Other than getting married, having children or possibly deciding which career path to choose, buying a house is one of the most important decisions a person or family will make. It’s not only a large personal decision, and arguably the American Dream, but it’s the largest investment you’ll make and with that comes a lot of responsibility.
Most online guides to buying a house are written by personal finance bloggers or marketing experts. Ours is different: this home-buyer guide was written with YOU in mind and crafted by our experienced and licensed loan officers.
Who better to guide you through buying a house than the people that help buyers with it every day?
Mortgage Program Overviews:
Other Helpful Resources:
To get approved to buy a house, lenders look at 4 components equally. You need to ultimately check off each section in order to get a loan approved.
Credit score and credit history – mortgage credit score requirements vary based on the loan program. FHA and VA have the most lenient requirements, with VA having no minimum FICO score requirement and FHA allowing down to 520. Conventional loans require a minimum score of 620 to qualify and most USDA loans require a 640 score.
Ideally, in order to have a likely chance of your loan getting approved it’s best to have a minimum credit score of 620, but there are a lot of cases where lower scores will work.
Having recent late payments doesn’t automatically disqualify you and the higher credit score the less they’re an issue. In a perfect scenario an underwriter will look for no late payments within the last 12 months but there are exceptions and depends on the overall scenario. If you’ve had a recent bankruptcy, foreclosure or short sale, that does play a factor and there are specific waiting periods each loan program has before you’re eligible to buy another home.
Employment and Income – mortgage lenders verify the last two years of employment along with documenting your current income. It’s a common misunderstanding, but you do not need two years on your current job; lenders simply need to document the companies you’ve worked for in the last two years (even if it’s 3-4 different ones).
If you’re a full-time W2 employee (hourly or salary) and don’t have any significant job gabs in the last 6 months, then your length of employment at your current company doesn’t come into play too much.
In cases where overtime, commission, bonus or part-time job income is needed, there are requirements that you have that income for 1-2 years before a lender can use it to qualify when buying a house. If you’re self-employed or receive 1099 income (other than retirement income – pension, social security), having a 2-year history filed on your tax returns is often required.
Debt-to-Income (DTI) Ratio – this is the primary calculation used to determine how much how you qualify for and ultimately the maximum mortgage payment you can have when buying a house.
A lender looks at your GROSS monthly income and then compares that to (1) your minimum debt payments listed on credit along with (2) the estimated new housing payment which includes the loan payment (principle & interest) and your monthly installment of property taxes, homeowner’s insurance, mortgage insurance and any HOA dues. Depending on the loan program, the total ratio can range anywhere from 41% to 57%.
Down Payment & Assets – nearly each loan program requires some sort of minimum investment (or down payment) and it’s determined as a percentage of the purchase price. The down payment and total amount due at closing must be verified by the lender around 7-10 days BEFORE closing, so all of those funds need to be in your checking or savings account by then.
FHA loans require 3.5%, Conventional mortgages ranges from 3-5%, whereas USDA and VA loans require no money down in most instances. There are county loan limits and other factors that may affect the down payment, so it’s best to consult a loan officer to get specific details. On top of the down payment, there are a myriad of costs that are also due at closing.
While it is ideal to save up for the down payment on your own, it is acceptable to get a gift (most often from a family member) or even take a loan from your 401(k). It is also very common for the buyer to negotiate for the seller to cover some, and in some instances all, of the closing costs which helps reduce the total out of pocket you must spend.
Determining if you’re ready to buy doesn’t have to be done on your own. Our team of loan advisors assists with this every day; if you’re unsure where your credit stands, want to find out what your debt-to-income ratio is or what estimated closing costs will look like, give our team a call or fill out one of our online forms.
We’ve also created a complete guide filled with information on the steps to buying a house if you want to learn more about the entire home buying process, from start to finish.
The most common disconnect when buying your first or second house is understanding what the monthly mortgage payment will be.
Often-times, the homes everybody wants to buy is significantly more expensive than you want to pay every month. So, before buying a house it’s important to know what goes into your monthly mortgage payment and run some calculations to know what price range you’re comfortable with.
A mortgage payment is comprised of four components:
Property tax, homeowner’s insurance, and mortgage insurance amounts are often determined by the value of the home or the loan amount. So, the more expensive the house you're buying, the higher each component will be and vice versa.
To get a solid understanding of what a payment will look like by using our step-by-step Mortgage Payment Calculator to run some initial estimates. If you’re buying a house in Florida, Texas, California or Maine, we have separate calculators with information tailored for your unique areas.
Before buying a house, you need to have a basic understanding of what mortgage programs are available and which might be most suitable. With the amount of federal regulation involved in the mortgage business, lenders across the country all have the same loan programs to offer home buyers.
For a more detailed look at home loan program, check out our helpful in-depth overview of home loan options.
For a brief summary, here's a look at financing options:
Conventional loans – these are secured by Fannie Mae or Freddie Mac and they’re also responsible for setting the program guidelines. This is one of the most common loan programs people choose when buying a house.
Conventional loans have a First Time Home Buyer option that allows for as little as 3% down. The typical down payment for a Conventional loan is 3-5% and with a 20% down payment can avoid PMI (Private Mortgage Insurance) completely.
Conventional loans require a 620 minimum FICO score and allow debt-to-income ratios as high as 50%. They can be more challenging to qualify for than some of the other programs and the interest rates are very credit sensitive, meaning that the lower the credit score the higher your rate will be. PMI is also credit score based, so the lower the scores the higher the mortgage insurance rates will be as well.
Ideally suited for: 2nd home or investment property purchase. 10% or more down, or somebody with excellent credit.
FHA loan – FHA mortgages are the second most common program when buying a house. This is a HUD/government-backed program and was originally created for people with fair to good credit or higher debt-to-income ratios. FHA loans allow down to a 520 credit score but you’ll often need a higher score to get a loan approved.
FHA loans require a minimum down payment of 3.5% and have competitive interest rates (often better than Conventional loans), regardless of credit score. FHA allows up to a 57% debt-to-income ratio, making it easier to qualify.
Typically, a borrower with 580-680 credit would be best suited to go with an FHA loan because the interest rate will often be lower and the MIP (Mortgage Insurance Premium) on an FHA loan is based on the loan amount and is not credit score driven.
Ideally suited for: less money down, under 690 credit and/or higher debt-to-income ratios.
VA Loan – the VA loan is strictly reserved for qualifying Veterans and qualifying widow(er)s. The VA loan is also a government-backed loan, so it has similar guidelines and interest rates as the FHA loan.
The primary benefit of a VA loan is that they do not require a down payment in most instances AND there is no monthly mortgage insurance. Instead, the VA loan has a fee called the VA Funding Fee that can be rolled into the loan at closing.
The interest rate on a VA loan is also not as dependent on credit scores and are often lower than Conventional loan rates.
VA technically has no minimum credit score requirement, but in order to get a loan approval, borrowers typically need to have a score in the high 500’s.
Ideally suited for: nearly all qualifying Veterans.
USDA Loans – Rural Housing are another government-backed program particularly for houses in more rural settings. This is the least common option when buying a home compared to the other 3 mortgage programs mentioned above. While it’s one of the most difficult programs to qualify for, it is highly advantageous due to no minimum down payment requirement and very affordable monthly mortgage insurance.
USDA generally requires a 640 credit score, but there are some exceptions made for lower scores. The property must be in an eligible area, there are income limits to qualify and the program does have the most restrictive debt-to-income ratio requirements at 43%.
Ideally suited for: low-to-moderate income, borrowers with good credit (640+), buying a home in an eligible location and have low debt-to-income ratios.
Jumbo Loans – depending on the property location, each of the above-mentioned loan programs have county loan limits. If a loan amount exceeds the county loan limit, then the only option would be a Jumbo loan. Jumbo loans typically are the most difficult to qualify for and require larger down payments than normal financing.
Ideally suited for: borrowers with 680+ credit, 15%+ down and buying a house and needing financing that exceeds Conventional county loan limits ($484,350 in most counties).
Every loan program has different nuances, pros and cons, and different guidelines. Ultimately this is where finding an experienced loan advisor comes in. Having an expert that knows how to compare and analyze options for you, knows the rules for each program, and can ensure you’re getting into the best home loan for your scenario is vitally important!
Getting pre-approved is one of the most important steps before buying a house. It comes BEFORE talking to a realtor or shopping for a home. It's the official start to your house-buying journey and ultimately determines if your'e eligible to start looking. Most realtors won’t even meet with you or show you a house until you’ve been pre-approved.
In order to get pre-approved to buy a house, you will have to complete an application. It’s called the Uniform Residential Loan Application, or the “1003” in reference to the Fannie Mae form number. Technically you don’t apply for a mortgage until you’re under contract for a home, but the information needed to pre-approve a borrower is the same.
The application can be filled out online, completed in person or over the phone. It takes 15-20 minutes to complete and you’ll be asked to supply things like your legal name, date of birth, social security number, residential and employment history for the last two years, along with income and asset verification.
Many lenders will ask you to verify your income with paystubs, W2’s and possibly tax returns.
In addition to the application, the loan officer will ask you about your budget (what you want your payment to be around), how much you plan to put down and roughly what your timeline will be. Once the lender has everything they need, they run all the factors - credit, employment, income, credit history, debt-to-income ratio, etc. - through a computer system called AUS (or an Automated Underwriting System). Literally, every lender in the country uses the same one. In most instances, we need an APPROVAL through this system to pre-approve you.
Your loan officer should be able to update you with a pre-approval letter and cost breakdown within 2-3 business hours.
Get a Written Estimate of Closing Costs and Estimated Payment
Borrowers have the tendency to think that interest rate is the most important component of their loan and because of that FACT, lenders feed off of and focus on that.
Reality is that interest rate is only 1/3 of the things you SHOULD be focused on. Before buying a house or even taking a step inside of one, you should have a written breakdown of estimated payments and costs for a few reasons:
Finding the "Right" Lender
Finding the right lender is the SECOND important part of buying a house. The mortgage industry is a multi-billion-dollar business and lenders are lending hundreds of thousands of dollars at a time. Because of that, lenders want your business and some are willing to do what it takes to get it. There is a reason a loan officer won’t mention their origination fee or the points they’re quoting you (unless you ask), and it’s why the ‘no PMI’ or ‘no closing cost’ gimmicks exist (and work).
If you don’t know what to ask or what to look for, you could think you’re getting a ‘good deal’ when in fact you’re spending thousands of extra dollars you shouldn’t be.
Note: A pre-approval is not a loan approval and is not a commitment to lend or a guarantee your loan will get approved. All items or assumptions used to pre-approved you must be vetted and verified by a real underwriter (a human) in order to obtain loan approval.
Behind selecting a lender, choosing a top real estate agent is certainly the third largest decision you'll make when buying a house.
As a buyer, you don’t have to pay the realtor, so you should utilize their service 100% of the time! The seller is responsible for paying the commissions to both the buyer’s and seller’s realtors.
The best place to find a realtor is either a referral from a friend, family member, or from your loan officer. If somebody is willing to refer a realtor to you based on past experience or interaction, then you should take them up on the offer.
Otherwise, the next best option is to use sites like Zillow or Realtor (.com) and search for them. The downside about this is that the people listed as “Premier Agents” or at the top of the lists are paying for that ranking. So, don’t assume you’re getting the best realtor because they have ‘Premier Agent’ next to their name.
If you do resort to the online search, be on the lookout for review count and recent reviews – if the realtor doesn’t have any recent reviews it means they may be part-time or aren’t actively selling real estate (or just aren’t very busy which isn’t a good indication). Also get a gauge for how long they’ve been in the industry. Being new doesn’t mean they won’t be good, but finding a good realtor is highly important and often-times that only comes with experience. Here's a great list of questions to ask a realtor if you're going to interview somebody without a referral.
WARNING: AVOID using the listing agent or allow dual representation. A listing agent represents the seller and is obligated to act in their best interest. It is legal for that agent to also represent the buyer, in which case they make each party sign a form acknowledging they’re acting on of your behalfs. Obviously, acting in two opposing party’s best interest is impossible, and all they’re doing is being a broker and negotiating a deal to make sure it gets done.
Always, always have a buyer’s agent representing you.
Finding the right house is obviously the largest decision you'll make when buying a house. If you're prepared financially, know you're getting into a loan you can afford, and have found the right realtor to help you find a house, then you're well on your way.
Once you’ve found “THE” home, it’s time to put in an offer and be ready to negotiate. The 3 primary components of the negotiation are:
Everybody wants a great deal in real estate and never wants to pay too much, but you normally either win a little on the purchase price OR the seller credits (your normally don’t win both battles). Understand that seller credits comes out of the seller’s bottom line which is why they won’t always let you win both battles.
Your realtor will help you with this, but it’s important to know your total estimated closing costs + down payment breakdown (from your lender) so you can know how much (if any) seller credits you NEED to negotiate.
Counter-offers are common in these scenarios and you’re officially under contract once both you and the seller have agreed to terms.
Once you’re under contract it’s off to the races. Finding the home you want to buy can be stressful, but a lot of stuff goes on from the day you sign the contract to the day you close.
You need to give a lender a copy of the executed contract right away; they’ll work up some legal disclosures that you must sign, lock in your interest rate and request any required documents needed to submit your loan to the underwriter.
Your realtor will help you line up an inspection; this is a report you get on the home to ensure there is nothing wrong with it. It’s not a requirement to get a mortgage, but it’s something everybody should get when buying a house.
After your inspection comes back clear, your lender will order the appraisal to determine the value of the home. The home needs to appraise for the purchase price (or higher) to be able to proceed. If it comes in lower, then you likely will need to try to renegotiate with the seller as most buyers don’t want to pay more for a house than what it’s worth.
Once the appraisal, title work and any final borrower conditions the underwriter needed are returned, then your loan is ready for FINAL APPROVAL!
Generally, the process from executed contract to closing takes 30-40 days. It’s possible to close quicker, but 35 days is a comfortable timeline. Anything less 30 days means you’ll likely be stressed out the entire process and there will be a lot demanded of you in a short period of time.
3 business days prior to closing, your lender is responsible for giving you a Closing Disclosure. This is the legal form that lists out your final loan terms, payments, and closing costs.
After you’re aware of the final cash due at closing, you will schedule a wire transfer or obtain a cashier’s check to take to the title company/attorney for closing.
On the day of closing you’ll sign around 100 pieces of paper; they’re mostly legal disclaimers saying you’ll fix stuff if something was done wrong. The important items are the Closing Disclosure, the Note or Mortgage Instrument (the loan you’re signing up for) and the Deed of Trust/Title (which gives you ownership to the home).
Once the paperwork is signed, the title company sends everything off to the lender and waits for the loan to be funded. Normally that can take an hour or two, so it’s not uncommon to leave their office for a bit (to get a snack or eat lunch), and by the time that’s done you’re likely ready to get the keys to your NEW HOME!
There’s a lot that goes into buying a house, and it can be overwhelming. That’s what our team is here for though. It’s good to educate yourself and look around online, but ultimately you need a professional to guide you through buying a house.
When you’re ready, give one of our loan advisors a call or fill out the application online to get started.