Buying a home is a major event. If you're a first-time homebuyer, it's normal to have a lot of questions about the process. Can I qualify for a mortgage? How much can I afford? Do I need a mortgage before I look at homes? Where do I even begin?
In this article, we'll outline the steps to getting a mortgage – including how to qualify and what you can do to prepare for the financial responsibilities of homeownership.
1. Get your finances in order
Before lenders will agree to a loan, they want to know that you are financially prepared to take on the costs of homeownership. It's important to show that you are a reliable and creditworthy borrower. You can prepare for the mortgage application process in a few ways:
Build your credit. Most mainstream lenders set minimum credit scores for borrowers. As you prepare for homeownership, be sure to use credit cards carefully and pay off the debt each month.
Pay down debt. It's important to keep your overall debt at a reasonable level relative to your income. As a rule of thumb, your expenses should not exceed more than 20 percent of your net income, excluding your mortgage.
Understand what you can afford. When you buy a home, you'll be expected to cover certain one-time expenses like the down payment and closing costs. You'll also be responsible for recurring costs like a monthly mortgage payment, insurance and maintenance. It's important to know what you can afford and what your homebuying goals are, so you can plan accordingly.
Read the Essential Guide to Creating a Homebuying Budget for ways to save and prepare for the costs of homeownership.
2. Learn about loan types and terms
Your mortgage type and term make a big difference in your monthly payments and the overall cost of your loan. Here are some mortgage basics to get you started:
When you qualify for a mortgage, you'll discuss the specific terms and all the costs associated with the loan. It will be important to talk with your lender about your short- and long-term personal and financial goals. For more information about loan types and terms and how to choose one, read: How to Find the Right Mortgage.
3. Research lenders
Once you're confident you can get approved, it's time to decide who you want to borrow with, such as a local bank, retail bank, credit union or online mortgage lender. Sometimes, the easiest way to find a great mortgage lender is to ask friends and family for a personal referral.
It's okay to work with more than one lender in the beginning. In fact, it's recommended that you request quotes from several lenders before selecting a loan, and consider discussing those loan options with a certified housing counselor.
4. Get a pre-approval letter
A pre-approval letter from your lender outlines the maximum amount they are willing to lend you—pending certain details, such as the appraised value of the home. To get pre-approved, you'll need to complete a mortgage application and provide a list of documents, including:
The lender will review these documents to verify your income, assets and debts, and they'll pull your credit report. Note: A pre-approval letter is not the same as a mortgage agreement, and it expires after a certain time (typically 90 days).
Getting a pre-approval letter is highly recommended. It shows a seller that you are a serious buyer. Note that if you find yourself in a bidding war, your offer will likely be dropped if you don't have a pre-approval letter.
5. Complete the application and underwriting process
When you find the home you want to purchase, you'll work with your agent to put it an offer. At this point, you'll submit your most recent financial information to your lender of choice, and they'll determine whether you're eligible for the loan.
You'll also need to schedule an appraisal and a home inspection. An appraisal tells the lender the market value of the home, so the underwriters can verify that the size of the mortgage you've applied for is comparable to the value of the property. You can imagine, your lender doesn't want to lend $200,000 on a home that's only worth $175,000, and you certainly don't want to pay $200,000 for a home that's worth much less.
6. Close on your loan
Closing on your loan is the final step in the homebuying process. It's a meeting where the final documents are signed, the closing costs are paid, and ownership of the home is officially transferred to you. At closing, you'll be asked to review and sign a handful of documents at closing that spell out your financial obligations and rights as a homeowner. When all the paperwork is signed, you'll receive the keys to your new home!
For more information about finding, buying, and financing a new home, check out My Home by Freddie Mac.
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When you purchase a home, even a home that isn’t new, there is a very good chance that you will be offered a home warranty as a safety net against expensive, unforeseen repairs. It may sound like a great form of financial protection—but is it really the safety net that homeowners expect? Let’s find out if home warranties are worth it.
A home warranty is not the same thing as homeowner's insurance, which covers major perils such as fires, hail, property crimes, and certain types of water damage that could affect the entire structure and/or the homeowner’s personal possessions. A home warranty is a contract between a homeowner and a home warranty company that provides for discounted repair and replacement service on a home’s major components, such as the furnace, HVAC, plumbing, and electrical systems. A home warranty may also cover major appliances, such as washers and dryers, refrigerators, and swimming pools.
Often homeowner's insurance doesn't cover these components. Or the cost of fixing them (while expensive) wouldn't meet the policy's deductible—the dollar points at which insurance coverage kicks in.
Most plans have a basic component that provides all homeowners who purchase a policy with certain coverages. Homeowners can also purchase one or more optional components that provide additional coverage at additional cost home warranties often come up when purchasing a home. The seller may offer to purchase one on your behalf to provide peace of mind that any component of the home can be fixed affordably; if not, you will receive numerous mail solicitations to purchase a home warranty once the sale closes.
Home warranty companies have agreements with approved service providers. When something that is covered by a home warranty breaks down, the homeowner calls the home warranty company, which sends one of its service providers to examine the problem. If the provider determines that the needed repair or replacement is covered by the warranty, they complete the work. The homeowner only pays a small service fee, plus the money already spent to purchase the warranty.
A home warranty costs several hundred dollars a year, paid up-front (or in installments, if the warranty company offers a payment plan). The plan’s cost varies depending on the property type—single-family detached, condominium, townhouse, or duplex—and whether the homeowner purchases a basic or an extended plan.
The cost usually does not vary with the property’s age, unless the home is brand new, which increases the cost of coverage. The home’s square footage also does not affect the price in most cases unless the property is more than 5,000 square feet. Separate structures, such as guest houses, usually are not covered by the basic policy but can be covered for an additional fee. However, garages should be included as a standard feature of a warranty.
In addition to an annual premium, home warranties charge a service call fee (also called a trade call fee) of around $75 to $125 every time the warranty holder requests that a service provider come out to the house to examine a problem. If the problem requires more than one type of contractor to visit (e.g., a plumber and an electrician), the homeowner may have to pay the service fee for each.
Having a home warranty doesn’t mean the homeowner will never have to spend a penny on home repairs. Some problems won’t be covered by the warranty, whether because the homeowner didn’t purchase coverage for that item or because the warranty company doesn’t offer coverage for that item. Also, home warranties usually don’t cover components that haven’t been properly maintained. (More about this drawback below.) Furthermore, if the warranty company denies a claim, the homeowner will still have to pay the service fee and will also be responsible for repair costs.
Like all warranties, a home warranty is supposed to protect against expensive, unforeseen repair bills and provide peace of mind. For a homeowner who doesn’t have an emergency fund or wants to reserve it for other things, a home warranty can act as a buffer. Home warranties also make sense for people who aren’t handy or don’t want to worry about tracking down a contractor when they have a problem. Warranties can also make sense for people with expensive tastes in appliances.
The subject of home warranties often comes up during the sale and purchase of a home. A home warranty can provide reassurance to a home buyer who has limited information about how well the home’s components have been maintained or—in the case of new construction—how well the home has been built. A warranty can also be helpful for people who have just depleted their savings to buy a home and want to avoid any additional major expenses.
For home sellers, offering the buyer a paid-up, one-year home warranty with the purchase may provide a measure of protection against buyer complaints about any discovered problems or defects that arise after the sale closes. However, providing a home warranty does not exempt the seller from the legal requirement to disclose any known problems with the home.
One major problem with a home warranty is that it will not cover items that have not been properly maintained. What is considered proper maintenance can be a significant gray area and is the source of many disagreements between home warranty companies and warranty holders. In a worst-case scenario, unscrupulous warranty companies may use the improper maintenance clause as an excuse to deny valid claims. In another scenario, the homeowner and the contractor who makes the house call may simply disagree over what constitutes proper maintenance.
Another common problem is that when a homeowner purchases a used home, it might come with a 10-year-old furnace that the previous owner did not maintain. At that point, no matter how well the new homeowner tries to care for the furnace going forward, the previous neglect can’t be corrected, and any damage can’t be undone. In addition, warranties have numerous exclusions, as well as dollar limits per repair and per year.
Home warranties aren’t expensive compared to the cost of repairing or replacing most of a home’s important components, and this fact is one of a warranty’s major selling points. However, there may be many years when nothing at all breaks down or wears out in the home. In these years, the homeowner gets nothing (except peace of mind) in exchange for her premium. If that money had been put into an emergency fund, it would’ve earned some interest at least. Also, a homeowner who tries to use the warranty and has the claim denied will feel like the money spent on the premium and the service call fee was wasted.
Home warranties do eliminate the need to find a contractor when something breaks. However, they also eliminate the freedom to choose your own expert—an independent contractor—if you want the warranty to pay for the repair or replacement. If you don’t like the contractor or the work that’s done, you’re stuck. Also, the homeowner may have little or no say in the model or brand of a replacement component, though the warranty contract should provide for an item of similar or equivalent quality.
Furthermore, the whole process may be more complicated when a third party (the home warranty company) is involved than if a homeowner is dealing directly with a contractor.
A home warranty is not a perfect solution to the risks and hidden costs homeowners face. If a seller wants to give you one, it won't hurt, certainly. Before you purchase one, though, read the fine print in the home warranty contract and carefully consider whether the warranty is likely to pay off.
Homeowners/buyers who would feel more comfortable having a home warranty—and home sellers who want to offer a warranty to a buyer—should also do careful research to find a reputable home warranty company that uses reputable contractors and will actually pay for legitimate repairs when they are needed.
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Two housing-market shifts encourage potential homebuyers to call real estate agents. The first is a drop in housing prices and the second is low mortgage rates. Deciding which factor is more important can make a difference in several areas. The most important may be in your wallet.
Impact on Monthly Payment
Suppose you started the home search process when interest rates were 4%. You saw a one-bedroom condo for sale for $100,000. You calculated your 30-year monthly mortgage payment on $80,000—the amount you would be mortgaging after a 20% down payment and your closing costs.1 Your monthly payment would be $382.
You decide you can do better than this payment and rate, so you wait six months, and the interest rate drops to 2%. However, a condo in the neighborhood you want now costs $120,000. You put down 20% plus closing costs, and you are left with a mortgage of $96,000. Your monthly payment on a 30-year mortgage is $355. Your payment dropped by $27.
If real estate prices had not risen in your prospective neighborhood from the $100,000 price point with which you started and you had snagged a 2% interest rate, your monthly mortgage payment would have been $296. You can gather the following pieces of information to put into a mortgage calculator to see what your payments would be.
Impact on Down Payments
In the example of the condo that rose from $100,000 to $120,000, your monthly payment dropped because of a lower interest rate. But would the lower payment help you if you didn’t have an extra $4,000 for a larger down payment? The difference in the down payment could eliminate the possibility of buying the home you want or knocking you out of the buyer’s market altogether if you can’t find a cheaper neighborhood. Also, losing that extra $4,000 will affect your ability to pay for unexpected home repairs, lower the amount of your emergency savings, and diminish your ability to afford to furnish your new home.
Coexistent Low Rates and Low Prices
How do you know what a low rate is? You can find historic mortgage rates and housing prices on the Freddie Mac website. For example, in 2020 interest rates and housing prices remained comparatively low when compared to the previous and following three to five years.2
Of course, there’s no assurance that history will repeat itself and create other relatively low-priced/low-rates housing markets. According to property market analysts in a June 2020 Reuters poll, house prices remained firm despite the pandemic.3 Many experts are predicting another strong housing market in 2021.4 If you need to buy a house soon, waiting for an ideal market to come about again may not always be realistic.
Impacts on Movability
Interest rates don’t matter as much if you can easily afford your payments and plan to live in your home for five years or less. While it’s never a guarantee that housing prices won’t drop further, you can view estimated housing prices for the last 10 years by selecting an address in the neighborhood you are studying online.
Always compare neighborhood values instead of national or city by city. Home price patterns vary greatly from neighborhood to neighborhood and state to state. The likelihood that you will owe more than your home is worth (known as being underwater) will be less if you buy a home when your local real estate market is below its peak.
The HOA Factor
Not every house you consider will be in a planned or gated community or condominium with a homeowner association (HOA). But if that’s where you end up, realize that HOA fees are often more expensive for higher-priced homes and can climb higher when more homes are vacant. Why?
HOAs cover shared services such as lawn maintenance, condo maintenance, clubhouses, pools, tennis courts, and/or private streets.5 When fewer homeowners share the cost, HOA fees go up. As with other historic data, you should contact prospective HOAs and ask for their rates over the last 10 years.
You should also ask about maximum fees and which factors determine rate hikes and decreases. Always seek out information about HOA fees on all the homes you are considering. HOA fees may be lower on a slightly higher-priced home, especially if fewer services are offered. In low-interest-rate environments, HOA payments can present an excessive monthly burden, so make sure that these payments are factored into your monthly budget.
An advantage of buying at a lower home price compared to having a lower interest rate is that your home can be refinanced or modified in the future. If interest rates decrease, you can lower your costs. Basically, the problem with high initial interest rates can be mitigated in the future if rates decrease.6
If your current home’s interest rate is significantly higher than current rates, ask potential mortgage bankers how much it would cost to modify your loan. The range can be anywhere from free to thousands of dollars. There’s no guarantee that home loan interest rates will drop, but you can make sure that you can afford to refinance if they do.
The Bottom Line
The decision to buy a home should always be based mostly on your ability to afford the monthly payment, down payment, home repairs, and furnishings, while still having enough left for an emergency fund. Always consider factors such as HOA fees and the option to pay down your mortgage if you must move quickly.
Ideally, buy when both interest rates and home prices are low. If that’s not possible, calculate both the short- and long-term costs of a lower interest rate versus a lower purchase price. When the numbers make the most sense, make your move.
Discrimination and inequalities persist
The mortgage approval process refers to the steps related to securing a home mortgage. Estimates report that nearly two-thirds of a typical American household’s wealth comes from homeownership, making it crucial for prosperity.1
Lending is central to homeownership in the U.S., and the market is projected to grow. Fannie Mae, the government-sponsored entity that guarantees mortgages through a secondary mortgage market, estimates that home sales and purchase mortgage originations will rise by 6.2% and 14.5%, respectively, in 2021.2
Historically, homeownership has been influenced by racial, ethnic, and other prejudices. Even in the areas where it has improved, recent studies have characterized the reduction of racial inequality in housing generally as “slow, uneven, and fragile.”3 In some places, however, there has been little to no improvement. Recent phenomena such as the Great Recession of 2008 and the COVID-19 outbreak have also diminished minority homeownership rates, particularly for Latinx and Black communities. Other studies have suggested LGBTQ+ communities also face marked inequalities in access to housing financing.
In the last four decades the most naked forms of discrimination, such as “direct denials” of housing availability, have declined. Housing inequalities among Whites, Blacks, and Hispanics have also declined, but the continued existence of inequalities points toward discrimination, scholars say.4
Notably, despite the existence of laws that prohibit discrimination in the housing market, recent studies have suggested that racial bias—particularly in the mortgage approval process—continues to entrench racial segregation and influence the racial wealth gap.45
Forms of Discrimination
A comprehensive review of the evidence published by the Urban Institute in 1999 found that minority homeowners in the U.S. had faced discrimination from mortgage lending institutions, which took two main forms. The first is “differential treatment,” which occurs when qualified minority homeowners are discouraged from taking a loan, denied a loan, or offered unfavorable loan terms because of their race or ethnicity. The second is “disparate impact,” which is present when minority loan seekers are disqualified at a higher rate than Whites in a manner that cannot be justified as a business necessity, even when the reasons why this difference exists aren’t immediately obvious.6
Mortgage Discrimination and Homeownership
Since the passing of the 1968 Fair Housing Act, which prohibits housing discrimination based on race or ethnicity, the difference in homeownership rates between Whites and Blacks has actually grown.
A 2019 report from Alanna McCargo, then the vice president for housing finance policy at the Urban Institute, put the situation in stark terms. “A significant racial and ethnic homeownership gap persists in our country,” McCargo said. “These gaps are large by every measure, and they are worse than the gaps that existed when private race-based discrimination was legal. We have not simply failed to make progress; we are losing ground. And we cannot continue to go backward.”7
As of 2017, U.S. Census data revealed homeownership gaps among the racial and ethnic categories it tracked. While Whites had a homeownership rate of 72%, Blacks were only at 42%, Hispanics were at 47%, and Asian Americans and Pacific Islanders combined had about 57%.8
Black and Hispanic communities especially had bought homes during the peak of the bubble and were more likely to be offered subprime loans than Whites and Asian Americans, even when they qualified for prime ones, according to McCargo. Their recovery rates had also been slower than Whites, she reported.9
Disparate rejection rates and segregation
A 2020 meta study from Northwestern University reported that racial discrimination has persisted in mortgage lending. While most forms of discrimination in the housing market had declined or ceased, including the most extreme forms, such as lying about the availability of advertised housing units, the authors of the study said that Black and Hispanic borrowers still face disproportionately high levels of rejection.10
From the 1970s to 2020, the Northwestern study noted, the data showed that racial gaps in loan denial have only decreased slightly, while racial gaps in mortgage cost have not declined at all for Blacks, Hispanics, and Asians. Lincoln Quillian, the sociology professor who led the study, has commented that these forms of discrimination entrench racial segregation by pushing those with weak preferences toward neighborhoods where their own race predominates, which fuels the racial wealth gap by making it harder for Blacks to build wealth.103
Other studies have seemed to corroborate this finding and extend it. A report from LendingTree in 2019, for instance, also indicated racial differences in lending rejection rates. According to that report, Black borrowers have the highest denial rates, at 17.4%, and non-Hispanic Whites have the lowest, at 7.9%.11
LGBTQ+ rejection rates
A 2019 study showed that LGTBQ+ couples faced 73% higher rates of loan rejection than straight couples with similar applications. They also were more likely to be charged higher fees and higher interest rates.12
Historical Discrimination and Laws
In U.S. history, discrimination has shaped the mortgage approval process. Some have characterized the current inequalities in housing as the lingering hangover of historical inequalities.13
In the 20th century the Federal Housing Authority (FHA) encouraged White middle-class homeownership. However, the practices it used, including redlining and restrictive covenants, denied minorities access to federally subsidized housing and mortgage insurance.14
In 1968, during the Presidency of Lyndon B. Johnson, the U.S. put into effect the Fair Housing Act, which makes housing discrimination based on race or ethnicity illegal. A follow-up to the 1964 Civil Rights Act, the Fair Housing Act was signed in the days immediately after the assassination of Martin Luther King Jr., who had become affiliated with the struggle for fair housing during the 1966 open housing marches in Chicago.15 The key aim of the Fair Housing Act, according to some summaries, was to “curtail discrimination in the housing sector.”3
The Equal Credit Opportunity Act of 1974 broadened protections to interactions with places that regularly extend credit, including banks and other institutions that offer home loans. It makes it illegal to discriminate because of race, color, religion, national origin, sex, marital status, age, or public assistance.16
Housing discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB) or with HUD.
The emergence of digital mortgage platforms, which automate the process of seeking loan approval, has also raised the question—in the New York Times and elsewhere in the popular press—of whether they reduce discrimination.
A recent University of California, Berkeley study of consumer lending in traditional and financial technology markets found that fintech doesn’t completely remove bias. While algorithmic lenders reduce disparities in rates, and many show no discrimination in loan rejection rates, they did not eliminate “impermissible discrimination,” because they may profile consumers for low-shopping behavior and operate in weaker competitive environments. They charged otherwise-equivalent Latinx and Black borrowers $765M more per year for refinance mortgages, the study reported.17
In the United States homeownership accounts for as much as two-thirds of the wealth of a typical household. The mortgage approval process, therefore, represents a large potential stumbling block on the road to wealth and stability.
McCargo’s testimony highlighted several changes she said would improve the situation. Her recommendations included promoting an equitable housing finance system that is sensitive to the fact that minorities are more likely to lack a credit history, as well as an expansion of credit access, an update of credit scoring systems, and modernization of the FHA. McCargo also suggested improving down-payment assistance programs, creating a “robust small-dollar mortgage market,” and outreach and counseling for renters and home-ready millennials, among other proposals.18
With mortgage rates at historic lows, now is a great time to save money by refinancing. And it may make sense even if you already have a low rate on your mortgage.
Mortgage rates have been at historic lows ever since the beginning of the coronavirus pandemic. At the beginning of 2020, 30-year mortgage rates were 3.72%, and 15-year mortgage rates were 3.16%.
In comparison, 30-year mortgage rates are currently 2.96%, and 15-year mortgage rates are 2.3%. These rates continue to fluctuate, and its unlikely refinance rates will stay this low as the economy continues to recover.
So, if you want to take advantage of the current rates by refinancing to lower your monthly payments or pull-out cash to pay down high interest credit card debt, now is the time to act. And a mortgage refinance may make sense even if you already have a low interest rate.
If you’re wondering how much you could save on your monthly payments by refinancing, visit ChangeMyRate.com to get prequalified rates without having it negatively impact your credit score.
When should you refinance your mortgage?
Many people start to think about a mortgage refinance once the rates fall below their current mortgage rate as they consider a lower payment or a home equity loan that could help pay down credit card debt or even personal loans or student loans. When you refinance your mortgage, you’ll reduce the interest rate and could save money over the life of the loan. But how do you know if refinancing your mortgage is the right option for you?
One of the biggest things to consider is how long you plan to stay in your home. Refinancing your existing mortgage only really makes sense if you plan to stay in your home for a while. That’s because after you pay for the closing costs, it can take several years to break even after refinancing and even longer than that to see any significant savings on your home loan.
Refinancing your mortgage also makes sense if you can lower your mortgage refinance rate or lower your monthly payment. If you’re interested in learning how much you could save by refinancing, this free online refinance calculator can help you determine your new monthly costs.
4 reasons to refinance a home loan if you have a low rate
In general, it makes the most sense to refinance if you can cut your current rate by one percentage point or more. Let’s look at three reasons why it could make sense to refinance your mortgage even if you already had a low rate including using your homes equity, low closing costs options, new loan terms and removing mortgage insurance from FHA loans:
To learn more about refinancing, visit ChangeMyRate.com to talk with qualified loan officers who can answer your mortgage refinancing questions and help you figure out your next steps.
Can I get a lower interest rate without refinancing?
If you’re looking to make changes to your current mortgage, refinancing isn’t your only option. You can also apply for a loan modification in order to lower your interest rate.
Unlike refinancing, a loan modification won’t pay off your current mortgage and replace it with a new one. Instead, it changes the loan terms and conditions of your existing mortgage. For that reason, a loan modification is only available through your current lender.
Most people apply for a loan modification if they want to lower their current interest rate or change their current loan terms. However, most lenders will only agree to this loan option if your mortgage is underwater, or you are at risk of foreclosing.
For most people, refinancing is the best way to save money and earn a better rate on their mortgage. Visit ChangeMyRate.com to view your loan options across multiple lenders with fewer forms to fill out.
Mortgage rates are expected to remain low, and home prices are forecast to rise more slowly than in 2020.
Buying a house is like playing a complicated sport. You need to know the rules and get in shape before hitting the field, and then nimbly maneuver through challenges to win the game.
In 2021, “winning” requires understanding how you stack up against lender qualifications, preparing to compete with other buyers and navigating a socially distanced homebuying process until vaccines end the pandemic.
Here's what buying a house in 2021 looks like and how to prepare.
More buyers than homes for sale
If you find a reasonably priced house in good condition, chances are you won't be the only one making an offer — even if it just hit the market.
"It is a seller’s market in just about every part of the country," says Christopher Arienti, broker and owner of Re/Max Executive Realty in Franklin, Massachusetts. “Seller’s market” is a real estate term used when there are more prospective buyers than homes for sale.
“It is a seller’s market in just about every part of the country.”
Christopher Arienti, broker and owner of Re/Max Executive Realty in Franklin, Massachusetts.
For buyers, this means flexibility is important, and you may have to make some concessions. For example, it's tough to win over a seller in a hot market if you make the purchase offer contingent on the sale of your current home.
"That's like a nail in the coffin," Arienti says.
On the other hand, understand the risks of any concessions you offer, and don't make any that you can't afford. Talk to your real estate agent to understand your local market and how to make a strong offer.
Home prices expected to increase
Real estate experts expect home prices to go up in 2021, but not as fast as they did in 2020.
Prices of existing homes are projected to increase 5.9% in 2021, compared with a 10% jump in 2020, according to an average of the latest forecasts from Fannie Mae, Freddie Mac, the National Association of Realtors and the Mortgage Bankers Association.
Prices vary by season, so when you choose to buy can impact what you’ll pay. Homes are generally most expensive in June and July and cheapest in January and February, according to a NerdWallet examination of market trends across 50 of the most populous metros in the U.S. The analysis used Realtor.com data from 2015 through 2019.
Active home listings are also highest in the warm months, which means you'll have more homes to choose from. But demand is high then, too, so homes sell more quickly. Homes spent an average of 76 days on the market in the lowest-priced months, compared with 51 days in the most expensive months, according to NerdWallet's analysis.
Mortgage rates expected to stay low
Economists expect mortgage rates to remain low in 2021 after falling to historic lows in 2020. The 30-year fixed-rate mortgage is projected to average 3.15% in 2021, up slightly from an average of 3.025% in 2020, according to an average of the latest forecasts by Fannie Mae, Freddie Mac, the National Association of Realtors and the Mortgage Bankers Association.
Even though rates are generally low, it's still important to shop around for a mortgage. The rate you're offered will depend on the lender and your financial circumstances. Contact multiple lenders to compare mortgage rates and fees, and choose the best deal you're offered.
Digital tools make buying a home easier
Virtual home tours, e-closings, smaller open houses and Zoom meetings have helped keep business going while keeping people safe during the COVID-19 pandemic.
Social-distancing regulations, which vary by state, county and city, are loosening with the rollout of vaccines. But online tools that ease the home buying process will outlast the pandemic.
Lender shopping remains critical
Shopping for a home before shopping for a lender is a common home buyer mistake.
Get your finances in order and shop for a lender before looking at homes, advises Scott Lindner, national sales director for TD Bank Mortgage.
Before you apply, check your credit reports and dispute any mistakes you see, and find out your credit score.
"Nothing is worse than finding your dream home and getting surprised that your credit score isn't what you thought it was," Lindner says.
“Nothing is worse than finding your dream home and getting surprised that your credit score isn't what you thought it was.”
Scott Lindner, national sales director for TD Bank Mortgage.
To get preapproved, be prepared to provide details about your income, debt, employment and financial accounts. A mortgage preapproval is an offer by a lender to loan you a certain amount under specific terms. It's not a guarantee for a final loan approval, but it will show real estate agents and sellers that you're a serious buyer.
Combined with your household budget, knowing the amount you're qualified to borrow is essential for knowing how much house you can afford.
Credit requirements still tight
The credit score needed to buy a house depends on the type of mortgage and the lender. Some lenders raised their credit score requirements amid the economic fallout from the pandemic.
Credit availability has increased slightly over the last several months but is still near its lowest level since 2014, according to the Mortgage Bankers Association. Lower credit availability means it's tougher to qualify for a loan.
Some lenders may loosen credit requirements as the economy improves in 2021, but it may still be hard to find a lender if you have a lower credit score.
Down payment requirements vary
Down payment requirements vary by the type of mortgage and the lender but could be as low as 3% for some conventional loans.
Putting more money down will help you qualify for a lower mortgage rate and will decrease your monthly payment. A higher down payment may also give sellers more confidence that your loan will close, which may increase your chances of getting an offer accepted, Arienti says.
A home appraisal helps sellers extract maximum value and protects buyers and lenders from overpaying.
The goal of an appraisal is to provide an estimation of a property’s market value.
A home appraisal may not be top of mind when you're looking to buy, sell or refinance a home. But maybe it should be: An appraisal determines for the seller, the buyer and the lender how much a home is worth.
The purpose is to protect the buyer and the lender from paying too much.
A home appraisal isn't the most glamorous part of buying or selling a home, but it's a key step. Learn more about the home appraisal process.
What Is a Home Appraisal?
When you have your home appraised, a professional visit the property and inspects both inside and out. However, though both processes involve someone looking around your property, an appraisal has a different objective from a home inspection.
During an inspection, an inspector examines things like your crawlspace, attic, cabinets, water tank and roof, says Doris Phillips, owner and CEO of title insurance company RealSource and chief operating officer of Lake Homes Realty. "Inspectors also look at everything that is moving and mechanical – they look for safety issues to make sure the house is in sound shape." If anything is found to be damaged or in need of upgrades for safety reasons, the inspector will give you a list of what needs to be addressed.
The goal of an appraisal, on the other hand, is to come up with an estimated market value for a particular property, based on its characteristics and market conditions, according to Matt Harmon, a state-certified property appraiser and strategic real estate advisor at Real Estate Bees. "Appraisers seek to determine the fair market value that a typically motivated buyer would pay for a home."
After a visual inspection, the appraiser creates a report that explains how the value of the home was determined and what that estimated market value is. Though the value is ultimately the opinion of the appraiser, it is meant to be an unbiased, expert assessment.
Appraisals can be coordinated by either the buyer or seller. If you are planning to sell your home, getting an appraisal can help choose an appropriate listing price that will attract qualified buyers.
However, appraisals most typically take place during the mortgage approval process. The lender will order an appraisal to ensure that the home's value is in line with what you're planning to pay for it. Since the property serves as the loan collateral, the lender wants to be sure you aren't overborrowing, which could result in a loss if you aren't able to make your payments.
"If the property is not worth what you are paying for it, then they will not loan you as much as you are going to need," Phillips said. In some cases, your mortgage application may be denied.
Even though it's the lender that requires an appraisal, the borrower is usually the one who pays for it. Home appraisals cost from $200 to $600. The national average cost is $340, according to HomeAdvisor. Factors that affect the cost include the size of the home, its condition, the location, how detailed the report needs to be and more.
Regardless of whether you order a home appraisal as a buyer or seller, Harmon says it's important to have it scheduled as close to the sale date as possible. Market conditions can change dramatically over just a few months.
What Do Appraisers Look for During a Home Appraisal?
Home appraisers are responsible for estimating a property's market value, but how do they go about it, exactly?
Most appraisers use Fannie Mae's Uniform Residential Appraisal Report to evaluate a property's condition, size and layout, as well as any desirable qualities or drawbacks. That can include square footage, number of bedrooms and bathrooms, overall condition, and health and safety issues. "We also observe things about the surrounding area, like the land the home is on, the type of homes in the immediate surrounding area and any negative features like loud roads, power lines, airport noise, etc.," Harmon says.
Once observations are done, the appraiser moves into the analysis portion of the process. "We take all of these factors into consideration and compare the subject property to other homes that have sold recently in the immediate area," Harmon says.
In fact, similar home sales in the area is one of the most important factors in a home's appraisal. Phillips notes that appraisers look for sales that occurred within six to 18 months and within a mile of the subject property, for homes that have similar features such as age, size and amenities. These are referred to as "comps." "(Appraisers) typically want at least three comparable properties to come up with a good median price value of the home," she says.
For example, if homes sold within the last year ranged in price from $250,000 to $280,000, the appraiser would start with this range in mind and then adjust up or down. If the subject property has a bigger yard or a remodeled kitchen, for instance, the appraiser may go with the higher end of that range.
Ultimately, the goal is to determine what sale price a buyer and seller would agree on at that given time. This process usually takes about a week, though timing depends on the time of year and complexity of the report.
How Does a Real Estate Agent Affect a Home Appraisal?
Home appraisers are independent professionals who do their best to come up with an objective property value based on data. That means other interested parties, such as real estate agents, should not have influence over the result.
"There is some separation between agents and appraisers," Phillips says. However, a real estate agent can assist in the appraisal process by providing detailed knowledge of the property. If you're selling your home, your agent will meet with the appraiser to go over recent home improvements and other pertinent details. The agent can also help point the appraiser toward other comps in the surrounding area.
How Can You Improve Your Home Appraisal?
It's important to get an accurate home appraisal. But it's still best for sellers or owners who want to refinance their mortgage to get as high of an appraisal as possible.
That's not totally in your control, however. "The biggest influence on the value of a home is recent sales data in the immediate market area," Harmon says. "If homes are increasing in sales price, then the subject property will continue to increase in value with no changes to it." Alternately, if recent local sales prices are down, then the value of the subject property will likely go down, too.
That said, there are a few ways you can ensure your property is appraised higher.
Curb appeal counts. Mow the lawn, pull the weeds and trim the hedges.
Make sure the property is in tiptop shape. The appraiser should be able to see the home's potential. Your decor may not be a factor, but curb appeal and upkeep can influence your home's appraised value. "The most significant way a person can impact the market value of a home is by making improvements to the condition and quality of the home," Harmon says. Fresh paint and carpet, or updated kitchen and bathrooms tend to provide the greatest return on investment.
Prepare a list of recent home improvements. If you have made improvements or added special features to your home, make a list of these upgrades and leave it for your appraiser. For example, you'll want to note if you put on a new roof or siding, or upgraded your furnace, and when. "At times, these additional facts about the home can help the appraisal support a higher value," Harmon says.
Focus on the right upgrades. "Most people think pools, pizza ovens and large yards will make the difference," Phillips says. "It really is updated kitchens and bathrooms." At the same time, don't get too excited if you've spent a lot on repairs and renovations. Your $30,000 kitchen remodel may help the appraisal, but it won't automatically mean that your house is worth an extra $30,000.
Escrow accounts are a key feature of real estate transactions and homeownership.
With an escrow account, the buyer's initial deposit is held until the sale moves forward.
Most people never encounter the concept of escrow until they buy a home. Escrow accounts are set up by third parties as a safe place to hold money. They are used for two main purposes when it comes to real estate: during a home purchase and afterward as an easy way for homeowners to save for property tax and insurance costs.
Here's what you need to know about escrow accounts, how they help facilitate a home purchase and how they help you manage your home expenses after the sale.
How an Escrow Account Works When You're Buying a Home
An escrow account is where the buyer's initial deposit (sometimes called earnest money or a good-faith deposit) is held until the sale moves forward. Once the buyer and seller reach an agreement, the money held "in escrow" will be released and applied toward the buyer's down payment. If the sale falls through because of the sellers, the money will be returned to the buyers. If it's the buyers who back out, they may have to forfeit the deposit. Details about what happens to earnest money should the sale not go through will be in the purchase contract.
The other part of the homebuying process with an escrow account is when the sellers set money aside as an "escrow holdback."
"This is usually in connection with some kind of repair that the buyer is asking the seller as part of the negotiated sale," says David Carey, vice president, residential lending manager at Tompkins Mahopac Bank in Lagrangeville, New York. Typically, the seller will have to put aside 1.5 times the amount of what the repair will cost, and then once it is completed, the escrow will be released back.
An escrow holdback could also be used for other reasons, such as if the buyer allows the seller to remain in the home past the closing date, or if it's a new construction that still needs some updates after the buyer moves in, or if a home is bought during winter and required repairs cannot be made until spring. The funds offer the buyer protection in case anything is damaged and to ensure that work is completed.
How an Escrow Account Works for Paying Property Taxes and Insurance
Once you've completed your home purchase, your mortgage lender may open an escrow account for you so that you can save up enough money to pay the property taxes and homeowners insurance for the home you are purchasing. In this case, an escrow account is basically a savings account, says Carey.
Homeowners can think of escrow as a forced budgeting for important parts of your mortgage payment, says Brian Koss, executive vice president of Mortgage Network, an independent mortgage lender in Winchester, Massachusetts. "By accruing your tax and insurance costs monthly, your lender is just acting as your budget manager and ensuring there will always be enough in your escrow account to pay for these items on time," he says. This is so you – and your lender – aren't at risk of losing the house due to unpaid taxes, or if there's a fire and the home is not insured.
Here's how the tax and insurance amount is calculated: At the time of loan origination, the lender gets the annual property tax amount from the assessor and the annual homeowners insurance premium from the insurance company. "These two amounts are broken down into a monthly cost basis, and that monthly amount is added to your monthly principal and interest mortgage payment," says Carey.
That's why your monthly mortgage payment is sometimes referred to as a PITI payment, which stands for principal, interest, taxes and insurance. Note that the lender may also tack on some cushion for your monthly tax and insurance payments at the start of the escrow account, adds Carey.
Then, once the tax bill or insurance premium is due, the lender pays from the escrow account on the homeowner's behalf. The benefit is that because it's automatically part of the mortgage payment, the homeowner doesn't have to worry about coming up with a lump sum, says Carey. "It's all handled behind the scenes, and you don't have to worry about rushing to pay your taxes or insurance in time."
Your Escrow Questions, Answered
Even though escrow is something that is handled behind the scenes by your lender while you make mortgage payments, you might still have questions.
How do you put money into escrow? Every time you make a mortgage payment, some of that money goes into your escrow account – it's as simple as that. If you look at your mortgage statement, you'll see the amount that is being contributed.
Are funds in escrow refundable? If for some reason there is a significant balance left in your escrow account at the time of escrow analysis and reconciliation (which is conducted annually by the lender), you are entitled to a refund of that amount, minus any required cushion of funds to be retained, says Carey. "Many lenders offer the ability to carry over the escrow surplus and reduce your monthly mortgage payment during the next calendar year, or they can refund these funds to you at your request," he says.
It could also happen that there is an escrow shortage, like if you have a large increase in your property taxes. "You run into this occasionally when there's new construction and the new assessment hasn't been completed prior to closing," says Carey. "Then the house gets assessed and the taxes increase significantly." If this happens, the lender will either increase your monthly payment to spread out your additional escrow obligation or give you the option to make a lump-sum payment so you can keep your monthly payment the same.
What fees are associated with escrow accounts? There are no ongoing fees associated with managing an escrow account, says Koss. However, there is an escrow fee that will be included in the closing costs when you buy a home. You may also be charged a fee if you choose to opt out of escrow.
How long do you pay escrow? Escrow accounts can last for the life of the loan or until the borrowers opt out, if they have that option, says Koss.
Who manages the escrow account? The lender who holds your mortgage manages the escrow account, says Carey. Thus, the lender is responsible for paying your tax and insurance on time, as well as performing an escrow analysis each year to make sure your account is funded enough to continue making tax and insurance payments.
Can you opt out of having an escrow account? Some lenders have an escrow requirement in place to mitigate their risk, says Carey. For example, escrows may be mandatory for certain types of loan programs, for high loan-to-value loans, for first-time homebuyers, or in cases where the homeowner has a history of missing tax and insurance payments.
Once you reach a certain equity in your home, you may have the opportunity to opt out, but there is usually an upfront fee involved, Koss says. Plus, continuing to pay for taxes and insurance will become your responsibility.
Some people might want to opt out and take control, like if they had a poor experience with a mortgage servicer in the past. Many homeowners find it easier to just keep paying into the escrow account.
If you're looking to get a mortgage, your goal should be to lock in the lowest interest rate possible. After all, the lower the rate, the less your loan will cost you each month. And that means you'll have less interest to pay over the life of your loan. Imagine you're taking out a 30-year $200,000 mortgage. If you lock in a mortgage rate of 3.25%, you'll pay $871 a month for principal and interest on that loan. But if you manage to lock in a rate of 3.05%, you'll pay $848 a month instead. You'll also, with that lower rate, pay a total of $8,000 less in interest in the course of your 30-year repayment period.
So how can you snag the low-interest rate you want? Here are a few tips.
1. Boost your credit score
The higher your credit score, the more appealing a loan candidate you'll be, which means you're more likely to snag a competitive interest rate on your mortgage. There are several steps you can take to raise your credit score:
Not only can a higher credit score help you get a better interest rate on a mortgage, but it can also make it possible for you to qualify for other attractive financial offers as well, like a credit card with a strong rewards program.
Find out more about credit scores with the following guides:
There is no one-size-fits-all solution when it comes to financing your home. Freddie Mac offers different loan programs that make it possible for borrowers in various situations to achieve their dream of homeownership.
Freddie Mac doesn't make loans. Instead, we purchase qualified loans from lenders. This provides crucial funding for the banks, so they can make more loans and keep interest rates low for borrowers like you.
Freddie Mac has a set of guidelines for the mortgages we back. Mortgages that meet these criteria are called conforming conventional loans. Conventional loans can either be fixed- or adjustable-rate and can be used to finance just about any type of property.
To qualify for one of these loans, borrowers must
Ultimately, the lenders decide the standards they apply in making loans. Learn what lenders look for.
Here’s a look at some of the Freddie Mac conforming conventional loan programs that might be right for you as a homebuyer.
If you are a first-time homebuyer, low-income borrower and/or retired.
Good option: Freddie Mac HomePossible® mortgages
The Home Possible mortgage program is designed to help low-, very low- and moderate- income borrowers qualify for a mortgage and become homeowners. The eligibility requirements are more flexible for a HomePossible mortgage than with other conventional loans. For example, with HomePossible, borrowers are only required to put 3% down.
If you don't have the personal funds to cover the down payment, you can use other means, such as gifts from relatives or funds from a governmental or non-governmental agency. In some cases, eligible borrowers can even qualify for a HomePossible mortgage without a credit score.
If you are a first-time homebuyer
Good option: Freddie Mac HomeOneSM mortgage
HomeOne mortgages are available for qualified first-time homebuyers with a down payment of just 3%. The loan is meant to help borrowers purchase a single-family home (including townhomes and condos). Note: At least one of the borrowers must be a first-time buyer.
If you are buying a manufactured home
Good option: Freddie Mac CHOICEHome® mortgage
The CHOICEHome mortgage program provides specific financing for buyers of manufactured homes, (i.e. built in a factory and secured on a permanent frame). The program makes it possible for these borrowers to access high-quality, affordable homes and achieve their dreams of homeownership for as little as 3% down.
To qualify, CHOICEHomes must meet HUD code and other standards to ensure that the home will stand up to severe weather conditions.
If you want to finance the cost of energy efficiency improvements
Good option: Freddie Mac GreenCHOICE® mortgage
Energy Efficient Mortgages are specifically designed to help homebuyers purchase an energy-efficient home or finance the cost of energy improvements to a home over the life of the loan. The GreenCHOICE mortgage can be applied to a new home purchase or a no cash-out refinance to cover basic energy efficiency improvements, including:
How to apply for a Freddie Mac loan program
Your lender can help you understand the specific requirements for each mortgage option and assist you through the application process. You will always apply for your loan through your lender.