It's a Buyer's Market - Seek Incentives!
When there are a lot of homes for sale and it takes a long time to sell them – that's a "buyer's market." In most of the country, that's the current situation. If it is a buyer's market where you live and you're looking to buy a home, you are in a strong position to negotiate for lower prices and incentives.
The guidelines for buyers' incentives do vary from loan program to loan program, so make sure to get pre-qualified first so you can ask your loan officer about the allowable incentives for your loan program and down payment. Let's talk first about how much you can ask for. If you are putting ten percent or more down, you can ask for up to six percent of the price of the home. If you are putting less than ten percent down, you can ask for three percent of the price. Nothing guarantees you will get everything you ask for, but sellers are generally willing to negotiate and give you something.
The next thing you should do is make an offer and ask for those incentive funds to be applied toward your non-recurring closing costs. By applying the incentives toward your closing costs, you lower the amount of out-of-pocket cash you need to close the deal. Otherwise, you would have to come up with a down payment and the closing costs.
There are two types of closing costs: non-recurring costs and recurring costs. Non-recurring costs are things like points and fees that you only pay once and never pay again. Recurring costs are things like insurance and property taxes that you continue paying over the time you own the home. Most loan programs only allow you to apply incentives to pay non-recurring costs. FHA and VA loans are exceptions.
Now comes the hard part: making sure no one takes advantage of you. Sometimes a lender may just inflate your loan costs to use up the incentives you just negotiated. You need to work closely with your real estate agent and your loan officer to make sure you use all of those funds for your benefit. Let's explore this further.
If you can get a 5.75% fixed-rate loan for a one point loan origination fee, you can probably get 5.625% for one and a half points and 5.5% for two points. Remember, interest is a recurring expense whereas points are paid at closing and never recur. Therefore you will almost certainly save money on a loan with a lower interest rate but higher points.
If you don't think your lender is getting you the best deal, talk to him (or her) directly and ask what a loan officer from another company could get you for the same costs. If you don't want to play hardball like that, get your agent to play hardball. The agent wants you to close on the real estate deal because if you don't close, they don't get paid. Ask for help if you need it.
What you don't want to do when you make an offer in any kind of market is ask for a "carpet allowance." Most lenders won't allow carpet allowances because it is just cash in your pocket and there is no guarantee the money will actually be spent on a new carpet. If the carpet really needs to be replaced, just ask the seller to replace the carpet before you close. That's allowable and it still saves you money replacing it yourself after you move in.
Also, don't load up your offer with a lot of contingencies, especially when you are pursing incentives. An example of a contingency would be, having to sell your home to buy this one and making your offer contingent on that sale going through. Loading up your offer with contingencies makes it less certain you will actually close, so that makes it less likely the seller will offer you lots of financial incentives. The one contingency you always want to include, especially in this market, is that your offer is contingent upon the property appraising at the purchase price by the lender's appraiser.