November 30, 2023
How To Buy a House (Real Estate & Mortgage Guide)
People interested in buying a home are often overwhelmed with all the information they need to know about the process. To save time and money, you need a basic overview of home finance options and everything involved with the process.
Not all properties and locations are equal, and in many cases, the local market and location that offer premiums to lenders might determine your options.
Here’s a crash course on everything you need to know about buying a home.
The Down Payment
If you are borrowing money from a bank or other lender to purchase a home, you’ll need the initial money or down payment.
With most lenders, a buyer must deposit at least 20 percent of the borrowed amount, with the lender loaning you the remaining 80 percent. This means, if you’ve set your sights on a home at around $600,000, you should’ve saved at least $120,000 before you can borrow the rest.
For first-time buyers, governments often can help, with home finance programs that lower your deposit requirements to 10 percent or, in some cases, even less than that.
Home Finance Options
Conventional loans are typically fixed-rate mortgages that are neither insured nor guaranteed by the federal government.
While their stricter approval conditions usually require a larger down payment, better credit score, lower income-to-debt ratios, and sometimes even private mortgage insurance, at the end of the day, conventional mortgages typically cost less than guaranteed loans.
There are two types of conventional loans: conforming and non-conforming. Conforming loans follow standard home finance guidelines like loan limits established by government-sponsored bodies. This is because lenders often buy these mortgages and sell them as security packages in the secondary market. For instance, in 2019, the loan limit for conventional mortgages was $484,350. Anything above that was called a jumbo loan, and included a steeper interest rate.
A jumbo loan is a non-conforming loan, and its terms and conditions vary from lender to lender. As for those steeper interest rates? They’re necessary because lenders take on a much higher risk.
Another thing a buyer needs to consider is whether to apply for a fixed-rate or floating (variable) rate mortgage. With fixed-rate mortgages, the rate stays the same for the entire period of the loan.
The major benefit here is that you can easily calculate your monthly costs for the entire loan period, and if you managed to obtain a low-interest rate, you have it locked down until the loan is paid off.
A floating-rate mortgage, on the other hand, is tailored to assist first-time homebuyers, as well as people who expect their incomes to rise noticeably over the loan period. These variable rates may start low, but they can rise and dip, based on market conditions. There’s greater risk involved with choosing a floating rate for home finance, but depending on the market, the overall interest paid could be lower than a fixed-rate mortgage. That’s the gamble the homebuyer takes.
In markets experiencing a housing boom, variable-rate home buying or new construction loans are often a popular option with first-time buyers.
As a subsidiary of the U.S. Department of Housing and Urban Development, or HUD, the Federal Housing Administration, or FHA, provides different home finance packages. When compared to conventional loans, an FHA loan comes with favorable down payment conditions and it’s easier to get approved.
These loans are popular among people who are buying for the first time because apart from lower upfront loan prices and more relaxed credit requirements, the minimal down payment can be 3.5 percent.
However, there’s a catch: Homebuyers borrowing from the FHA are required to pay a mortgage insurance premium along with their loan payments.
Homebuyers who qualify can also apply for loans guaranteed by the U.S. Department of Veterans Affairs.
While the VA itself doesn’t offer home finance programs, it stands behind mortgages offered by qualified lenders. Using these guarantees, military personnel and veterans can apply for home loans with more agreeable terms — typically with no down payment.
For most buyers who qualify, VA loans can be obtained more easily than conventional loans, as the maximum VA loan is usually limited to conventional mortgage limits.
When submitting an application, a buyer needs to request qualification from the VA. If approved, the VA issues an eligibility certificate that allows the buyer to proceed with the application.
The prices of home mortgage loans are determined by the lender, who investigates your FICO score with three main credit bureaus. Then, they calculate your loan-to-value ratio — this is the amount of the requested loan compared to the home’s appraised value.
Lenders also use this ratio to decide whether you need to pay for private mortgage insurance. PMI protects the lender by sharing a part of the risk with a mortgage insurer. If an LTV is higher than 80 percent, meaning that you own less than 20 percent equity in the home, most lenders will require a PMI for the loan.
For many people, a home loan is the biggest financial commitment they’ll ever make, so it’s important to learn and understand all the options before making decisions.
First-time buyers are at a slight advantage, as the federal government often offers incentives such as reduced deposit requirements.
Other Fees & Costs to Expect
Buying a home doesn't mean just financing, but also paying additional fees. Here are some guides we've put together to learn more:
- Average HOA Fees and How They Impact Homeowners
- Property Taxes by State
- Guide to Property Tax Increases
- Costs of Building a House by State
- Guide to Getting a Home Inspection
Process of Buying a Home
Once you've found financing for your home, and you're ready to purchase home, here's a breakdown of the rest of the process:
Making an Offer
Once you find your dream home, you should look at the home closely and check for any major issues, such as structural damage or anything that could seriously put the home and your family at risk.
If the home is in good shape, make an offer and wait for the seller’s response. Most purchase contracts have a deadline, such as 72 hours, for the seller to accept or reject the offer. If the seller makes a counteroffer, that extends the purchase’s timeline.
And, keep in mind, you may have to go through multiple counteroffers, not to mention competing offers!
That’s right — if it looks like your dream home, it probably looks like someone else’s dream home too. If a seller receives multiple offers, you’ll need to counteroffer with a better deal.
This could mean increasing the earnest money (which gives the seller peace of mind because it’s what you forfeit if the deal doesn’t go through), paying the difference between the property’s appraised value and your offer in cash, agreeing to do some of the repairs, and of course, offering the highest amount you can afford for the home.
Some buyers even write personal letters to appeal to the seller’s emotions! It’s not a surefire dealmaker, but in some cases, it couldn’t hurt!
Going Under Contract
Once the seller accepts your offer, you’re officially under contract. You can submit your loan application, order an inspection, and set up homeowner’s insurance.
You’ll also finish gathering your funds to close.
During this stage, some potential homebuyers look for down payment assistance. A standard down payment is 20% of the home’s price, although you can find help from the state, banks and private agencies if you don’t have that kind of money. And if you meet income requirements, a loan from the U.S. Federal Housing Administration requires just a 3.5% down payment.
You may also need the first installments for homeowners’ insurance, not to mention funds for moving expenses and home furnishings.
Preparing for Closing Day
It usually takes about 30 to 60 days to move from “under contract” to “homeowner” status. Most people make it to the closing table in 45 days or less, while others, especially those paying cash, may complete the transaction much sooner.
Work with your lender and real estate agent to avoid missing the closing deadline. Remember: there could be a monetary penalty if the deal doesn’t close by the agreed-upon date.
For instance, the buyer could be contractually obligated to pay a flat fee, or some of the seller’s mortgage payment, if the deal doesn’t close by deadline.
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