GETTING PREAPPROVED

Pre-qualification is a good first step when you’re not sure if you’re financially ready to buy a home. A mortgage pre-qualification is usually based on an informal evaluation of your finances. You tell the lender about your credit, debt, income and assets, and the lender estimates whether you can qualify for a mortgage and how much you may be able to borrow.

Preapproval is the next step if you get a thumbs up during pre-qualification. During the mortgage preapproval process, a lender pulls your credit report and reviews documents to verify your income, assets and debts. If you’re confident about your credit and financial readiness to buy a home and you’re ready to start shopping, then you might skip the pre-qualification step and go straight to preapproval.

A mortgage preapproval is an offer by a lender to loan you a certain amount under specific terms. The offer expires after a particular period, such as 90 days.

EARNEST MONEY DEPOSIT

Earnest money is put down before closing on a house to show you’re serious about purchasing. It’s also known as a good faith deposit.

When a buyer and seller enter into a purchase agreement, the seller takes the home off the market while the transaction moves through the entire process to closing. If the deal falls through, the seller has to relist the home and start all over again, which could result in a big financial hit.

Earnest money protects the seller if the buyer backs out. It's typically around 1% – 3% of the sale price and is held in an escrow account until the deal is complete. The exact amount depends on what’s customary in your market. If all goes smoothly, the earnest money is applied to the buyer’s down payment or closing costs.

If the deal falls through due to a failed home inspection or any other contingencies listed in the contract (we’ll look at those contingencies in a bit), the buyer gets their earnest money back. The practice of depositing earnest money can decrease the likelihood of a buyer placing offers for multiple homes, then walking away after the seller takes the home off the market.

A FEW THINGS TO KNOW

CONTINGENCIES

Real estate contingencies in a home purchase contract are "walk-away" clauses that let you back out of the deal and get your earnest money back if certain conditions aren't met.

Think of a contingency as an “if-then” proposition. For example: “If I’m able to sell my current home, then I’ll buy yours.”

Knowing common contingencies prepares you to make a competitive home buying offer that protects your interests and entices sellers. The most common are inspection, appraisal, and loan contingencies.

When making an offer on a home, you'll have to decide which contingencies to include in the purchase contract. Our duty as your agent is to clearly explain each type of contingency and help you decide if any are negotiable.

Real estate contingencies protect your interests, but be aware that too many stipulations in the contract can reduce the likelihood of the seller accepting your offer, especially in a tight market.

DOWN PAYMENTS

Putting at least 20% down on a home will increase your chances of getting approved for a mortgage at a decent rate, and will allow you to avoid mortgage insurance.

But you can put down less than 20%. The minimum down payment required for a house varies depending on the type of mortgage:

FHA loans, which are backed by the Federal Housing Administration, require as little as 3.5% down.

VA loans, guaranteed by the U.S. Department of Veterans Affairs, usually do not require a down payment. VA loans are for current and veteran military service members and eligible surviving spouses.

USDA loans, backed by the U.S. Department of Agriculture's Rural Development Program, also have no down payment requirement. USDA loans are for rural and suburban home buyers who meet the program's income limits and other requirements.

Some conventional mortgages, such as the Fannie Mae HomeReady and Freddie Mac Home Possible mortgages, require as little as 3% down. Conventional loans are not backed by the government, but follow the down payment guidelines set by the government-sponsored enterprises Fannie Mae and Freddie Mac.

Down payment requirements can also vary by lender and the borrower's credit history. The minimum down payment for an FHA loan is just 3.5% with a credit score of 580 or higher, for example, but the minimum is 10% with a credit score of 500 to 579.