How do I find a lender? Answers to 15 common homebuying questions
Buying a home can be an exciting time—but if you’re a new buyer, it can also be intimidating. With tons of moving parts to contend with, how exactly can a homebuyer best navigate the multipart process?
It starts by finding the answers to some of the most important questions about what to expect. To help with the homebuying journey, Better Mortgage, an online lender and homeownership platform with a free mortgage calculator, compiled a list of 15 commonly asked questions for beginners. From choosing when to buy and evaluating different mortgage loans to knowing what inspections need to be done, these questions are answered using information accumulated from news reports, realtors, and personal finance experts.
For example, just the home loan process alone can be surprisingly complex. To start, there are lenders to narrow down, loan types to consider, and interest rates to gather. And that’s just the loan process. After you’ve decided on the lender you want to use, you’ll need to jump through other hoops, from formally applying for your loan to providing your lender with the documentation necessary for underwriting.
The process of buying a home can even be confusing for a veteran homeowner. After all, you may not know whether it’s better to sell your current home before buying a new one—or may be stumped on whether you can get a home loan while you’re still paying on your current mortgage. Here’s what you should know.
How can I tell it’s time to stop renting and buy a home?
There are a few different ways that you can tell that it’s time to stop renting and start buying, but one of the major signs is that your finances are in neat and tidy order. Your lender will want to see that you have a steady income that will allow you to make your mortgage payments each month—and the other pieces of the financial puzzle need to be in place, too. That means you’ve saved enough for a down payment and closing costs and have a positive credit history. The higher your credit score, the better your chances to get loan approvals, though some government loans make it possible to purchase a home with scores between 500 and 580.
How long does the homebuying process typically take?
It can take some time to go from a signed offer to a new homeowner, even if the homebuying stars align just right. According to recent data from the Ellie Mae Origination Insight Report, it takes, on average, about 51 days to close on a home—but the process can be much shorter or longer depending on your unique situation. Moreover, the type of loan or mortgage lender you choose when financing your home can have a big impact on the timeline. For example, buying a home with a conventional mortgage loan takes, on average, about 49 days from start to finish. The timeline for buying a home with a government-backed Federal Housing Administration (FHA) loan typically takes longer, at an average of 54 days, according to Ellie Mae.
What’s the first step of homebuying?
You may think that the first step in homebuying is to find the perfect home, but it’s actually smarter to start by getting a mortgage preapproval from a lender. By going through the mortgage preapproval process, you’ll get a clear idea as to whether you can qualify for financing—and, if so, what the maximum amount is that you can afford to spend on a home. You can also use a mortgage preapproval to show the seller that you’re a serious buyer who has done the legwork on your financing. That can help your offer stand out in a competitive market where there are more buyers than homes available for sale.
Do I need a good credit score?
Contrary to popular belief, a good credit score isn’t a requirement for homeownership—but it can be helpful if you want to get access to the best loan interest rates. Lenders use credit scores to evaluate your credit history and determine your eligibility for mortgage and interest rate options. Boosting your score improves your chances of getting approved for lower rates on your mortgage, which saves you money over the life of the loan. That said, conventional loans are hardly the only mortgage loan option available to homebuyers. Government-backed loans, like Federal Housing Administration (FHA) loans or U.S. Department of Agriculture (USDA) loans, make it possible to purchase a home with a FICO credit score as low as 500 to 580 in some cases. These types of loans can be a great way for buyers with credit blemishes to get funding for their homes at low interest rates.
What home inspections should I have done?
Most buyers should start with at least a standard home inspection when purchasing a home, which gives you insight into everything from the home’s structural components to the major appliances, ventilation, and exterior of the home. Other types of inspections can be extremely useful as well. For example, many states require buyers to have wood-destroying organism (WDO) inspections performed, and it may be smart to have a mold inspection and a foundation inspection completed on the home, too. Depending on where the home is located, you may also want to have a radon inspection done. About 1 in 15 homes has an elevated radon level, according to the Environmental Protection Agency (EPA)—so if you’re in an area prone to this type of issue, it may be worth investing in this type of inspection.
How can I tell that I’m not overpaying?
If you want to know whether you’re getting a fair deal on a home, you should look at a couple of factors. Start by asking your real estate agent for a Comparative Market Analysis, or CMA, which is a document that includes information about the comparable properties that have been listed and recently sold in the area. This information will give you a good idea about whether what you’re paying for the home is more or less than what others have paid for similar properties over the last three to six months. Your home’s appraisal will also tell you the fair market value of the property, which is an indicator of whether you’re overpaying. If the home appraises for more than what you’re paying for the property, chances are you’re getting the home for a steal.
How much is a down payment?
While most homebuyers are under the impression that you must make a 20% down payment on a home purchase, that isn’t necessarily the case. The amount of your down payment can vary—and in many cases, the type of loan you choose will dictate the down payment requirement. For example, FHA loans require you to put down as little as 3.5%—and if you can qualify for a Veterans Affairs (VA) or USDA loan, you may not have to put down any money at all. Down payments on conventional loans can be as low as 3%, but your chances of approval may be higher with a larger down payment, so it all depends on your loan type and personal circumstances.
How do I find a lender—and are there homebuying programs that can help?
Finding the right lender is a highly personal process—and there are tons of options to choose from. Credit unions, conventional banks, online or non-bank mortgage lenders, mortgage brokers, and even mortgage marketplaces are all options when looking for a lender, and the option that’s right for you will depend on your unique circumstances. For example, if you need a lender willing to work with non-traditional income streams or credit blemishes, you may want to start with a local credit union. Homebuying programs are another factor to consider when vetting lenders. If you’re looking for a lender that offers access to homebuying programs to help you achieve your goal of buying a home, you may want to start with a conventional bank or larger lender instead.
What’s the difference between a real estate agent and a broker?
Real estate agents and real estate brokers may sound like the same thing, but these two types of real estate professionals are actually quite different. Real estate agents work under brokers or brokerage firms and are licensed to help buyers and sellers navigate the process of buying or selling their homes. Brokers, on the other hand, are real estate agents with specific types of licensing that allows them to work alone. Both can be smart options to utilize when buying a home, but if you’re selling a home, brokers may charge less because they are not required to share their commissions with the agency they work for.
Do homebuyers have to pay realtors?
Realtor fees are part of nearly every real estate transaction, but homebuyers typically aren’t on the hook for the realtor costs. That doesn’t mean the buyer’s agent is working for free, though. It is true that buyers aren’t generally responsible for paying their agent—the seller is the one on the hook for the money—but that cost is commonly factored into the price of the listed home. The typical commission paid by the seller is 5-6% of the home’s sale price, and the seller’s agent is paid the commission fee at closing. That money is then split with the buyer’s agent.
What fees are associated with buying a home?
Your down payment is just one of the costs that come with buying a home. When you purchase a home, there are a number of fees you will have to contend with, and most of them are wrapped up in the closing costs. For example, you’ll likely need to pay for your lender’s fees, which can include everything from the application, origination, and credit check costs to the fees for the home inspection, appraisal, title search, insurance, taxes, discount points, and other fees. There may also be third-party fees to contend with, but what exactly you’ll need to pay for will depend highly on the lender you choose and the fee structure they—and the experts they work with—charge for their services.
When is the house mine?
It may feel like the home you’re buying is yours after you have a signed contract in hand, but that isn’t the case. The home you’re buying is yours only after you have completed the closing process. During closing, you will sign all of the home loan documents and other legal papers such as the deed transfer and the paperwork for the recording, which is what the county or local government uses to document that you are now the full and legal owner of the home.
What is a fixed- vs. adjustable-rate mortgage?
The difference between these two primary mortgage types can have a profound effect on the life of your home loan. Fixed-rate mortgages are loans that come with a fixed rate of interest for the life of the loan. For example, if you opt for a fixed-rate mortgage loan with an interest rate of 3.4%, the interest rate will stay at 3.4% until you pay the loan off or sell the home—whether interest rates drop, rise, or stay the same. Adjustable-rate mortgages, on the other hand, are mortgage loans with interest rates that can increase or decrease at certain points in the life of the loan. For example, if you take out an adjustable-rate mortgage loan with a 2.4% interest rate and interest rates increase to 4.4% five years later, your interest rate may increase to 4.4% at that point.
Should I sell my home before buying a new one?
Whether you sell your home prior to buying a new one is a personal decision that should be made based on your unique circumstances. That said, it typically makes sense to sell your home before buying a new one. That’s because buying a new home is expensive, and if you buy before selling, you’ll have to come up with the money to purchase the new home and possibly cover both mortgages until the other home sells. If you sell your home first, you’ll have an easier time covering the costs of the new home purchase, but you may have to find temporary housing while waiting to close on the new home.
What is a contingency and do I need one?
Most contracts have a contingency clause that allows buyers to back out if the inspection comes back with issues, which can be anything from a broken water heater to a mildew issue in the bathroom. Buyers can also add a mortgage contingency that protects them from financial penalties if they don’t qualify for a loan to purchase the home. There may be other contingencies included in the contract, and if these stipulations cannot be met, you can often back out of the contract without strict financial repercussions—but you’ll need to consult your real estate agent and perhaps an attorney or legal professional to be sure.
Buying a home comes with plenty of moving parts. It starts with getting your finances in order and figuring out what type of home you can afford. From there, you can start researching mortgage rates and lenders. Once you have a loan preapproval letter, you can tour homes with a real estate agent and make an offer when you find the right one. Submitting a mortgage application and initiating the closing paperwork are the final steps to officially becoming a homeowner. The process can seem intimidating—whether you’re a new buyer or a veteran homeowner—but knowing the answers to some of the most common questions can help you be well-prepared for whatever comes your way.