Having a home of your own is one of the most longed-for dreams for many people. In some cases, investing in a property is the biggest investment of their life, so everything related to this decision requires a lot of consideration and research. That’s where this guide comes in. Whether you’re buying your first home, or selling one in order to upgrade to a better one, you’ll find useful tips and strategies below.
What stage of homebuying are you in?
We want to provide you with the most relevant information related to where you are in your journey, as such we’ve outlined below where you should go based on your needs:
- Do you want to buy a home and need a mortgage loan? Go to the first section of this article.
- Do you want a home equity loan to solve a financial issue and don't know what option to choose? Go to the second section of this article.
- Do you want to sell your property to buy a new home and you need information on selling? Go to the third section of this article.
Before going into details, always remember that the most important thing is to do your research, compare options and spend time evaluating your options for buying, mortgaging or selling a house. Keep your financial situation in mind as you consider plans offered by financial savings institutions, credit unions, mortgage companies and government institutions.
Keep in mind: If you have no credit history, start building one as soon as possible, as it is an important requirement for applying for loans.
What you need to buy a house
The first step in buying a house is identifying how doing so could improve your life and figuring out the finances. This helps ensure that your decision to buy a home makes sense for you financially, and that once you’ve made the investment, it doesn’t turn into an unsustainable debt nightmare. Best way to avoid that is by arming yourself with the information you need.
1. Determine how much you can afford
First and foremost you’ll need to take an inventory of your finances. Any lender with whom you consult will look at your income, if you currently have other real estate, your debt payment history, your current employment situation, and a number of other factors. So prepare yourself for such an analysis. If there are any questionable areas in your financial history - have answers ready.
Next, you’ll need to evaluate your home buying budget as this will help you focus your search on the most viable options for buying a home. Oftentimes the financial institution lending to you can help you determine what type of loan and monthly payments you can afford.
In addition, the Consumer Financial Protection Bureau (CFPB) offers services to help guide you in this process in the form of housing counselors. They can offer one-on-one support to help you determine the best loan and mortgage options, the best time to buy a home, how to improve your credit score, and more! Click here to find a housing counselor near you or call (800) 569-4287.
Keep in mind: If this is your first time buying a home, ask if there are specific assistance programs for you when speaking with a housing counselor. You may qualify for programs that support first-time home buyers.
2. Find the loan you qualify for
In the United States there are two types of mortgage loans to buy a home: conventional mortgages and those backed by the government.
- Conventional mortgages: These are loans guaranteed by a private lender or by a banking institution.
- Government-backed mortgages: These are Federal Housing Administration (FHA) loans.
Generally speaking, FHA loans are more advisable because the qualification requirements are more flexible than conventional loans. This means more leniency around your credit score, down payments are lower, and they include a fixed interest rate of 3%.
On the other hand, conventional loans are those issued by private institutions such as banks, credit associations, private lenders or savings institutions and they typically have stricter requirements. First off, you’ll need a good credit history in order for them to trust you to pay off a decades-long loan. You’ll also most likely pay a higher down payment than government backed loans, and you’ll need to make a minimum monthly payment of 5% (variable). The interest rate varies depending on the economic circumstances and whether you pick a fixed or variable rate.
It is important to consider that if you do not make a minimum down payment of 20% when applying for any of these loans, you’ll need to also pay for mortgage insurance.
As you can see, there are a number of home loans to choose from,. We suggest that you shop around for the best option based on your financial situation.
3. Find the home of your dreams!
Once you've followed the first two steps, it's time to see which homes are for sale. There are free search engines where you can enter the zip code you’re interested in and they’ll display the available options. Two of the search engines for this purpose are Trulia and Zillow.
In addition to searching on your own, it’s a good idea to contact a real estate agent to help in your search. Real estate agents may have access to properties for sale that may not be available on free search engines, giving you more options to find something to your liking and within your means.
When you have found the home you want, it’s time to make your offer. We advise that you set a maximum amount beforehand so you don’t get tempted to go over. When the seller accepts your offer, that’s when you’ll proceed to formally apply for the mortgage.Keep in mind: Be wary if the person from whom you’d like to buy a home offers to finance the property through a contract in writing (Contracts for Deed or Land Contract). These methods of obtaining financing are more risky than a mortgage through a bank or lender since you do not have the protections that the latter provides.
Setting up a home equity loan
In the scenario that you already own a home and you have a need for additional capital, you can apply for a home equity loan. This type of loan depends on your credit history, income and the real value of your home. It’s typically estimated at up to 85% of the cost of your property.
This is a serious decision as the terms of the loan are monthly payments and if you do not repay the loan according to the agreement in your contract, the lender can foreclose on your home. People typically use this type of loan for larger investments such as higher education, a second house or investing in their business.
In this case as well, you’ll need to research, compare, then negotiate with multiple potential lenders so that you can get the best deal for your needs. You should feel safe to take your time, and even withdraw from the process if it doesn't suit you. Keep in mind that you can also cancel a contract within three days after signing it, without penalty.
Before closing a loan, familiarize yourself with the terms of the contract, and if you do not understand a clause, or what something means, don’t hesitate to bring it up and clarify it. Anything in the contract that you don't understand can cause unexpected challenges in the future so don't be caught off guard!
How to sell a house
You have two options when selling a home - go it alone or work with a real estate agent.
Not hiring an agent can save you a lot of money. An agent's commission is typically around 6% of the cost of the property. That means that if for instance your home is worth $300,000, the agent will take $18,000 of that total.
On the other hand, managing the selling process on your own means a lot of paperwork, having to advertise and showcase the home and manage offers as they come in. The biggest point of concern is that the legal and financial procedures may be totally new and unknown to you, presenting the risk of making errors and creating further complications.
However, if you feel confident that you can learn and handle it yourself, there are a lot of online resources available to help you. For instance, you can post a sale announcement with a detailed description of your property for an annual cost of only $100. One of the sites is For Sale By Owner, but there are many others online.
If you need a price quote for your home and you’d like to avoid hiring an appraiser (they charge about $400) you can research home prices similar to yours in your neighborhood on property finders like the ones listed above.
Lastly, we wanted to mention that understanding the terms of a mortgage loan contract and a home equity loan can be challenging as they may introduce a lot of new terminology and concepts. We highly recommend that you study up before diving into it. With that in mind we’ve put together a glossary of some of some of the most important concepts below.
Home Mortgage Consultant
Sometimes called a loan officer, account executive, or sales representative. He is the person who will help you during the financing process when buying a home.
A professional estimate of the market value of the property.
Credit Score (FICO Score)
A numerical rating that indicates the credit worthiness of the mortgage applicant based on various criteria. It is a part of the information that is used in the loan approval decision process.
Amount collected by the lender for setting up the loan. It is generally equivalent to a percentage (or a point) of the loan amount.
This is a written promise from the lender to the mortgage applicant, generally under certain stipulated conditions. It allows the applicant to prove that they can get the required loan when putting down an offer.
A meeting or agreement on the completion of the sale of a property where documents are signed and money is exchanged.
The conditions under which the lender agrees to make the loan. They include the interest rate, length of the loan agreement, and any requirements the borrower must meet prior to closing.
Expenses or settlement costs above the home sale price, incurred by both the buyer and the seller during the transfer of a property.
A holding account for the amount the mortgage borrower pays monthly that the lender uses to pay the borrower's taxes, other recurring property debts, homeowners insurance, and if applicable, mortgage insurance.
Good Faith Estimate
A detailed breakdown of the estimated closing or settlement costs.
A measure used by lenders to indicate any change in the interest rate charged to an adjustable rate mortgage (ARM). Your monthly interest rate payment will be adjusted in relation to this market indicator plus the margin as specified in your note.
A report issued by an independent agency that contains certain information regarding the mortgage applicant's credit history and current credit score.
The limit on how much the interest rate can change on an adjustable rate loan (ARM) at each adjustment and during the life of the loan.
Initial Payment (Down Payment)
The part of the purchase price of a home that the buyer pays in cash and that is not included in the mortgage
Annual Percentage Rate (APR)
The total annual cost of the mortgage is indicated as a percentage of the loan amount.
A mortgage that is not guaranteed or insured by a government agency.
Adjustable Rate Mortgage Loan (ARM)
A loan that allows the lender to periodically adjust the interest rate when the index changes according to market conditions on predetermined dates.
Agreement between the borrower and the lender to protect the quoted interest rate, points and terms of the loan while it is being processed.
The percentage between the mortgage applicant's total debt payments and their gross income.
A risk analysis done by a lender to decide whether or not to approve a home loan.
Insurance policy that protects the lender against loss if the borrower does not make the payments agreed in the note. Mortgage insurance may be required if the borrower makes less than a 20% down payment on a home loan.
An accident insurance policy that covers the real estate property. The conditions of the coverage depend on the insurance provider and what you select.
Policy that insures against any property loss resulting from defects in title or legal title to a particular property.
Private Mortgage Insurance
Mortgage insurance policy on a conventional home loan issued by a private insurance company.
Percentage of the mortgage amount that is paid to the lender for providing the loan, usually expressed as an annual percentage.
This term is used when the mortgage applicant decides not to lock in the rate, but instead allows the interest rate to fluctuate until the borrower decides to lock it in. This is generally done no later than five days prior to closing.
Legal document that establishes the current right to, or owner of, a property, as well as a history of its owners and transfers.
The execution of the application for a mortgage loan and supporting documents.
Added Value of Housing - Capital Gain (Equity)
The difference between the fair market value of a property and the amount still owed on your home loan. For example, if the property is worth $100,000 and the loan is for $75,000, then you have $ 25,000 or 25% of your home's added value (equity).