Home Buyer’s Basics

Weigh the Costs & Benefits

Home ownership brings a lot of added responsibilities. But it also has its advantages.

Before You Buy

Before you purchase your first home, there are important things to do and know.

Know How Much You Can Afford

Depending on the amount you have saved for a down payment, your mortgage payment should typically be no more than 28% of your monthly income, and your total debt should be no more than 36%, although debt ratios have some flexibility, depending on mortgage type you choose. 

Maximize Your Credit Score

Generally, a better credit score will help you get a better interest rate on your mortgage. And even a small improvement in your score can have an impact on your monthly payment and save you thousands of dollars over the course of your loan.

Learn more about how to improve your credit score.

Save For Extra Costs

Lastly, you’ll need to have some money tucked away for extra costs beyond your monthly mortgage payment. These costs include your down payment and closing costs.

• A down payment of 20% or more helps you avoid PMI (Private Mortgage Insurance) and lowers your monthly payment.
• Closing costs are typically 3% - 5% of the total home cost.

Getting Pre-Approved

Being pre-approved^[1] indicates that you are a serious buyer and may even put you ahead of other applicants once you make an offer.

In fact, being pre-approved indicates that you are a serious buyer and may even put you ahead of other applicants once you make an offer!

Pre-approval also has additional perks worth noting. For instance, it helps you determine how much house you can afford and how much money you can borrow. That way your time won’t be wasted looking at out-of-reach properties.

Filling Out a Loan Application

To establish your employment history and financial capabilities, you must provide the lender with the following income documentation:

• Pay stubs for 1 month
• W-2 forms for the past 2 years
• Most recent 3 months’ bank statements
• All credit account and debt information

After the mortgage loan officer receives these documents, he or she will then pull your credit report, assess your financial capabilities, and inform you of how much money you can borrow towards your home.

For more information, check out the article Preparing Your Finances & Getting Pre-Approved.

Finding the Right Home

Once you’re pre-approved, you can start looking at houses!

Now’s the time to contact a reputable real estate agent who can show you homes you can afford.

Use our House Hunters Checklist to help with your home search.

Found a Home You Like?

Get a home appraisal & title search. Once the seller accepts your offer, you may strongly consider hiring a certified home inspector who can verify there are no structural problems, code violations or other undisclosed concerns.   When your contract is final, your lender will have the property appraised by an independent, third-party appraiser who will confirm the fair market value of the home.

Closing the Sale

At last – you’re ready to finalize the sale!

During the closing, you’ll meet with all parties involved in the sale to make it official by signing documents, receiving the deed and paying your closing costs, which may include:

• Attorney, broker, credit report and/or lender fees
• Title search and insurance
• Appraisal and inspection fees
• Points – a predetermined fee similar to prepaid interest
  • Paid to the lender to receive a particular interest rate
  • 1 point equals 1% of the loan amount
• Other costs depending on your particular loan

Property insurance: Also called homeowner's insurance, property insurance protects the homeowner from losses to the property, as well as potential liability from events that occur on the property and elsewhere. Lenders require homeowner's insurance coverage to protect the collateral that secures their loan. Some homeowner's insurance policies do not cover catastrophic events such as tornadoes, hurricanes or floods. These kinds of events generally require a separate insurance policy. Sometimes additional insurance may be required for your loan.

Property Taxes and Homeowner's Insurance: A typical monthly mortgage payment consists of amounts for loan principal, interest, taxes and homeowner's insurance. Taxes and insurance are usually paid from an escrow, or impound, account.

To learn more about the process of actually submitting your application, closing costs, and insurance requirements, please see our article What to Expect: From Application Through Closing.