Buying a Home
Part of living the "American Dream" is the ability to own your own home. This section explains what you need to know to buy a home in the United States.
Starting Out
Steps to purchase a home
Most people start the home buying process in one of two ways: 1) they saw a home they were interested in buying or 2) they consulted a lender to figure out how much money you could borrow before you found a home (sometimes called pre-qualifying).
The next step is to sign an agreement of sale with the seller, and apply for a loan to purchase your new home.
The final step is called “settling” or “closing.” This is where the legal title to the property is transferred to you.
At each step you may have the opportunity to negotiate terms, conditions and costs to your advantage. You will also need to shop carefully to get the best value for your money. There is no standard home buying process used in all localities.
Hire a licensed real estate agent
The first person you consult about buying a home is a real estate agent (realtor) or broker.
Although real estate brokers provide helpful advice on many aspects of home buying, they may sometimes serve the interests of the seller, and not your interest as the buyer. The most common practice is for the seller to hire a broker to find someone who will be willing to buy the home on terms and conditions that are acceptable to the seller. Therefore, the real estate broker you are dealing with may also represent the seller.
However, you can hire your own real estate broker, known as a buyer’s broker, to represent your interests. Also, in some states, agents and brokers are allowed to represent both buyer and seller. Even if the real estate broker represents the seller, state real estate licensing laws usually require that the broker treat you fairly. If you have any questions concerning the behavior of an agent or broker, you should contact your State’s Real Estate Commission or licensing department. Sometimes, the real estate broker will offer to help you obtain a mortgage loan. He or she may also recommend that you deal with a particular lender, title company, attorney or settlement/closing agent. You are not required to follow the real estate broker’s recommendation. You should compare the costs and services offered by other providers with those recommended by the real estate broker.
How Do I Get a Loan?
Just as there is more than one kind of home, there is more than one way to finance it. Your choice of lender and type of loan will influence not only your settlement costs, but also the monthly cost of your mortgage loan. There are many types of lenders and types of loans you can choose. You may be familiar with banks, savings associations, mortgage companies and credit unions, many of which provide home mortgage loans. You may find a listing of some mortgage lenders in the yellow pages or a listing of rates in your local newspaper.
How much can I afford?
Before you start shopping for a home, you need to know what kind of home to shop for. To determine that, of course, you’ve got to figure out how much you can afford to pay each month. Fortunately, there’s a pretty simple formula for coming up with this number. It’s the Federal Housing Administration’s formula that many mortgage lenders use. The FHA has found that most people can afford to budget 29 percent of their gross monthly income to housing expenses, depending on total debt. Buyers with no debt can budget as much as 41 percent of monthly income to housing.
Mortgage brokers
Some companies, known as “mortgage brokers”offer to find you a mortgage lender willing to make you a loan. A mortgage broker may operate as an independent business and may not be operating as your “agent” or representative. Your mortgage broker may be paid by the lender, you as the borrower, or both. You may wish to ask about the fees that the mortgage broker will receive for its services.
Government programs
You may be eligible for a loan insured through the Federal Housing
Administration (“FHA”) or guaranteed by the Department of Veterans Affairs or similar programs operated by cities or states. These programs usually require a smaller down payment. Ask lenders about these programs. You can get more information about these programs from the agencies that run them.
Computer loan origination systems
Computer loan origination systems, or CLOs, are computer terminals sometimes available in real estate offices or other locations to help you sort through the various types of loans offered by different lenders. The CLO operator may charge a fee for the services the CLO offers. This fee may be paid by you or by the lender that you select.
Types of Mortgages
Fixed-rate mortgage
With a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage,
which is usually 30 years. Your principal and interest payment remains stable, making it easier to plan a monthly budget. However, initial interest rates tend to be higher than with other types of loans.
Adjustable-rate mortgage
With an ARM, your interest rate and monthly payments start out lower than with a fixed-rate, but your rate and payments can change either up or down, depending on where interest rates in general are going. (If they’re going up, your monthly payments will probably go up as well, sometimes significantly.)
FHA-insured mortgage
In this type of loan, the Federal Government insures the lender against loss in case the home buyer defaults on the loan. This program was set up so that Americans who can’t afford the 10 percent to 20 percent down payment required by most lenders can still buy a home.
VA loans
Under this program, if you are a U.S. veteran, the U.S. Department of Veterans Affairs guarantees the lender against loss.
Assumable or non-assumable
You may find a home with a mortgage loan you can “assume” from the previous owner. This means that the lender is willing to transfer the old loan on the home to you. These loans can be wonderful bargains, and the paperwork is usually not very complicated. Before you decide which loan is right for you, talk to your loan officer. You’ll get information that will help you figure out which option best suits your needs.
Finding a Real Estate Attorney
Before you sign an agreement of sale, you might consider asking an attorney to look it over and tell you if it protects your interests. If you have already signed your agreement of sale, you might still consider having an attorney review it. An attorney can also help you prepare for the settlement. In some areas attorneys act as settlement/closing agents or as escrow agents to handle the settlement. An attorney who does this will not solely represent your interests, since, as settlement/closing agent, he or she may also be representing the seller, the lender and others as well. Please note, in many areas of the country attorneys are not normally involved in the home sale. For example, escrow agents or escrow companies in western states handle the paperwork to transfer title without any attorney involvement.
If choosing an attorney, you should shop around and ask what services will be performed for what fee. Find out whether the attorney is experienced in representing home buyers. You may wish to ask the attorney questions such as:
- What is the charge for negotiating the agreement of sale, reviewing documents and giving advice concerning those documents, for being present at the settlement, or for reviewing instructions to the escrow agent or company?
- Will the attorney represent anyone other than you in the transaction?
- Will the attorney be paid by anyone other than you in the transaction?
“Closing” Your Deal
The day you finally close on your new home will probably be one of the most exciting in your life. Finally, the long, tedious process of finding a home and getting a loan is over, and by the time the day is done, you’ll be the proud and happy owner of your new home. Before that day ends, you will be asked to sign a seemingly endless number of forms, but the closing agent will go over each one with you. It’s all necessary, but you can make it a little easier by asking the real estate agent about it before the big day comes. Also, when you apply for your loan, your lender is required to give you a booklet explaining closing costs, an estimate of how much cash you’ll have to supply at the closing, and a list of all the documents you’ll need.
Homebuyer’s Terms
Adjustable Rate Mortgage (ARM) - A type of mortgage rate loan whose interest rate changes periodically up or down, usually once or twice a year.
Annual Percentage Rate (APR) - Everything financed in your mortgage loan package (interest, loan fees, points or other charges) expressed as a percentage of the loan amount (usually slightly above the actual interest rate alone).
Assumable Loan - A loan in which the lender is willing to “transfer” from the previous owner of the home to the new owner, sometimes at the same interest rate, sometimes at a new rate. An assumable loan can make your home more attractive to buyers when you want to sell.
Closing Costs - Costs the buyer must pay at the time of closing in addition to the down payment: including points, mortgage insurance premium, homeowners insurance, prepayments for property taxes, etc. Closing costs average 3 percent to 4 percent of the loan amount.
Conventional Mortgage - A type of mortgage not insured by either the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), and thus usually requiring a 10 percent to 20 percent down payment.
Earnest Money - Funds submitted with an offer to show “good faith” to follow through with the purchase. Earnest money is placed by the broker in an escrow/trust account until closing, when it becomes part of the down payment or closing costs.
FHA Financing - Financing for a loan which will be insured against loss by the Federal Housing Administration. Such financing allows for a lower down payment than required by most lenders.
Homeowners Insurance - Insurance that protects the homeowner from “casualty” (losses or damage to the home or personal property) and from “liability” (damages to other people or property). Required by the lender and usually included in the monthly mortgage payment.
Loan Origination Fee - A fee charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan.
Mortgage Insurance Premium (MIP) - A charge paid by the borrower (usually as part of the closing costs) to obtain financing, especially when making a down payment of less than 20 percent of the purchase price, for example on an FHA-insured loan.
Pre-qualifying - Consulting a lender to determine how much money you can borrow before you found a home.
Point - An amount equal to one percent of the principal amount being borrowed. The lender may charge the borrower several “points” in order to provide the loan.
Property Taxes - Taxes (based on the assessed value of the home) paid by the homeowner for community services such as schools, public works, and other costs of local government. Paid as a part of the monthly mortgage payment.
Title Insurance - Protects lenders and homeowners against loss of their interest in property due to legal defects in the title.
VA Loan - A loan guaranteed by the Department of Veteran Affairs against loss to the lender, and made through a private lender.
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