Understanding the Steps
Thinking of buying a home? It’s the biggest purchase most will ever make. Before you start, make sure you understand the homebuying process.
How to Buy a Home
If you are a first-time buyer or haven’t bought a home in a while, understanding how to buy a house can be daunting. Although your experience may differ, the homebuying process generally follows these steps.
1. Gather the Information You Need to Qualify for a MortgageBefore buying a home, you will need to secure financing. When preparing to buy a home, be ready to provide a mortgage lender with the following information.
Income and employment
- What is your current income?
- Are you employed?
- Do you have a history of steady employment?
- How much do you have in savings?
Down payment
- Your lender will ask how much money you have available for a down payment for the house you would like to buy.
- A down payment of 20 percent or more of the home purchase price generally provides you with immediate equity in a new home.
2. Find a Lender to get Preapproved for a Mortgage LoanWhile preapproval is not a mortgage commitment or guarantee, it will provide guidance on what you can afford to spend on your home. Having a preapproval letter to show to a seller demonstrates that you are a serious buyer. When you are ready to buy, it will shorten the time it takes your lender to complete the mortgage application process.
Talk with several lenders and shop carefully for the best dealGetting the best deal on loan terms, interest rate, and fees is important. Remember that you are investing not just in a home but also in the mortgage loan that will finance your home. Talking with several lenders can help you get the best deal possible.
Make sure your lender explains the preapproval process clearlyDuring the preapproval process, the lender you choose will review your financial information, including salary and how much you owe on credit cards, car payments, student loans, and other debt. They’ll review your credit report, which shows how promptly you’ve paid your bills in the past, and they’ll review your ability to pay property taxes and other expenses of homeownership.
Make sure your lender explains all loan fees – the up-front costs of originating, processing, and closing the loan – as well as costs associated with escrows for taxes and insurance (see below) and other costs of owning a home, such as homeowner association dues. This will help educate you on some of the additional expenses related to buying a home.
3. Consider Setting up an Escrow Account Your lender may suggest that you set up an escrow account. In fact, most mortgage companies require an escrow account for mortgages with less than a 20 percent down payment or those with a lower loan-to-value ratio, unless the borrower is willing to pay a higher interest rate.
An escrow account helps you:
- Manage your budget with monthly tax and insurance payments instead of an annual lump sum payment
- Gain peace of mind knowing your payments will be made, on time, on your behalf
- Meet your lender’s requirements by ensuring that your home is protected with paid-up insurance coverage and taxes
What is an escrow account?An escrow account is defined as a trust account held in the borrower’s name to pay obligations such as property taxes and insurance premiums.
Your monthly mortgage payment includes an amount for property taxes and insurance in addition to the amount you owe for principal and interest. Your mortgage company will place the amount of your monthly mortgage payment that is for taxes and insurance into an escrow account. The funds can be used only to pay taxes and insurance on your behalf.
Your mortgage company pays the taxes and insurance bills for you when they are due. Your mortgage company examines any changes in your tax and insurance costs (for example, your local government may change the amount of your real estate taxes). Each year, your mortgage company sends you a statement showing the activity for the prior 12 months – amounts collected from you and placed in escrow as well as the payments made on your behalf – and showing any adjustments that may be needed based on changes in your tax and insurance costs.
A simplified example* of how escrow payments are calculated
- Annual real estate taxes: $1,800 ÷ 12 months = $150 per month
- Annual property insurance: $720 ÷ 12 months = $60 per month
- Total monthly taxes and insurance: $210
In this example, $210 would be added to your total monthly mortgage payment and applied to your escrow account. You might hear your total monthly mortgage payment referred to as your “PITI” – for principal, interest, taxes, and insurance.
*The amounts you owe for real estate taxes and insurance will vary – this is a simplified example, and your mortgage company will likely use a more detailed calculation method that considers various factors. Ask your lender for a full explanation and an estimate of the escrow payment on your mortgage.
How to tell if you have an escrow accountIf you have a mortgage but are not sure if you have an escrow account, check your monthly mortgage account statement or contact your mortgage company. Your account statement will typically indicate your “Escrow Balance” and the amount of your total monthly mortgage payment that is applied to escrow.
More information about escrow accountsFor more information, talk with your mortgage company to determine if you are setting aside adequate funds in your escrow account or if you should set up an escrow account. Also, the U.S. Department of Housing and Urban Development (HUD) offers Frequently Asked Questions about Escrow Accounts for Consumers.
4. Select Your HomeWith your mortgage preapproval in place, you are ready to begin your search. You can check online and your local newspaper for homes for sale in your area. A licensed real estate professional can help you find a home that meets your needs and your budget. In addition, a licensed agent has access to the Multiple Listings Service (MLS) that generally offers the most comprehensive list of homes for sale, making the house buying process easier.
Important Documents to Complete
Your Application
You will most likely need the following information to provide to your loan officer in order to
complete Sections IV–VI of the mortgage loan
application:
■ Paycheck stubs for the past 30 days.
■ W-2 forms for the past two years.
■ Information about long-term debts, like car
loans, student loans, etc.
■ Recent statements from all of your bank
accounts.
■ Tax returns for the past two years if you’re
self-employed.
■ Proof of any supplemental income.
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