A Step-by-Step

Guide to
Buying a Home
1
Table of Contents

Step 1: Know What You Can Afford 3

Step 2: Shop for a Mortgage 4

Step 3: Find a Home 7

Step 4: Make an Offer 9

Step 5: Close on the Home 14

Bonus: 10 Tips to Be a Smart Homebuyer 15

Buying a home is one of the most rewarding — and expensive — decisions any
of us will make. Before you put out the welcome mat declaring “Home Sweet
Home,” you’ll want to ensure that your home and your home loan, are sound
both legally and financially.

This guidebook covers the basic process for understanding how much you
can afford, shopping for a mortgage, making an offer and closing on a home
purchase. You can save time and minimize hassle if you understand the basics of
the process, including the terminology, background and legal consequences.

2
Step 1: Know
What You Are you ready to own a home?
One of the first things you’ll need to do is decide how much
Determine how much house you can afford with an
Can Afford home you can afford. Take an honest look at your current
income and expenses so you understand how much you can
online calculator such as:

afford to spend on a house. You’ll also need a rough idea • themortgagereports.com/mortgage-calculator/

of how much down payment you’ll have and what current • lendingtree.com/home-affordability-calculator
interest rates are for different types of loans.
• mortgagecalculator.org/

Check your credit report

Lenders will look at your credit report to determine what
interest rate they’ll offer you. A higher score generally means
you’re a lower credit risk and will qualify for a lower interest
rate. Check your credit report for any inaccurate details
Review Your Credit Report
before you start to shop for loans. If your credit score is low,
The Federal Trade Commission (FTC) encourages consumers to
you may want to take steps to improve it before taking on a
review their credit reports every year. Clear up misinformation as
mortgage.
soon as possible to keep from jeopardizing your credit rating, or
stalling your application for any credit purchase.
How much will I need for a down payment?
Most mortgage companies require 20 percent of the
You get one free credit report a year from each of the three major
purchase price as a down payment for financing. If you don’t
credit bureaus by visiting AnnualCreditReport.com. This is a free
have the 20 percent down, you may pay a higher interest
site that will not ask for your credit card number or try to sell you
rate. You’ll also need to set up an escrow account. An escrow
additional services.
account is an account held in the borrower’s name to pay
obligations such as property taxes and insurance premiums.

3
Step 2:
Shop for a Shopping for a mortgage loan is important because different lenders will have
different offers on loan terms, interest rates and fees. Talk with several lenders

Mortgage before you start to look for a house so you can get the best deal available. t

Choose a lender who is willing to explain the pre-approval, approval and closing
processes clearly. Be sure that your lender explains all fees, up-front costs,
taxes, insurance and other costs of owning a home.

Visit HUD.gov and select

“Homebuyers” under the
“Audience” dropdown menu for
calculators, podcasts and the
option for free housing counseling.

4
How do I know what type of mortgage is right for me?
The type of loan you qualify for will determine your monthly payment amounts, the length of the loan and other Interest on your loan
terms of the mortgage. The total amount of interest a buyer will pay the
lender on their loan depends on the interest rate
and how it will be applied for the duration of the
• A conventional loan is a type of mortgage loan that is customarily made by a bank, savings and
loan.
loan association or other financial institution that is without governmental underwriting (such
as the Federal Housing Administration (FHA) insurance or a Department of Veterans Affairs Fixed rate loans are mortgages with an interest
• 
(VA) guarantee.) Here the lender looks at your debt to income ratio, credit history and credit rate that will not change over the life of the loan.
score to determine the terms of the loan. Conventional loans can be adjustable rate mortgage The interest rate is fixed in advance to a set rate,
(ARM) or fixed rate loans. usually in increments of 1/4 or 1/8 percent.

Interest-only loans are loans where the

• 
• A
 n FHA loan is a mortgage that is insured by the Federal Housing Administration. The credit borrower pays only the interest on the principal
requirements are less stringent than with a conventional loan. To qualify for an FHA loan you balance, typically for a five or ten-year interest-
need two years of steady income and your new mortgage must be 30 percent of your gross only period.
income. If you have filed for bankruptcy, your discharge must be at least two years old. If you
• A
 djustable rate mortgage (ARM) is a mortgage
have gone through foreclosure, it must be four years old. FHA loans tend to be fixed rate loans.
interest rate that changes periodically based on
a selected index that reflects changes in inflation
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs. Generally, veterans,
•  and cost of credit. The interest rate and your
National Guard, reserve and some surviving spouses can apply for VA loans. The major payments are adjusted up or down as there are
requirements are steady income and at least two years of military service. VA loans tend to be changes in the index.
fixed rate loans.

• A
 purchase money loan is commonly known as a seller-financed loan where the buyer makes
payments directly to the seller until the loan balance is satisfied. This type of loan is risky for
a seller because the seller may not recover the balance from the buyer and runs the risk of
foreclosure. The loan is equally risky for the buyer because the seller holds the title to the
property and can potentially sell the property to another person without the knowledge of
the buyer.

Construction loans are usually short-term, variable-rate loans priced at a spread to the prime
• 
rate or some other short-term interest rate. The contractor/builder and the lender establish a
draw schedule based on stages of construction and interest is charged on the amount of money
disbursed to date. Many homeowners use construction-to-permanent financing programs
where the construction loan is converted to a mortgage loan after the certificate of occupancy
is issued. The advantage is that you only need one application and one closing.

5
Pre-qualify for a mortgage
Generally you must establish a few things in order to qualify for a mortgage loan; for example, Federal income tax deductions and credits for
adequate income to support the continuing loan obligations and credit worthiness to demonstrate home buyers
persistence in meeting credit obligations. The mortgage loan origination fee (a fee charged by the
lender to process the loan) is deductible if it was used to
• T
 he lender will consider your income to determine the amount of loan. Lenders look at your debt
obtain the mortgage and not to pay other closing costs.
to income ratio to determine the amount of loan you will qualify for. In other words, the balances
The Internal Revenue Service (IRS) specifically states that
on your credit and other loans will reduce the amount of the mortgage loan you will qualify for.
if the fee is for items that would normally be itemized on a
Your credit score determines the amount of interest and type of loan you can qualify for.
settlement statement, such as notary fees, preparation costs,
• T
 he down payment is equally important. This is the amount of money you have to reduce the appraisal fees and inspection fees, it is not deductible.
amount you need to borrow or increase the value of the house you can purchase. Some of your
down payment can be applied to your loan to decrease your loan interest; this is called buying Energy related credits
down points. Homeowners who install solar,
geothermal or wind systems to
Pre-approval letters generate electricity, or in some
Before you put an offer on a home, a seller will generally want to see a pre-approval letter. This letter cases heat water, are eligible for a
tells the seller and their agent how much of a loan you qualify for, excluding the amount you have tax credit worth 30 percent of the
available for a down payment or have to bring to the closing table. Most realtors like to see a pre- cost of the system, with no upper
approval letter before they will agree to represent a buyer and begin showing them homes. dollar limit. This credit is due to
expire in 2016.
Based on your income, expenses, and credit, a lender will provide you with pre-approval letter for the
loan amount and type of loan that they are willing to lend to you based on those factors. Mortgage interest
All interest paid and reported to
you at the end of the tax year is
deductible, unless your loan is more
Where can I get pre-approved for a mortgage loan? than $1 million ($500,000 filing
• Y
 our current bank or credit union. They typically have in-house loan officers and separately).
underwriters who review all of the information and decide if you qualify.

• A
 mortgage lending company that specializes in residential home sales. They can Mortgage points
look for a wide variety of loan products and lenders that best suit your needs. You can deduct points in the year
you paid them if the loan is to
purchase or build your main home.
Points on a refinanced loan must be
deducted over the life of the loan.

Property taxes
You can deduct the real estate
taxes imposed on your property.
You must have paid them either at
settlement, closing or to a taxing
authority (either directly or through
an escrow account) during the year
in order to deduct them.

6
Step 3: Find
a Home Determine if you want to manage the purchase by yourself or hire someone to help
you. If you hire someone to help, know that not all realtors are real estate agents.

Considerations if you hire an agent

• Your agent should be there to look out
for your best interests.
A realtor refers to anyone A real estate agent is
who’s an active member of specifically licensed to • Choose someone you feel comfortable
the National Association help consumers buy with and who explains the home buying
of Realtors (NAR), and sell commercial or process in a way you fully understand.
including home appraisers, residential property. • A
 sk friends or family for agent
property managers, real recommendations.
estate counselors and real
• Interview several agents before
estate brokers.
selecting someone to represent you.

• Select someone who is licensed in the

A knowledgeable local real estate agent can be helpful because buying a home state you are buying in and familiar
requires understanding the many rules and requirements that have to be met with the areas you want to live.
locally by a buyer and seller. An agent can help you:

• Understand what price you have to pay.

• Find affordable mortgage lenders.

• Get the home inspected.

• Get title insurance and surveys.

• Handle the requests of all the parties involved in the transaction.

• Respond to problems along the way.

Hiring an agent also will provide more exposure because most traditional real
estate agents share their property listings in a database called the Multiple Listing
Service. Agents also represent potential buyers they can share your listing with
before it even goes on the market. Some agents advertise their services and listings
which lead to more exposure to potential buyers.

7
How an agent is paid
A buyer’s agent usually is paid through the commission fees the seller pays his or her agent. These fees are
split by the seller’s agent and buyer’s agent at closing. Typically, a buyer’s agent will have the buyer sign a
contract, which is an agreement between the buyer and the buyer’s agent. The agreement states whether it is
exclusive or non-exclusive.

• If it is non-exclusive, the buyer can hire • If it is exclusive, the buyer may not hire another
another agent to assist them in purchasing agent to assist them in their purchase. An exclusive
a home. buyer/agent agreement binds that buyer’s agent to
you and you to that buyer’s agent. You cannot buy a
property without owing a commission to that agent.

Dual agency
In some states, agents and brokers are allowed to represent both buyer and seller. This is called dual agency.
The agent is required to disclose this information to you if he or she is representing both you and the seller.

A dual agency could exist even if two different agents who both worked for the same brokerage company
represented you and the seller. This may be the case even if the two agents didn’t work in the same office.
Disclosures
Full disclosure of dual agency to the buyer and
Advantages Disadvantages seller is required in all 50 states. Dual agents
In some limited situations Agents appreciate dual agency because cannot operate in a fiduciary relationship with
the dual agency may not they can get double commission. Too either party and must treat both sellers and buyers
be a problem. The buyer’s often, there may be a conflict of interest equally. They cannot share confidential information
agent may really consider between buyers and sellers. A single and they cannot give confidential advice.
their needs and wants first agent may not be able to truly represent
and show them a wide the best interest of both clients and Single agency agents must use care and due
variety of listings, even often one party’s needs is given priority, diligence to perform duties, disclose all material
those outside their agency. typically that will be the seller because facts and be honest. They cannot share confidential
they are paying the commission. Dual information with the other party or the other
agents tend to show buyers dual party’s agent.
listings.

For example, if you purchase a home

from a builder, his or her agent is paid
to represent the builder. Due to the
high volume nature of brand new home
sales, lots of builder’s agents are paid
less than a traditional commission;
some earn a salary plus incentives.
Therefore, their income is directly
related to the number of homes they
sell for the builder.

8
Step 4: Make
an Offer Once you find a home you want to buy, you’ll submit an offer to the seller. Typically, the offer is made in a standard form locally used
by real estate agents and attorneys and is submitted by the buyer or the buyer’s agent to the seller or the seller agents for review and
acceptance. If the seller accepts the offer, the contract becomes binding, subject to contingencies.

• E
 xpiration date of the offer. This is the Required home inspection. This term
• 
amount of time the offer will be valid for and would entitle the buyer to have the home
how much time the seller has before the offer professionally inspected for construction
will terminate, which could be hours, days or defects, home systems functionality,
weeks after the offer is submitted. code compliance and general habitability;
the term may also include provisions for
Purchase price. The total price the buyer is
•  responding to identified problems.
offering to purchase the property from the
seller.
Contingencies. Events that would void an
• 
offer to purchase such as the buyer being
unable to get financing at a certain rate or
• Initial deposit. Also known as earnest
the inspection revealing serious structural
money, this is a good faith deposit held in
problems.
escrow, while the buyer obtains financing.

Warranties. As to title (see “Warranties by

• 
Buyer down payment. Readily available
•  Deed” on Page 13), condition of the property.
cash that will be paid as part of the sale
that is not financed. The buyer will need to
disclose proof of this down payment to the
seller (bank statement, check, etc.). Fees associated with closing the sale. If the
• 
seller will have to pay closing costs and if so,
how much.
Financing terms. The rate and terms the
• 
buyer must receive if financing the sale.

The seller can either accept or deny the offer or make a counter-offer stating the terms of the offer that need to change or be added to be
acceptable. The buyer can then accept or refuse the counter-offer, or make a counter-offer to the new terms. The offer does not become
a binding contract until both parties agree to the terms and sign the contract.

9
Inspection 10 Questions to Ask Your Home Inspector
Before you close, whether required by the contract
or not, you should have the house inspected. A home

1. 7.
inspector examines the physical structure and What does your inspection cover? How long will the inspection take?
systems of a house from the roof to the foundation. Make sure the inspection and inspection The average on-site inspection time for a
Generally, a standard home inspector’s report will report meets all applicable requirements in single inspector is two to three hours for
cover the condition of the following: your state and complies with a well-recognized a typical single-family house; anything
• Heating system standard of practice and code of ethics. significantly less may not be enough time to
perform a thorough inspection. Additional
• Central air conditioning system
inspectors may be brought in for very large

2.
How long have you been a home inspector
• Interior plumbing and electrical systems properties and buildings.
and how many inspections have you
• Roof, attic and visible insulation completed?

8.
How much will it cost?
• Walls, ceilings, floors, windows and doors
Costs vary depending on the region, size

3.
• Foundation, basement and structural components Are you specifically experienced in and age of the house, scope of services
residential inspection? and other factors. A typical range might be
The fee for the home inspection could be small $300-$500, but consider the value of the
in comparison to major repair issues if they are home inspection in terms of the investment

4.
discovered down the line. If you are acquiring an Do you maintain membership in a being made. Cost does not necessarily reflect
FHA or VA loan, an inspection of the property will be professional home inspector association? quality.
required. There are many state and national

9.
associations for home inspectors. Request to
What type of inspection report do you
A buyer should generally request an inspection, even see their membership ID.
provide and how long will it take to receive
if it is not required by the lender. The inspection puts
the report?

5.
the buyer on notice of most major defects in the Do you participate in continuing education
Ask to see samples. Most inspectors provide
property and repairs that buyer otherwise would have programs to keep your expertise up to date?
their full report within 24 hours of the
to undertake after taking possession. A thorough The inspector’s commitment to continuing
inspection.
inspection may cause some buyers to back out of a education is a good measure of his or her
sale, negotiate a lower sales price or ask the seller for professionalism and service to the consumer.

10.
repairs before closing: choices that a buyer without an This is especially important in cases where Will I be able to attend the inspection?
inspection report would not have. the home is much older or includes unique This is a valuable educational opportunity,
elements requiring additional or updated and an inspector’s refusal to allow this
training. should raise a red flag. Never pass up this
opportunity to see your prospective home
through the eyes of an expert.

6.
Do you offer to do repairs or improvements
based on the inspection?
Some inspector associations and state
regulations allow the inspector to perform
repair work on problems uncovered in the
inspection. Other associations and regulations
strictly forbid this as a conflict of interest.

10
 What if the report reveals the defects?
Several things can occur if the inspector lists some defects in his inspection report.

I f inspection was part of the If you have an FHA loan, the I f the seller had made warranties in the
purchase contract, then the house must pass FHA standards contract, the seller may be willing to negotiate a
contractual responses will be before your final loan will be rebate off the sales price for the repairs or make
triggered. approved and you can purchase the repairs prior to closing. As a buyer, you
the property. should contact some contractors and find out
how much the repairs will cost. If the seller is
unwilling to make repairs prior to closing, then
you may want to cancel the sales contract.

Prior to closing
Other tasks that need to happen before closing include:

Title search. This verifies the seller really owns the

•  Radon Testing/Mitigation. This is a relatively new test
• 
property and there are no other claims to the property. that is recommended by the EPA. Homes across the
country have tested high for radon.
• T
 itle insurance. The lender requires title insurance
to protect the investment in case the title comes • Septic certification. Some states require this
into question after closing. Title insurance for the inspection if the property you are buying has a septic
homeowner can be purchased at the same time so tank.
that the homeowner’s interest in the property can be
• W
 ell testing. Some states require this inspection if the
protected.
property has a well.
Homeowner’s insurance. You’ll be required to have a
• 
Termite inspection. This requirement varies by state
• 
receipt of payment and declaration of insurance when
and must be completed prior to closing. Some types of
you close.
loans might also require this inspection.
• S
 urvey. This is a technical drawing of the property and
• F
 inal walk through. Generally the sales contract
its structures. A survey can take weeks and needs to be
includes a clause that allows you a walk-through
ordered in advance to be ready in time for closing.
inspection within 24 hours prior to closing. This gives
• F
 lood search. This determines if the property is you the chance to see that the seller has moved out,
located in a designated flood zone. Federal flood made agreed-on repairs and kept other terms of the
insurance may be a condition of the mortgage agreement.
commitment.

11
 Different Types of Insurance

Homeowner’s Insurance Private mortgage insurance

Also commonly called hazard insurance and often abbreviated Generally referred to as PMI, this is an insurance policy that a
in the real estate industry as HOI, it is the type of property lender will require a buyer to have if the loan is more than 80
insurance that covers private homes. It is an insurance policy percent of their new home’s value. In other words, if your down
that combines various personal insurance protections, which payment is less than twenty percent, your lender will generally
can include losses occurring to one’s home, its contents, loss require you to obtain this insurance.
of its use (additional living expenses), or loss of other personal
possessions of the homeowner, as well as liability insurance for As the borrower, you can request cancellation of PMI when
accidents that may happen at the home or at the hands of the you pay down your mortgage to less than 80 percent of the
homeowner within the policy territory. If you have a mortgage original purchase price or appraised value of your home at the
loan, then the mortgage holder is also made an insured on the time the loan was obtained. You also need a good payment
policy in order to ensure its investment is protected in the event history, meaning that you have not been 30 days late with your
of serious or total damage. mortgage payment within a year of your request, or 60 days late
within two years.

12
 Forms of Joint Ownership

Warranties by Deed
Ownership type Ask your real estate agent
A new home warranty is generally provided to a
If the property is owned by more than one person there are various ways or attorney about joint
buyer by a builder and offers warranties on limited
the property can be titled. The way a property is titled determines the ownership laws in your state.
coverage on workmanship and materials relating to
property interests and rights of the co-owners, how the property can be sold/
various components of the home, such as windows,
transferred, and creditor’s rights against the property.
heating, ventilation and air conditioning (HVAC),
plumbing, and electrical systems for specific
periods (typically a year).

A seller’s warranty provides added assurance that

any repairs to major appliances, plumbing and other
home systems will be covered by the seller within a
specified time period after the home is purchased.
• T
 enancy in common is • J oint Tenancy with the Tenancy by the Entirety is
• 
A seller may also provide a warranty as to validity the most common form of right of survivorship is a a classification of ownership
of the title they can convey to the buyer. It is multiple ownership. In many classification of multiple where the property is titled/
important that your real estate agent or real estate states a property titled in ownership where each deeded in the name of a
attorney do due diligence and perform a thorough the names of unmarried interest is considered to be husband and wife. Creditors
title search to insure that you are being conveyed individuals is presumed to an undivided whole interest. of only one of the spouses
good title when you purchase your home. However, be this type of ownership. In other words, the interest cannot stake a claim or
since the seller may be hard to locate or lack the Each co-owner is a co- is not divisible without the place liens on this type of
resources when a problem arises, a seller’s warranty tenant, and each co-tenant’s permission of all the tenants property interest. This form
should be secured by holding back some of the ownership interest is equal (owners). When a joint tenant of ownership is not available
seller’s sales proceeds for the warranty period. to the amount that co-tenant dies, their interest passes to in all states.
contributed to the property’s the other tenant or tenants
A general warranty deed is where the seller acquisition, or, if the property without having to go through
warrants the title of the property against any other was a gift, by the co-tenants’ the court system.
third parties allotment of shares as
expressed in the deed. In
A special warranty deed is where the seller this type of ownership the
warrants the title of the property to the buyer interest of any co-tenant is
against any one claiming an interest under the freely alienable without the
seller (heirs, assigns). other co-tenants’ permission.

A quitclaim deed is a deed where the seller

provides no warranties and makes no statement
as to title to the extent that they state they are
transferring whatever interest they have to the
buyer. This is usually used when spouses are
conveying their interests after divorce or in the case
of a foreclosure sale.

13
Step 5:
Closing Closing is the final step in the process. During closing, the deed of title is
delivered to the buyer, the title is transferred, financing documents and title Consult an attorney
insurance policies are exchanged, and the agreed-on costs are paid. Some of A real estate attorney plays a different role
the final documents, including the deed and mortgage or deed of trust, are than an agent and in some states you are
signed by the appropriate parties, and then delivered to the county recorder required to hire a real estate attorney to assist
to be recorded. with the closing. The role of the attorney is to:

Closing costs • Help the buyer understand the sales

Local practice establishes which side —seller or buyer —is responsible for contract and mortgage loan, including how
some or all of the closing costs in a transaction. But generally, the buyer is the buyer will take title on the property.
required to pay those costs associated with its obligations in the transaction, • R
 un or review a thorough title search
such as: to make sure there are no covenants,
• Agent commissions easements, liens, etc. registered against
• Loan fees the property that will impede your use of it.
• Title insurance charges
• Prepare and record all the legal documents.
• Recording and filing fees
• Some upfront costs: down payment, first month of the mortgage • E
 valuate any adjustments, including taxes
• Buyer’s portion of transaction taxes and other fees owing and utilities costs paid, prior to the
transaction closing.

• Attend the closing and review all the papers

you will be required to sign.
As part of the sale, the buyer • A
 rrange or review title insurance protection

Did you can negotiate with the seller to

pay a portion of their closing
to protect you from losses due to title
defects.

know?
costs up to a certain percentage • E
 nsure you receive a validly recorded
depending on the law and type of ownership subject only to the liabilities you
mortgage involved. have accepted.

14
Bonus:
10 Tips to
1.
Before you buy a home, attend a
homeownership education course offered by

Be a Smart nonprofit counseling agencies approved by

the U.S. Department of Housing and Urban

Homebuyer Development (HUD).

2.
Interview several real estate professionals.
Ask for and check references before you
select one to help you buy or sell a home.

3.
Get information about the prices of other
homes in the neighborhood. Don’t be fooled
into paying too much.

4.
Hire a properly qualified and licensed home
inspector to carefully inspect the property
before you are obligated to buy. Determine
whether you or the seller is going to be
responsible for paying for the repairs. If
you have to pay for the repairs, determine
whether or not you can afford to make them.

5.
Shop for a lender and compare costs. Be
suspicious if anyone tries to steer you to just
one lender.

6.
Don’t let anyone persuade you to make a
false statement on your loan application,
such as overstating your income, the source
of your down payment, failing to disclose the
nature and amount of your debts, or even
how long you have been employed.

15
 7.
Don’t let anyone convince you to borrow more
money than you know you can afford to repay.

8.
Never sign a blank document or a document
containing blanks. If information is inserted by
someone else after you have signed, you may
still be bound to the terms of the contract. Insert
“N/A” (i.e., not applicable) or cross through any
blanks.

9.
Read everything carefully and ask questions.
Do not sign anything that you don’t understand.
Before signing, have your contract and loan
agreement reviewed by an attorney skilled in
real estate law, consult with a trusted real estate
professional or ask for help from a housing
counselor with a HUD-approved agency.

10.
Be honest about your intention to occupy the
house. Stating that you plan to live there when, in
fact, you are not (because you intend to rent the
house to someone else or fix it up and resell it, for
example) violates federal law and is a crime.

This publication is provided as educational material only. While every effort has been made to ensure the
Take Control with ARAG accuracy of this publication, it is not intended as legal advice as individual situations will differ and should
be discussed with an expert and/or lawyer.

If you have questions about buying a home or aren’t sure where to

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