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Most likely, unless you have already bought a house or work in real estate, you do not feel that you know much about what it takes to buy a house. At least, that’s the rule for many Americans, according to a recent GOBankingRates survey.
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Of the 1,000 people surveyed across the country, only 26% felt they understood the home buying process well. The most confusing part of the process for respondents was pre-approval, followed by closing costs. Here’s a quick rundown of the most important parts of buying a home that you may not be aware of.
What does it mean to get pre-approval to buy a home?
If you do not pay all the cash for your home, you will need a mortgage to buy a home. Pre-approval refers to mortgage approval. Obtaining pre-approval informs sellers that you have a credit line ready to buy a home.
To receive this pre-approval, you will need to contact a lender when you begin the home buying process. The lender will check your credit, assets and income and verify your employment. The lender will then approve you for a certain amount of money based on all of these factors. For credit, most lenders are looking for a credit score of 620 or higher. If you have a lower rating, you may need to make a higher down payment on the home you are buying.
The lender will then write a pre-approval letter for the amount for which you have been approved. This pre-approval documentation expires after 60-90 days. Some real estate agents who show the houses you are looking at may require a pre-approval letter to see the house, so you will want to keep it up to date.
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What kind of mortgage should you take out?
In the GOBankingRates survey, 14% of respondents said they were confused about what mortgage to take out. It makes sense for people to be confused, as there are six types of mortgages to choose from:
If your lender has determined that you have good credit, recurring and stable income and can make a 3% down payment on a home, you can get a conventional loan. These are usually backed by Freddie Mac or Fannie Mae, which are two government-funded companies that manage most conventional mortgages.
These loans must comply with the maximum loan limits set by the federal government. The loan limit for 2022 is $ 647,200 for single-unit properties, but this can be increased if you live in a city with homes much higher than average.
The amount for these loans is usually much higher than the compliant mortgages, so you will need to show a lot of cash on hand to qualify. Usually you have to make 10% -20% of the deposit and have excellent credit.
Federal Housing Administration (FHA) Loans Insured by the Government
If this is your first time being home and you are determined to have a low to moderate income, you may be eligible for an FHA loan. You will usually need to make a 3.5% down payment and pay a mortgage premium in advance.
Government Insured Veterans Affairs (VA) Loans.
Members of the military, veterans and their spouses are entitled to a VA loan for 100% of the value of the home. If you qualify, you do not need to make a deposit of any kind and you will usually incur lower closing costs. However, there is a funding fee that some eligible people will have to pay.
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Loans from the US Department of Agriculture (USDA) with state insurance
If you are determined to be low-income and live in a rural area, you may be eligible for a USDA loan. These loans usually do not require much money, if any, as long as the home meets the eligibility rules.
Once you have selected the type of mortgage you are eligible for, there are repayment options to consider:
Mortgage loan with fixed interest rate
If you plan to live in your home for a long time, you can get a fixed rate mortgage, which means you will pay the same interest rate on your mortgage for 10 to 30 years. Depending on how much you can afford to pay each month, your lender and you can negotiate how long the mortgage will last and therefore the interest rate.
Mortgage loan with adjustable interest rate
If you want to renovate your home or refinance it in the future, you can opt for a mortgage with an adjustable interest rate. These loans have a fixed interest rate for 10 years, then you and your lender can adjust based on the purchase. After these 10 years, the interest rate may go up, so if you plan to get the house after 10 years, you will want to be prepared for this potential leap.
Depending on your situation and your qualifications, you and your lender will be able to choose the right mortgage and repayment rate for you. First time home buyers also have options available that can reduce their monthly mortgage payment. Check with your lender for your state programs.
What is the closing cost?
Closing costs are additional charges in addition to what you pay for the house. These commissions are paid for payment such as loan application fee, credit report fee, real estate tax and appraisal fee, mortgage, real estate commissions, securities and records and other costs that vary by state and type of residence.
The cost of closing is usually between 3% and 6% of the total cost of a house. The lender you spoke to to get pre-approval is required to give you the estimated closing cost based on the amount of the loan for which you were approved. Three days before the closing of the house you bought, your lender must provide you with the exact amount of the closing cost.
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Methodology: GOBankingRates surveyed 1,012 Americans aged 18 and over across the country between March 8 and March 9, 2022, asking sixteen different questions: (1) Do you consider yourself financially literate? (2) Where did you learn most of your financial knowledge? (3) What financial subject do you think you should have learned more about in high school? (Select all that apply). (4) On what financial issue do you think you need more education in 2022? (Select all that apply). (5) When you were growing up, did your parents talk to you about how to manage your money? (6) Do you think that high schools lack financial education? (7) How much has the lack of financial education cost you more? (8) At what age did you feel comfortable with basic money skills (ie, checking, balancing your accounts, budgeting)? (9) At what age did you start saving and planning for retirement? (10) How do you feel about using the 2021 US Rescue Plan incentive check? (11) What financial issue did you feel the need to learn more about due to the COVID-19 pandemic? (Select all that apply). (12) What do you not understand about child tax credit? (Select all that apply). (13) What part of the home buying process is most confusing to you? (14) What part of the car buying process confuses you the most? (15) Are you ready to end the student loan debt moratorium in May? and (16) How do you change your driving habits with rising gas prices? GOBankingRates used the PureSpectrum research platform to conduct the survey.