Curious about owning a home?
We're CNE, a nonprofit dedicated to helping you find a home you love and a mortgage that fits your needs.
We're here to answer any questions you may have, but let's start with the top 5:
What is the home buying process?
The process of buying a home is unique for each homebuyer, but the following steps are recommended.
- Take a home buyer education class and/or read up on home buying.
- Resolve any outstanding credit issues and determine what you can afford.
- Get pre-approved for a mortgage loan.
- Select a real estate agent and shop for a home in your price range.
- Make an offer and an Earnest Money Deposit, and sign a Purchase and Sales Agreement (typically it will be 30-60 days from date of signed agreement to closing).
- Purchase a home inspection and negotiate any repairs (usually within 10 days of the offer acceptance).
- Complete a formal loan application. The lender will process your application to make sure that you and the house you have chosen qualify for the loan (3 weeks average).
- Shop for homeowners insurance.
- Bring your funds to the closing meeting ( including down payment and other closing costs) and sign closing documents and receive the keys to your new home!
How good does my CREDIT score need to be so I can buy a home?
Your credit score is just one piece of your larger financial profile. Your FICO score only looks at information in your credit report. However, lenders consider many factors, including your income, length of your employment, and the kind of credit you are requesting. Some banks have required minimum credit score for some products.
Banks want to loan money to people who are likely to pay it back in full and on time, so they want to see someone with good credit, balanced spending habits, and the capacity to carry more debt. If you are lacking in these categories, they may charge you a higher interest rate to make up for the perceived increase in risk.
Four main considerations in getting a loan are:
- Capital: The amount of money that you have available for a down payment, closing costs, and reserves to pay for unexpected expenses (such as home repair).
- Capacity: Your ability to make the mortgage payments and pay your other bills on time. It is determined by:
- Current income
- Income history and future earning potential
- Existing debt: installment accounts, revolving charge accounts, and other monthly payments
- Credit: Your credit report and credit score, which help lenders to assess the risk to loaning you money.
- Collateral: personal property you already own, such as a car or a home. For a mortgage, the home itself will be the collateral on the loan. The home will need to have a value equal to or exceeding the sale price of the home to secure a mortgage loan for the property.
What kinds of loans are there?
There are a number of different kinds of loans you may be applying for in buying a house. For more information regarding various types of loans currently available, please visit consumerfinance.gov.
Conventional loans are the most common type of mortgage. They are offered by a private bank or other financial institution and are not insured by the government, which makes them a slightly higher risk for the bank offering the loan. As such, qualifications for these loans are more strict, such as requiring a higher down payment or a lower debt to income ratio. These loans adhere to Fannie Mae guidelines, which set the maximum loan amount and requirements for borrowers.
Non-conventional loans are insured and guaranteed by government agencies such as FHA, the FmHA and the VA. First-time homebuyer loans, VA loans, and other federal or local mortgage programs typically offer easier qualifying guidelines than convention loans, such as lower down payment requirements or higher debt to income ratios.
Federal Housing Administration (FHA) Loan
The government-insured FHA loan allows buyers who may not qualify for a conventional home loan to obtain one with low down payments, low closing costs, and easier credit qualification. The size of your loan may be limited, however, and FHA loans are only available to those meeting eligibility requirements.
Veterans Administration (VA) Loan
A VA loan is a guaranteed loan for eligible veterans, active duty personnel, and surviving spouses. These loans offer competitive rates and low or no down payments. The size of the loan may be limited, however, and you must meet eligibility requirements.
A balloon mortgage is a fixed rate loan with relatively low payments for a fixed period. After the initial low-payment period is over, the entire balance of the loan is due immediately. This type of loan may be risky for some borrowers. It is generally appropriate for those who intend to sell the home soon after they purchase it. If the value of the house remains the same or goes up, the owner can use the proceeds of the sale to pay the balance of the loan, without having paid much in interest while they owned the house.
With an interest-only mortgage, the borrower pays only the interest on the loan in monthly payments for a fixed term. After an initial period, the balance of the loan is due. This could mean much higher payments, paying a lump sum, or refinancing. This type of mortgage would appeal to a similar kind of buyer as a balloon mortgage, above. It can be very risky for the typical or first-time borrower.
Down Payment Loan
A down payment loan is a secondary loan intended to assist the buyer in making the down payment on a property. It is generally used to avoid paying mortgage insurance – an extra fee that is added to your mortgage payment if you are borrowing more than 80% of the value of your home. There are many different kinds of down payment assistance loan programs available from lenders and nonprofits, with varying eligibility requirements. Check with your CNE homeownership advisor to see if you might qualify for one of these programs!
Why should I work with a real estate agent when buying a home?
Your first home will probably be the single biggest purchase you have made, so expert advice and guidance is invaluable. A real estate agent is an expert on the real estate market. They can provide detailed information about transportation, local taxes, property values, and community characteristics, and provide you with resources to research schools, neighborhoods, and other amenities. They can work with you to identify available properties that fit your budget and lifestyle.
A real estate agent can also help you in negotiation by comparing the asking and selling prices of homes in the neighborhood, providing experience with disclosures and procedures, and serve as a point of contact between you and the seller.
How much home can i afford?
The amount of money you can afford to pay for a home depends on many factors, including your income, your debt, your monthly expenses, the amount of money you can contribute to the purchase up front, among other factors. The maximum dollar amount that a bank will agree to lend you should be the upper limit; in most cases, it is advisable to borrow less than this amount.
There are many calculators available online to help you get a general sense of what you can afford on sites like Zillow, Bankrate.com, and others. At CNE, we use the financial information you provide to create a home purchase package that is unique to you. We consider a monthly housing payment to be genuinely sustainable as long as it is no more than 28% of your gross monthly take home pay. But realistically, most families are usually also making monthly payments on some other kind of debt besides their housing payment (such as a car note or paying down credit card debt). Because of that, we also take a look at your TOTAL debt when calculating what your maximum home purchase price. When looking at your total debt (your house payment plus any other monthly debts you might be paying), we consider your total monthly debt to be sustainable when it is 36% or less than your gross monthly pay.
Here’s an example – if your gross monthly pay is $4,000, then your monthly housing payment should be no more than $1,120, or 28% of $4,000, and your TOTAL debts shouldn’t exceed $1,440, or 36% of $4,000. Let’s say in addition to your housing payment, you have a monthly car note of $400. We subtract that $400 from the total debt payment allowable ($1,440) to come up with a monthly housing payment that shouldn’t exceed $1,040. So, even though your gross monthly income can support a housing payment of $1,120, once you combine your housing payments with your other outstanding debt (car note), you need to lower your housing budget down to $1,040 in order to stay below the 36% sustainability range for total debt payments. Remember, this is just an example - your homeownership advisor can provide a person-to-person perspective in addition to the financial one. This is designed to give you a personalized recommendation for the mortgage amount you can afford and sustain.