Basic Homebuying Terms

Basic Homebuying Tips

A special guest post from Trulia’s Dina Hanna

Buying a home can be a stressful process, but it doesn’t have to be. If you’re looking to buy a home and don’t know where to start, here are some important tips to help you prepare for homeownership.

Pre-qualification/Pre-approval

Unless you’ve saved enough money to buy a house outright, you’ll need to qualify for a loan. Just as with a car dealership, a bank or mortgage company will review your credit score and evaluate your total assets to see how much you can afford.

Acquiring a pre-approval letter, sometimes referred to as a pre-qualification letter, is a great first step on our first-time homebuyer’s checklist. Having a pre-approval letter helps limit the house search to affordable and realistic homes, and can make your offer and negotiations easier. A pre-approval letter also shows that you’re serious about buying a home.

Down payment

The down payment is the amount of money you use towards the purchase of your home. For example, if you have a $3,000 down payment for a $100,000 home, you can afford a 3 percent down payment (the typical minimum amount). The loan amount in this example would then be $97,000. Having a higher down payment has benefits:

  • A higher down payment poses less risk to the lender. If you are unable to meet your monthly mortgage payments and end up in foreclosure, the lender will sell your house at auction. The more equity there is in the property, the more likely the lender will be able to recoup the principal of the loan, funds advanced on your behalf (such as property taxes and hazard insurance), and the costs associated with the foreclosure. Less risk to the lender makes you a stronger candidate for a loan.
  • Using the example above, paying a mortgage includes interest. At any interest rate, a loan of $80,000 is going to accrue less interest over a 15 or 30-year period than $97,000. The less interest you accrue over the life of your loan, the more money you could save.

Equity

Equity is the percentage of your home that you own, including the initial down payment as well as the principal amount of your mortgage payments. There are a couple benefits to owning more equity in your home:

  • You can take a loan out on the equity of your home for a large renovation project or to invest in some other aspect of your life. Home equity is viewed as an asset, just like cash.
  • When you sell your home, your equity is given back to you in cash. The lender takes the remaining amount of the loan, and you take the rest, giving you more money back if you sell your home at a higher price than what you paid.

Return on Investment

Remember that your home is an investment. Most homeowners move within 5-10 years of purchasing a home. A strategic purchase in an improving market will give you a greater return on investment when you decide to move.

For example, living in a neighborhood with top ranked schools will always increase the value of your home. Even if you’re not looking for good schools in the area because you don’t have kids and plan on moving before any potential children enter school age, you want to think about your target market. Is your home the perfect size for a small family? If so, being near a top ranked school could improve your return on investment when you sell your home.

Always keep in mind what a future owner of your home would want to see. Landscaping, maintenance, and renovations are necessary costs that come with homeownership that may be overlooked by renters.

Homeowners’ Association (HOA)

Your house may be part of a Homeowner’s Association (HOA). The HOA helps keep your neighborhood clean, safe and happy for homeowners. Each HOA has its own rules and regulations and fees. At the very least, you’ll pay a monthly fee to keep shared space landscaped or clean. If your neighborhood has a clubhouse, gym or pool, your fees may increase.

HOAs also help mediate neighbor disputes or “pet-peeves.” For example, neighbors may have music on very loud in the middle of the night or keep shoes on the front doorstep of their home. The issue may not necessarily disrupt your day-to-day life, but as a homeowner, you want the value of the neighborhood to reflect the value you place on your home. Your HOA will help you and your neighbors reach resolutions.

Buying a home can be a long process, but with the right knowledge and understanding, you’ll know what to expect!