 3 counties at the intersection of a new major toll-road and the longest highway in the United States. Housing prices, even in the craziness of 2022 real estate, start around $200,000 and grow up over $2 million with a median price point around $450,000. Roughly 1,000 new houses are being built and sold each year with an average price of $650,000. In 2000 the population was 28,031, which isn’t a small town by any means. By 2010 the population had doubled to 56,368 and today in 2022 the population of the city is around 80,000. It’s the 3rd largest city in Tarrant County, which is one of the fastest growing counties in the Country, and surrounded by thousands of acres of developable land in other major cities like Grand Prairie, Arlington, and Midlothian, TX.
The reality is, Mansfield, TX is currently a big city that is going to be a really large city and economic powerhouse for the region in the not too distant future. But we also have a tremendous number of people that lived here in 1985-2005 when we were “small” that want to keep that feel.
So how do you keep that small town feel that everyone loves and craves while still being in the middle of a massive population boom toward being a large city?
The Small Town Life
Here’s what I’ve found to be true. We all remember our hometown most fondly from a perspective of our own past. We think about high school and how we knew everyone on campus, or at least those in our social circles. We think about the parties we attended or the community events at a park. We remember the places we hung out as a teenager with our friends after the Friday night football game. We remember helping Mr. Smith get his tractor out of the mud. We remember running up the street to the corner store where we were likely to bump into someone we knew and strike up a conversation. We knew we’d see all of our friends at church on Sunday morning and likely have a potluck for lunch after service. We played sandlot baseball from morning to dusk all Summer with our friends in the vacant field nearby. We met with our neighbors to help clean up litter from downtown. We joined together with others to paint a park bathroom or to build the volunteer fire station. We attended the elementary school play, held a PTA meeting, and fellowshipped with the other families in our kids schools afterward.
Small town life for most of us is remembered from a time period where we were active participants in that small town life. Our schedules were consistent. We did the same thing every day and every week. And we were actively around the same groups of people, often just by happenstance.
But as we’ve grown older – as our small towns have grown into cities – as a new generation has grown into adulthood – and as we’ve each added on other personal responsibilities in this more complex and hurried life we live now in 2022, WE have become less active participants of small town life and become more a consumer of our city. We’ve built entire neighborhoods and communities that allow us to isolate ourselves from each other, park in our garages, never go outside or bump into a neighbor, easily commute out of town for work, and avoid all interaction with anyone else that lives in our community if we don’t want to. The small town life has not left our cities as they have grown larger. We have personally removed ourselves from shaping our communities and as a result left it up to city professionals and a small group of public servants to try and meet our individual needs and desires.
I regularly hear that phrase, “we want to stay small and keep our hometown feel.” But my personal experience is that I live in a really great place with a really great hometown feel. This disconnect really jumped out to me a few months ago at our annual Volunteer Appreciation Celebration.
Several years ago, rather than constantly issue code violation citations to residents that couldn’t afford repairs to their property, let alone a citation, Mansfield started the Mansfield Volunteer Program to help address these code issues. We partnered with community organizations to solicit help from volunteers and businesses in our community to clean up landscaping, fix broken fences, repair houses, and more. The program was a huge success and has grown to have over 55,000 hours of donated sweat equity annually. We’ve won dozens of awards as a City for this innovative program. Each year we celebrate and honor the volunteers that help make our City great.
As I was shaking hands and passing out awards it became abundantly clear that I know each of these people. They’re the ones that serve on our Boards and Commissions at the City. They’re plugged into their church groups. They serve in other community organizations. I see them weekly in a coffee shop or restaurant. Our kids play sports together. They host their own community events and meetups. It’s the same group of people that are plugged in and actively engaged in our community and we all know each other. We’re all friends. And we all love serving the people of this city together. I get to experience that same small town hometown feel with these people because we’re all active participants in small town life, even though we’re living in a 36 square mile – 80,000 population – fastest growing region in the Country.
But the other thing that jumped out at this event is that those who are most vocal about their negative views of our city – those who are most vocal about wanting to keep our city small and to keep a hometown feel – the ones that push back against every new development for growth or any city initiative for improvement – they were nowhere to be found at the event. They are consumers rather than active participants in shaping a hometown.
Getting Involved in a Small Town Life
I believe any of us can experience a small town life regardless of the size of the city where we choose to live. But it does take being intentional. This doesn’t just happen. You are going to have to make some efforts here to get involved and engage in shaping your hometown. Fortunately, these areas are easy and the opportunity is great! Here are a few ideas to get started:
Engage in your local church: Weekly church services, especially post-pandemic, have become a place where it is easy to be a consumer of church rather than actively involved in serving others. But your church needs help! Volunteer to be a greeter, help in the parking lot, serve in the children’s ministry, chaperone a youth group trip, join a small group or Sunday school class. Your church is also a built in community for you to know and be known. Your pastor can find a way for you to get plugged in to an area of weekly or bi-weekly service and help you connect with others that live in your city.
Become a regular: Go to the same coffeeshop the same day each week. Visit the same local restaurant for lunch on the same day each week. Stop in the local candy store with regular frequency. Get to know the owners. Sit down long enough, frequently enough, and the other regulars will naturally interact with you. “You wanna go where everyone knows your name.” Then go to the same place regularly and interact with those around you and you’ll soon find that to be your reality.
Reach out to your local leaders: You should know your local City Council Members, School Board Members, and if possible your City Manager and Superintendent. These public servants would love nothing more than to find ways for you to engage and serve the community. Their email addresses are typically posted on the school district or City website and they are usually very accessible. These are often the most dedicated people that love your city. They know just about everyone in town and can get you connected to programs, organizations, and resources anytime you may need them. Introduce yourself by email and let them know you’d love to meet them and see if they can help you get plugged into the community.
Join a local community group: You probably have a rotary club or similar in your town. These groups are full of leaders that love to give back to their community. It’s a great opportunity to know others that serve and volunteer to help others.
Serve at a food pantry, clothes closet, or mission center: There are people in your community that have food instability. There are kids in your community that don’t get new clothes at back-to-school time. Someone has to help provide for those needs. Fortunately, your community probably has organizations nearby to help. They just need volunteers to make the logistics work. You can fill that need!
Work where you live: I know that this isn’t always simple as we often move to metro areas because the job opportunities are abundant in the entire region. But as someone who spends 90% of their time within 2 square miles of their home putting few miles on vehicles and wasting time on a commute each day, working in the city where you live is one of the fastest ways to feel connected to your entire community.
Coach your kids sports team: Few people step up in this area, but it’s a great way to create small communities of families that will be together for an extended period of time each week, possibly for years. As the coach, you can help keep that team and group together for years.
Walk Places: This isn’t always easy, because we’ve built neighborhoods in favor of vehicles instead of pedestrians. But when and where possible, you should get out for a walk. Get to know your neighbors. If you can, walk to the corner store a few days a week and engage with the clerk. Walk at the park at the same time each day and you’ll likely bump into other people who are doing the same thing.
Keeping Small Town Life in a Big City
The bottom line here is that YOU can keep small town life regardless of how big the city is where you live. You can make intentional choices to build relationships in your community, serve the people around you, and shrink your own circles so that you regularly are bumping into people you know and shaping the community where you live. If you do this well, it won’t matter how big your city grows or how many people move to town. You will still be able to call it your hometown.
We made a catastrophic mistake in the name of “protecting property values.” We did it too well! Over the last 50+ years or so we’ve slowly and unintentionally made it illegal to live somewhere other than in large single family homes or in luxury apartments.
During that time period we have created entire zoning ordinances that require minimum square footage homes on minimum sized lots with minimum setbacks from neighbors and streets. We’ve prohibited generational living such as building a mother-in-law suite and guest homes are prohibited from having someone occupy them full time. We’ve let HOA’s and municipalities put ordinances in place that restrict our ability to let our aging parents live in a small apartment in our backyard. How crazy!!?!?!
We did all of this just so we could “protect our investment” into our single family neighborhoods by keeping out any other development (and people) that doesn’t look exactly like our own. God forbid someone might allow a newlywed couple to live in an over the garage carriage house while they save for a down payment! The world may literally end if our single family home sits adjacent to a really beautiful duplex where a family owns one unit and rents out the other unit to help offset the cost of their mortgage! I think the sky may actually fall if a quadplex even shares the same air as a Country Club neighborhood.
We have protected property values so well that we now have increasingly expensive single family neighborhoods all over the country. We’ve refused to build anything near those single family homes that doesn’t meet some subjective standard of quality that changes over time. And they’re now getting to the point where homes are flat out of reach for a new generation of homebuyers.
If real estate is one of the best ways to build generational wealth, to break generational poverty, and provide financial stability for families… which I believe it does… then EVERYONE DESERVES THAT OPPORTUNITY!
Accessory Dwelling Units help to solve this home affordability crisis by providing new options for renters and property owners.
An ADU is simply a secondary dwelling unit that is built on a single family lot and occupied/rented by someone else. They’re sometimes called carriage homes, garage apartments, granny flats, mother in law suites, backyard cottages. Sometimes they’re attached to the single family house or even a finished out basement. Other times they’re a detached structure on the side or in the backyard. 150 years ago it was uncommon that anyone but the extremely wealthy could afford a single family home without putting the land to use. It was a sign of extreme wealth to have a front lawn that’s only purpose was to grow grass that had to be mowed every week. The average family had to utilize as much of their land as they could to help financially pay for their home.
ADU’s help average property owners build wealth, but they also provide an affordable home option for a variety of people that live in a community. Maybe your aging parents need a little assistance from time to time and want to maintain their independence without owning their own single family home. Perhaps your college graduate just moved back home while they’re starting out in their first career and can’t quite afford the rent at one of the luxury apartments in town, but wants to be out living on their own. The recent high school graduate that’s working full time in the restaurant around the corner while they figure out what’s next in life likely can’t afford the rent at an apartment complex with tons of amenities, but they also need to be out living on their own instead of with family for whatever reason.
Building Accessory Dwelling Units on your single family property creates unique housing options within your community to address home affordability options while also creating wealth building opportunities for you. It’s literally a win-win scenario.
Yet for the vast majority of single family property owners that live in the United States, they are illegal to build. The zoning in your community most likely doesn’t allow for them. And if the zoning does allow for them and you live in an HOA, then your HOA likely prohibits them.
We could almost overnight change this home affordability conversation. We could create opportunities for you and your neighbors to build a she-shed in the backyard and rent it out for a few hundred dollars each month to someone needing a different housing option. It’d generate income for you as well as help you grow your equity in your property. It’d give someone else in a different life stage than you a housing option other than splitting luxury apartment rent with 3 other people. It’d let new homeowners find ways to generate extra income to help offset the rising mortgage costs.
We can solve this problem. It just takes your local governing body to quit making it illegal for you to build a small apartment for your kids grandmother to live in your backyard.
When I first moved into the community where I live it cost me roughly $6,000 out of pocket. My monthly mortgage payment including property taxes, insurance, and PMI was $1,650 each month. I moved into a brand new 2,150 square foot home on a cul-de-sac with a pond view, 3 bed/2 bath plus an office, gas log fireplace and a second living room. I was 21 years old.
I sold that home 9 years later and made $74,000 in profit (even going through the housing collapse and Great Recession). That same home is now 15 years old and costs roughly $225,000 more than I paid for it when it was new. The windows have lost their thermal seals, the roof probably needs replaced, the hot water heater definitely needs replaced, and the HVAC system is likely on its final days.
In order to buy that home today a buyer would need roughly $30,000 in cash to put down at minimum (if they could get a seller to actually accept that offer). The monthly mortgage payment would be about $2,950.
It costs $15,600 more each year to a homebuyer today than it cost me to buy it 15 years ago. Incomes are relatively flat over that same time period.
Here’s the reality. If you have lived in the same home for 10+ years right now, you likely couldn’t afford to live in your same community today. That means your kids…. When they start their families…. They can’t come home. They can’t afford it.
There are thousands of really smart people trying to solve this problem right now around the country. Real estate ownership is the fastest way to building long term wealth. Everyone deserves that opportunity. The solutions probably won’t look like a 21 year old buying a brand new 2,150 sq. ft. house. Housing is going to have to look different than generations of the past have grown accustomed to. We need to collectively recognize this shift rather than bury our heads in the sand. Townhomes, garden homes, patio homes, duplexes, quadplexes, condos, multi family homes, accessory dwelling units, and traditional single family homes are all housing options that we must embrace as reasonable places for people of different life stages to lay their head down each night. The long term path we’re on right now is financially catastrophic to our kids. There are solutions, but we have to change.
When home inventory is limited like it is right now across the country it can become frustrating for everyone. Homebuyers obviously struggle to find a home they’d like to purchase and struggle even more against competing offers to actually be able to purchase a home. But even home sellers face some frustrating challenges.
What if your family has outgrown your “starter home” and it’s time to buy a new place with some more space? And you can’t compete because all of your equity is tied up into your current home and there are dozens of other buyers in your same market with the same challenges competing for the one or two homes that have come on the market? That of course leaves your starter home unlisted on the market and unavailable for the next owner. It’s a compounding issue that’s difficult to resolve.
The solution often is purchasing a new construction home.
New construction homes can provide homebuyers with more flexibility, certainty, and favorability than trying to compete in the open real estate market for already existing homes. The great news is that in a market like this current one, home builders are building homes as fast as they can. We have a ton of new construction home options and more on the way.
But purchasing a new construction home does come with some challenges and you need real estate professionals representing you and your interests in the transaction. Why?
For starters, as nice as your new construction salesperson is going to be to you, they represent the builder and the builder only. They’re not going to volunteer information that is not required. They’re not going to help you navigate upgrade options, contract terms, incentive programs, or anything that is not beneficial to the builder. They aren’t going to care too much if they’re delayed or off schedule. They aren’t going to advise you about what a typical contract looks like or voluntarily make terms favorable to you. They do not represent you. You are on your own. If you know homes and real estate and purchase transactions and do them often, that may be fine. If not, you need an agent on your team.
Home builders include in their pricing the cost of real estate commissions. You don’t get a better price by purchasing a new construction home without using a Realtor. Home builders typically enjoy having a real estate professional involved in the transaction because it helps them coordinate the transaction, make the process more smooth, gives them someone to communicate with that speaks a common language, and is understanding of the construction process. Builders like for you to have representation and that’s why they pay a real estate brokerage fee.
Home builders have taken the time to strategically form relationships with lenders, title companies, and attorneys that will all pay affiliate fees, kickbacks, and marketing agreements. In some cases the home builder even owns the title company or the mortgage company. Your agent not only has relationships with multiple lenders, title companies, and attorneys, but they also know the programs and customary charges associated with those services. They can make sure you’re getting the best deals available from these ancillary services and that you are being served well. In addition, your real estate professional will have relationships with other home builders and know of all the new construction opportunities that are available to you, not just what that one home builder may have available.
Floor plan, lot, design selections, and cost savings:
In addition to their fiduciary duties in representation your Realtor can advise you of options available to you when choosing your floor plan, lot, and design features. When you meet with a builders representative, they have the options available to them and them only. Your Realtor may know of another neighborhood directly adjacent that better meets your needs with lot sizes or home types that more match what you’re looking for. Your real estate agent may be able to advise on future resale value and desirability of your choices throughout the build process to make sure you are making wise decisions and investments.
Your agent can also advise on areas where you can install an upgraded option or have better design selections by going outside of the homebuilders standard choices. They’ll help you from overbuilding/overdesigning and also help you focus your upgrade dollars in the areas that will make the biggest impact on your future home.
Contract to close:
If you’re unfamiliar with real estate contracts and terms, this is where having an agent on your team really helps. The builder’s salesperson isn’t going to be looking out for your best interests when it comes to contract dates and deadlines. Making sure you meet the contingencies and deadlines in your contract is your agent’s job. Coordinating with the lender and title company to make sure you get to the closing table on time with all of the needed documents is a key part of your agent’s job. And ensuring you know about all of the options available to you from lenders to title policies to surveys and more are all part of an agent’s fiduciary duties to you.
Construction Process and checkpoints:
A great real estate agent will be checking in on your project jobsite regularly and providing you with updates. They’ll attend your pre-construction meeting with detailed notes to make sure everything that you have requested for your new home is on the builders radar. They’ll walk the home weekly to make sure your wishes are actually being installed in the house and raising red flags along the way as things get missed. Having an agent on your team during the construction process ensures you have an advocate that does the fighting for you so that you can stand on the side and know your interests are being addressed. When you have concerns, they’ll communicate directly with the builder on your behalf and make sure that all of your concerns are taken care of along the way. And if they think something is being done incorrectly, they’ll get professionals involved early in the process. The vast majority of the time, construction goes on without many issues. But in the rare instance that construction doesn’t go as planned or there are issues, having an agent on your team is an invaluable part of the process to make sure your best interests are protected, that your money is protected, and ultimately that you get the home you want at the end.
Closing, follow up, and warranty:
Having an agent make sure you get keys, move in, and that everything is as you expected is putting someone in your corner to represent you. As things settle and you get moved into your new home, there will come times for warranty requests and repairs that need addressed. An agent can help you navigate warranty claims and know what you should request.
Ultimately, the builder is an expert at building homes and has a team of professionals, attorneys, architects, engineers, sales people, title companies, and lenders that are all on their team and representing them and their best interests. The home builders are willing to pay your real estate agents commission on new construction. You need a Realtor on your team protecting you and making sure that your new home construction experience goes smoothly and reaches the finish line the way you intend.
In a sellers market it can certainly be tempting for you to sell your home For Sale By Owner and save the money on the Realtor commission. But in almost every case I’ve come across it will cost you more money, a lot more time, and cause a significant amount more stress in your life versus hiring a professional.
Okay. So I’m a licensed, practicing Realtor. I sell a bunch of houses in Texas and refer real estate agents around the country. I’m supposed to say this, right?
For a minute though, set that fact aside and lets just look at some logical reasons why selling your house For Sale By Owner is a bad idea.
1. Time: There’s a lot more to selling a home than just putting a sign in the yard, taking pretty pictures, holding an open house, and waiting for a buyer. When you show your home, someone has to let the buyer in, allow them to walk through the house, spend time with them, and answer any questions about the home or neighborhood. There are all of the calls that come in off of the sign in your yard. There are all of the other real estate agents calling you to ask you about your house. If you show your home to 15 buyers at 30 minutes each you’ve personally invested 8 hours of your life into just showing your home.
And all of this is before you even get an offer. Then there’s the time to negotiate, time to go through inspections, time to coordinate closing with lenders and title companies.
2. Preparing Your Home: No offense here, but you aren’t necessarily unbiased about your home. When you hire a Realtor to come in they will point out the dirt on your baseboards that you’ve stopped noticing or the kids finger prints and scuffs on your kitchen cabinets. I don’t care how great of a decorator you think you are, your home is not ready to sell.
Home buyers that view your home will also walk through a similar home in a similar price point as yours that a professional pointed out all of the little details that need fixed before listing the home. That seller took care of those things. When you sell your home For Sale By Owner you miss those details and they hurt you by either not generating an offer or an offer comes in below list price because the house wasn’t perfect.
3. Risk: If you sell your home For Sale By Owner you are taking on all of the risk that your transaction was done legally and that you’ve disclosed everything you needed to disclose about your home to the buyer. Did you forget about that plumbing leak from 5 years ago that you thought dried out but in fact caused mold to grow between the drywall of your home? Well, when your buyer rips open that wall for their renovation project they will find that and sue you for non-disclosure and you will be responsible. By hiring a professional they will make sure you’ve disclosed all of the important facts about the home and make sure the transaction is handled correctly.
4. Negotiating: Who do you think is better at negotiating a real estate contract? You after you’ve read several articles on the internet and received a little bit of advice from your friends who sold their home For Sale By Owner? Or a professional that has negotiated 70 or 80 real estate contracts recently? When you sell your home For Sale By Owner you will likely be negotiating with a buyers real estate agent that negotiates contracts for a living. They are better than you at this.
There’s a lot more to a real estate contract than the sales price. There are exclusions, financing options, earnest money deposits, seller closing costs, timelines for surveys and HOA addendums, buyers objection timelines, notices required to be delivered to the buyer, inspection periods, closing dates, home warranty’s, possession dates, settlement expenses, mediation, option periods, and more.
Once you execute on a contract as the seller, you no longer have control of how your home will be sold. The buyer and that contract dictate everything about the sale from that point forward. If you’re not familiar with real estate contracts and don’t put everything in writing prior to signing, your entire deal can fall apart and often does just before you were supposed to close on the sale.
5. Price: This is usually one of the major reasons homeowners choose to sell their home For Sale By Owner in the first place. They think that they’ll be able to save on the real estate agent commission and pocket that money. In reality they almost always sell their home for a lower price and still pay a realtor.
Over 90% of home buyers have hired a Realtor to represent them in a home sale transaction. So with that, most Realtor’s will only show their buyer a home that is listed in the MLS or that has agreed to pay them a buyers agent commission. This amount is typically 1/2 of the total commission that a listing agent charges to the seller.
For example, if a seller hires me to sell their home for them at a 7% commission then I will earn that full 7% commission if I bring a buyer to the seller. However if another agent brings that buyer, then I earn that 7% commission but agree to pay the buyers agent 3.5% (or 1/2) of my total commission.
So if 90% of homebuyers have already hired an agent to represent them, those agents will only show their buyer a home in which they will receive a commission. So if you’re selling For Sale By Owner and 90% of buyers have a Realtor, you must pay a decent Realtor commission in order to get those agents to show your home. For this example, let’s assume 3% commission.
Now as far as listing agents are concerned, a really good one will typically have a sales price vs. list price ratio of 100% or higher. This means that they will typically sell a home near the list price or higher and that they fight in negotiations to get that price.
If you list your house For Sale By Owner for $200,000 and a professional buyers agent brings a buyer to you, they will negotiate with you and you will likely settle on a price around $190,000 to $195,000. Remember, these are professionals that negotiate for a living. You still have to pay them 3%. Did you really save any money or make any more money by doing this on your own? Nope. And you get to add all of the stress that goes into the process to not even make any more money.
This example doesn’t even account for the situation where a professional has better access to comps than you do and can possibly price your home higher than you expected. It doesn’t take into account the situation where an appraisal comes in below your contracted price and you need access to comps to fight for a higher appraisal. It doesn’t factor in that a professional knows how to negotiate contracts up over the list price.
Even if you are able to sell your home for the exact same price that a professional would be able to sell it for, which is highly unlikely, it doesn’t factor in all of the other costs working with a Realtor are able to save you, like marketing costs, time, and negotiating a beneficial contract for you.
6. Marketing and Tools: In order to sell a house it has to be in the MLS. It just does. That’s what puts your house on Realtor.com, on Zillow, and all of the other buyers and agents radars as the home is for sale. There are some agencies and companies that will list your home in the MLS for a flat fee. Sometimes this is $200. Other times it’s $500. But it is a cost you’d have to pay up front whether your home sells or not in addition to the Realtor commission you’ll be paying a buyers agent.
Also, Realtors in most areas have access to a showing or scheduling service. This is a central company that organizes all of the showing requests to come view your home. That way you don’t have to answer your phone every time it rings from an agent that wants to show your house tomorrow at 9am. They call the showing service, the showing service texts you to ask if that’s okay, and arranges the showing with the other agent.
You’ll also need to put really great photos of the house in your MLS listing. Your iPhone camera just doesn’t cut it. Realtors hire professionals photographers to take listing photos, so if you want to compete on the MLS you’ll need to spend that $200 out of your own pocket to get professional marketing photos taken.
There are tons of other tools, tricks, and techniques that Realtors have access to that brings in buyers, markets your home effectively, and generates offers that you just don’t have access to.
7. Relationships: You need to know at least 2 different lenders and a real estate attorney or title company to assist you in closing your transaction when you’re selling For Sale By Owner. You have to stay on top of them the entire time to make sure the transaction goes smoothly.
Realtors already have these relationships and their vendors like title companies and lenders work incredibly hard to keep Realtors happy. If a title company screws up a transaction they know that the Realtor will never use them again and encourage other agents to not use them again. These relationships are already established so you know that a good Realtor has a good team behind them that make things work smoothly.
I know it’s tempting. I know you think you can do this on your own and that you need that extra money to buy the next house or to pay off some debt or to boost your emergency account. But I promise that when it comes to selling your home For Sale By Owner you rarely get that extra money you want and you bring a lot of extra stress into your life in the process. Hire a professional.
(If you’re looking for a professional real estate agent anywhere in the country, I can help. Check out the real estate page here to find a top real estate agent in your area.)