The Ultimate Guide to Buying a Home

So, you’ve decided to make the leap from renting to buying the place you call home. Congratulations! Beyond the pride of ownership and the chance to say “goodbye” to your landlord, buying a home comes with several advantages:

• Your mortgage interest is tax-deductible.*
• You can build equity in your home.
• Homes can appreciate in value over time.
• You can avoid increases in your monthly payment.

*USA Mortgage is not licensed to provide tax advice.

But before you start picking out window treatments and shopping for patio furniture, you’ll need to collect your thoughts, as well as a number of key documents. Buying a home at a price you can afford is key to successful and long-term homeownership.

So, how much house can you afford? Start by taking a good look at your credit. Ideally, your credit score will be 720 or higher. If it’s not, don’t panic! It doesn’t mean you can’t qualify for a loan, but it may mean you’ll have to pay a higher interest rate. In addition to your credit score, lenders look at a variety of factors when determining whether you qualify for a loan, including the Four Cs of Credit:

Character represents your credit history or financial integrity. Lenders will evaluate your credit score, how much credit you’ve used in the past, and whether you make your payments on time.

Capacity represents your ability to repay a loan. Your lender will weigh your income and assets against your monthly debts to make sure you can afford a loan.

Collateral is the asset securing the loan—in your case, the value of the home you’re looking to buy. If you were to default on payments, the lender can repossess the property.

Capital is the amount of money you are able to invest in the property up front, represented by your down payment. The capital you contribute demonstrates your level of commitment to home ownership and reduces the lender’s risk.

Steps to develop a budget you can live with.

A budget is a plan precisely laying out your income and expenses. Budgets and spending plans are critical to using credit wisely and meeting your financial goals of saving for a down payment and making monthly mortgage payments. Rather than being an exercise in belt-tightening, creating a budget can actually help you uncover your spending patterns and discover areas where you can save for a house. It can be a powerful tool for improving your standard of living.

Start by making a detailed record of all of your household income and expenses down to the change you put into vending machines and parking meters. Look for places you can cut your spending. No expense is too small to consider when saving for the house of your dreams. Simple, logical changes in your spending habits can really add up, and you’ll be building that down payment in no time.

Of course, you’ll want to keep a detailed budget after you purchase your home, as well. In addition to planning for your monthly mortgage payment, you’ll also need to set aside money for day-to-day maintenance, any improvements you plan to make, and build savings to cover any emergency repairs that come up. Keep in mind that your monthly housing expenses should not exceed 28% of your gross monthly income.

Check in with yourself. Are you ready for the home buying process?

If you’re a first-time home buyer, there are a lot of factors to consider. Are you prepared mentally and emotionally for the responsibilities of home ownership? Buying a home can be a long-term commitment. Many mortgages have a 30-year term. While you may not intend to live there for that long, owning a home limits your freedom to move whenever you want. Take stock of your family commitments, career plans, your children’s needs, and your hopes for retirement. You may want to talk it over with a financial planner to make sure you’re truly ready and the time is right to take the leap into home ownership. It’s always better to be prepared when you first buy a home than just jumping into the whole process.

It takes a talented team of players to get you into the home of your dreams. Let’s get to know the people who will be making it all possible.

Your Lending Crew

Mortgage Loan Originator—Your guide from start to finish. Helps determine what you can afford, choose the right loan program, and keeps you informed throughout all the steps of the loan process.

Processor—Reviews your loan application to make sure it is complete and accurate before it goes to the underwriter.

Underwriter—Makes the final decision to approve or deny your mortgage loan based on your financial situation.

Real Estate Agents

Buyer’s Agent—Helps you find the right home and negotiates the offer of the house on your behalf.

List Agent—Represents the seller and helps them negotiate the selling price and terms of the sale.

Other Key Players in the Buying Process

Home Inspector—Inspects the home to assess its condition and identify any needed repairs before you buy.

Appraiser—Determines the market value of the home you’re buying, which helps the lender know how much money to loan you.

Title Company—Ensures the property title is clear of any liens or claims and prepares a title insurance policy for the property.

Closing Officer—Ensures that all necessary documents are signed and verified and the money from the sale is properly distributed to the various people involved.

Choosing the right mortgage lender.

Today’s home buyer has a dizzying number of options for where to find financing for the purchase of a home. Conventional banks and credit unions offer their own loan products, and they may offer special rates for customers. Mortgage brokers and mortgage marketplaces will search a number of lenders and present you with their best option. Nonbank mortgage lenders focus exclusively on loans and issue more mortgages than any other type of lender. Some are strictly online. Others, like USA Mortgage, offer the best of both worlds—online speed and convenience with dedicated, in-office personal service.

It’s plenty easy to shop interest rates online. But ultimately, choosing the right mortgage lender is about more than the rate. It’s about reputation and reliability, too. Buying a house is a complex, confusing process. You’ll want to work with a lender who listens and who you can trust. So, ask friends and real estate professionals for recommendations. Read online reviews. Talk to a few lenders and ask questions: How long will it take to close my loan? Who will I be working with? Ask them to outline the rates and fees that will be included in your loan.

Finding the right real estate agent.

Your Mortgage Loan Originator will be a valuable partner throughout the home buying process. Your real estate agent should be, too. Typically, real estate agents specialize in particular areas, so you may want to seek out someone with experience in the type of neighborhood and home you’re looking to buy. The agent will consult the multiple listing directory to identify properties that meet your specifications and budget. You can review the listings online, then ask the agent to show you the homes you’re most interested in.

You’ll be spending a fair amount of time with your real estate agent. So, it’s important to find someone you respect and trust. Ask for recommendations from your Mortgage Loan Originator, family, friends, and colleagues. Meet agents by attending open houses. Contact the real estate firms that are listing properties that catch your eye. Do an internet search to look for agents serving the part of town you’re hoping to move to. Your agent should have information about school systems, tax rates, water and sewer fees, public transportation, and other topics that are important in your selection of a home. Once you’ve narrowed down your list, be sure to do a quick internet search to verify that the agents’ licensing is in good standing with no disciplinary action taken against them. They should be experienced and not afraid to negotiate to get you the best price and terms. They should have a reputation for integrity and great customer service. A quick search of online reviews should help you make your selection.

Get prequalified. Find your home. Make an offer.

Before you begin your search for the perfect home, contact your Mortgage Loan Originator to get prequalified. This will give you an idea of how much you can afford to spend and how big of a down payment you’ll need. Prequalifying can give you an estimate of the purchase price and monthly mortgage payment you can afford and qualify for. It can indicate the amount of money you will need for a down payment and help you set budgeting and savings goals.

Your lender will consider your income, debts, savings, and assets, as well as your Loan-to-Value and your Debt-to-Income ratios.

Finding the right house for you.

Now that you have an idea for how much you can afford, think about what you’re looking for in your new home:

• Selling price
• Neighborhood
• Distance to work
• Schools
• Shopping
• Cell phone coverage
• Local home values
• Additional expenses like homeowner’s association fees

You’ll also want to consider specific features of the home itself. How many bedrooms and bathrooms do you need? Do you want a big yard or would you rather eliminate yard work altogether? Do you require a garage? If so, how big? Are the electrical systems, plumbing, and ventilation up to code?

Based on your budget and housing requirements, your real estate agent will suggest a number of homes that meet your needs. Be sure to visit a range of homes before you decide to buy. Don’t fall for the very first one you see. It’s natural to be excited and impatient to get settled in a new home. After all, you’ve been preparing and dreaming about it for months if not years. If you’ve found a few neighborhoods that appeal to you, look at enough homes there to get a feel for real estate values.

Once you’ve narrowed your choices, do your homework. How much are annual taxes? What about utility costs? Are the schools suitable for your children? Are community services like fire, police, or snow removal adequate to your needs?

Making an offer.

Once you’ve found a home you love, it’s time to make an offer. Your real estate agent will have your state’s standard Offer to Purchase form. They will work with you to fill it out completely and accurately. You may choose to write the offer yourself, but that is not recommended as any omissions or mistakes could put you at a disadvantage or trap you into a less-than-desirable loan agreement. Have your agent or an attorney thoroughly explain every item on the form so you understand precisely what you are committing to before submitting the offer.

This offer, or purchase agreement, is a legal document outlining the terms and conditions of the sale, which may include but is not limited to:

• Address and legal property description
• Purchase price
• Down payment amount
• Earnest money to be paid
• Offer expiration date
• Seller’s commitment to provide a clear title to the property
• Target closing date
• Target move-in date
• Any contingencies the agreement is subject to

Earnest money is a deposit you include with your offer as a sign of good faith that you are serious about buying the property. The amount can vary, but is typically 1–3% of the purchase price. The money is held in an escrow account until the purchase is finalized at which time it will be applied to your down payment. An escrow account is a third-party account used to hold money for two parties during a transaction.

Contingencies are conditions that must be met or you will not be bound to go through with the purchase after your offer is accepted. Most buyers make an Offer to Purchase contingent on their ability to obtain financing. Otherwise, you risk losing your earnest money if you can’t get a loan. Other common contingencies include getting a satisfactory home inspection and/or appraisal or getting a satisfactory attorney review of your Offer to Purchase if it was not prepared by an attorney.

The seller will accept your offer or present you with a counter offer. This is not unusual and gives you and the seller another opportunity to work out the price and terms that are right for both of you.

The home inspection: an important part of home buying.

You made an offer they couldn’t refuse. Kudos to you and your dream home dream team! But don’t break out the champagne quite yet. You still have several steps to complete before you move in. First of which is obtaining a home inspection. Although it’s not required, it is strongly recommended and may be a contingency on your purchase agreement.

Typically, it is the buyer’s responsibility to pay for an independent home inspection. Your mortgage lender or real estate agent may be able to recommend a qualified professional. Or you can search your area for members of the American Society of Home Inspectors (ASHI).

Your inspector will examine the property to determine the condition of the home’s structural and mechanical systems, including heating and air conditioning; interior electrical and plumbing; interior walls, ceilings, floors, and stairs; insulation; ventilation; foundation, basement, attic, and roof; exterior wall coverings, trim, gutters, and downspouts; windows and doors; surface grading and drainage.

Insist that each item is covered in a detailed, written report, and that you are given a copy when the inspection is complete. If possible, join the inspector on the property. It usually takes a few hours to complete the inspection, and it will give you the opportunity to ask questions about the home’s condition and estimated costs for any needed repairs.

On average, home inspections cost between $300 and $500 depending on the property’s location, age, and size. Although it’s an extra expense up front, it will give you confidence in the home you’re buying. And you may be able to negotiate with the seller to pay for repairs.

Choosing the right loan for your new home.

When it comes to home financing, every buyer and every situation is unique. Fortunately, there are a variety of loan programs available to meet a range of specific needs. So, which loan is right for you? Your lender can help you figure it out.

Fixed Rate: These loans provide the same interest rate throughout the life of the loan, making it a good choice if you want stable payments and plan to live in your home long-term.

Adjustable Rate Mortgage (ARM): With ARMs, the interest rate will fluctuate over time. It can go up or down, which will affect your monthly payment. An ARM can be a good option if you only plan to stay in your home for a few years.

Conventional vs Government-Sponsored Loans: which is right for you?

With a conventional loan, the lender assumes the risk for loaning you money. Conventional loans have more stringent credit requirements and higher down payments. Conforming loans adhere to loan limits set by the Federal Housing Finance Agency. Jumbo loans exceed the limits on conforming loans. Interest rates are usually higher and may have more strict credit standards and underwriting requirements.

With government-sponsored loans, the government backs the loan and assumes the risk. They typically have lower credit and down payment requirements, making it easier for many buyers to obtain a mortgage.

FHA: Federal Housing Administration (FHA) loans enable you to purchase a home with as little at 3.5% down. Buyers are required to pay a mortgage insurance premium (MIP) in addition to their monthly loan payment.

VA: Backed by the U.S. Department of Veterans Affairs, VA loans require no down payment and no mortgage insurance. They are available to eligible veterans, active duty military, reservists, National Guard members, and surviving spouses. Learn more about VA Loans and how they work.

USDA: Backed by the U.S. Department of Agriculture, these loans are available for homes in eligible rural areas. USDA loans do not require a down payment, but they do require mortgage insurance.

The guide to applying for a mortgage.

Although the Offer to Purchase document was meticulously prepared by you, your real estate agent or attorney, it does not guarantee you a loan. Once your offer is accepted, you’ll need to officially apply for a mortgage. Your lender will need several documents in processing your application. Be sure to have your paperwork on hand when you fill it out:

• Tax returns
• W2s and/or 1099s
• Recent bank statements
• Recent paystubs
• Residence history
• List of debts, such as car loans, credit cards, or student loans
• List of your assets, including investment and retirement accounts

Within three days of submitting your application, your lender must provide you with a Loan Estimate (LE), a form outlining the details of the loan you’ve applied for. It provides your lender’s best estimate of closing costs, mortgage and title insurance, and recording fees. An important part of home buying is ensuring that you are ready for all the fees and such that come with your purchase. If you decide to proceed with the loan, your application will go into processing. The processor will work with your Mortgage Loan Originator to collect all the documentation needed for the loan. An appraisal will be ordered to ensure that the home is worth the amount of the loan for which you have applied. The appraiser is a licensed, third-party professional trained to evaluate the market value of homes. They will consider the home’s condition, age, size, and other home sales in the neighborhood.

The next step is underwriting. The completed application is turned over to an underwriter who will review your employment and credit history, the property appraisal, and ensure your mortgage meets current loan product guidelines. Don’t be alarmed if the underwriter asks for more documentation from you. They need it to make an informed and intelligent decision on whether or not you qualify for the loan.

If the underwriter approves your application, you will receive a loan commitment letter confirming your approval. This document outlines the loan details, including amount being borrowed, the interest rate, and the term or repayment period.

Here’s what not to do during the buying process.

Once your loan is cleared to close, it can be tempting to start shopping for new items for your new home. But be patient. Any extra spending or financial changes now could jeopardize your loan. So, until you’ve officially closed on your home, avoid the following:

• Do not apply for a credit card, car loan, or financing for furniture or appliances
• Do not make major purchases
• Do not liquidate assets
• Do not make large deposits
• Do not change jobs

Closing is the final part of the homebuying process where you commit to your mortgage and become the legal owner of your new home. It is a complex process involving a number of people: the buyer (that would be you), the mortgage lender, the seller, the seller’s agent, the title company, attorneys if required in your state, and the closing agent.

Three days before your scheduled closing, you will receive the Closing Disclosure providing the final loan terms and closing cost details. Review it carefully. If something looks different than you expected, contact your Mortgage Loan Originator right away. If there are changes, your lender must issue another Closing Disclosure, delaying your closing for another three days.

You’ll want to carefully review all of your closing documents before the closing date, including the Mortgage which pledges your home as security for the loan. In some states, the buyer signs a Deed of Trust instead of a mortgage. The Mortgage Note is your promise to repay your loan. It indicates the terms and conditions of your loan and how it will be repaid.

Other important items for your pre-closing to-do list include:

• Get a home inspection.
• Get a homeowner’s insurance policy.
• Get copies of your other closing documents from your lender, including the promissory note and mortgage (also known as the security instrument or deed of trust.)
• Get a total for all closing costs and details on how you will transfer payment (cashier’s check or wire transfer).
• Do a final walk-through of the home 24 hours before closing to ensure that all repairs have been made.

On closing day.

Typically, the closing officer will begin by reviewing the mortgage note and the mortgage document and asking you to sign them. Then, they will move on to the Closing Disclosure (CD). On the back, you’ll find an itemized list of each cost being paid by the seller or the buyer, including all closing costs, the net amount due from the buyer and the net amount to be paid to the seller, commissions for the buyer’s and the seller’s real estate agents, charges for the title search, and the amount deposited in escrow to cover insurance and property taxes.

The closing officer will go over the entire document with you, at which time they will ask for a check to cover the down payment and closing costs. Then, they will review the documents with the seller, making sure that both the buyer’s and the seller’s documents match exactly.

The Deed is the document that transfers ownership of the property from seller to buyer. Any errors in the deed must be identified and corrected before you close on your purchase. After closing, the closing officer will have the deed recorded with the Registrar of Deeds in the county in which the property is located.

When buying a home, in most cases you will be required to obtain title insurance to protect your legal ownership of the property you buy. The title company will do a thorough search of public records to determine any exceptions to coverage, such as liens or other restrictions affecting ownership of the property. The insurance provider will inform you of any outstanding liens, so you can require the seller to satisfy them before you close.

The final step at closing is to distribute the fees, closing costs, and commissions. The closing agent will present checks to the seller, the seller’s lender if there is an existing mortgage on the property, the real estate agents, and any others indicated on the Closing Disclosure.

On closing day, be sure to bring your photo ID, a cashier’s check or proof of wire transfer to cover the down payment and closing costs, your checkbook, and proof of homeowner’s insurance, your purchase agreement, and a copy of the home inspection. Be prepared for a lot of paperwork—you’ll likely have to sign two or three copies of each document. Don’t rush—be sure to ask a lot of questions. If something isn’t clear, ask. Even if your state does not require an attorney to be present, you may want to have one to ensure you understand what you’re signing.

The papers are signed. The money has been distributed. And you now own a new-to-you home!

Your possession date is the day you can officially move into your hew place. It is listed in your purchase agreement and may or may not be the same as your closing date. Before or immediately after you move in, you’ll need to take care of the following items:

• File your closing packet in a safe place where you can easily find it.
• Change your address with the US Postal Service, your bank and credit card companies, the Department of Motor Vehicles, your insurance providers, internet service, and phone company.
• Switch your utilities to your new address—water, electric, gas, trash.

Reach out for help if you’re ready to buy.

As a home lender, USA Mortgage is here for the long-term. Our commitment doesn’t end when you get the keys to your new house. We’ll reach out periodically to let you know of any changes in the market and alert you to opportunities to save money. And if you ever have questions about your mortgage, please reach out. We’re here to help.

DAS Acquisition Company, LLC is not affiliated with or endorsed by any government entity or agency, including USDA, HUD or VA. Interest rates and products are subject to change without notice and may or may not be available at the time of commitment or lock-in.