CLOSING COST 

Buying a home involves more than just the purchase price. There are additional fees called closing costs, typically ranging from 2% to 5% of the property value. These cover various finalization expenses like appraising the house, ensuring legal paperwork is sound, and setting up an account to hold funds until everything is complete.  

Think of it like finalizing a deal with some service charges attached. Both buyers and sellers usually contribute to these costs. So, as you should be aware of, the price tag you see isn’t the only cost to consider when buying a home. 

DOWN PAYMENT 

When buying a house, you need to put down some cash up front, called the down payment. This represents a specific percentage of the property’s final purchase price. Regularly, your down payment goes into the escrow account, managed by a settlement officer or real estate lawyer. 

The minimum down payment can vary. Conventional loans start at 3%, FHA loans at 3.5% (or 10% for lower credit score, ranging from 500 to 579), while VA and USDA loans (for veterans and rural buyers) require no down payment.  

While a 20% down payment has been the ideal scenario for homebuyers, achieving it might seem out of reach for first-time buyers. But don’t panic, try to get in the game first. You may have smaller down payment, but bigger loan, and your equity can still be built over time, step by step. 

ESCROW ACCOUNT 

Owning a property covers responsibilities like property taxes and insurance premiums. To ensure these payments are fulfilled on time, your lender might set up a mortgage escrow account (just like a piggy bank for your expenses). 

To set up an escrow account, the lender gathers your annual tax and insurance bills, breaks them down into bite-sized monthly amounts, and adds them to your mortgage statement.

Escrow account is independent of both buyer and seller. Here, the money you’ve diligently saved rests until the closing day, safeguarding it until ownership officially changes hands. Only then, upon signing the final paperwork, does the treasure chest release its contents, ensuring a smooth and secure transaction for both parties. 

PREAPPROVAL 

If you are short of cash yet want to buy a home, a mortgage can bridge the gap. And getting pre-approved is the first step. 

It’s like a financial preview, where a loan officer analyzes your income, debt, assets, and credit history to tell you how much you can borrow, what your monthly payments would be, and what interest rate you might qualify for. 

Preapproval might not get you a mortgage, but it sure helps. It clarifies your budget, saves you time on offers and builds your credibility as a homebuyer. 

DEBT-TO-INCOME RATIO 

When reviewing your mortgage application, especially if you are first-time buyers, lenders will examine your debt-to-income ratio (DTI). This ratio measures the percentage of your income that goes towards existing debt payments, which is basically how much of your income goes towards debt each month.  

So, what’s a decent, or good debt-to-income ratio? It can be said that the lower the better. Your housing costs shouldn’t take up more than 28% of your income, and your total debt shouldn’t exceed 36%. Based on these ratios, lenders calculate and work backward to examine your potential mortgage and payment. 

LOAN-TO-VALUE RATIO 

When buying a home, the loan-to-value ratio (LTV) plays a crucial role. It reveals the percentage of the purchase price financed through a loan compared to the property’s appraised value. Additionally, LTV reflects your equity, which is the portion of the home’s value you truly own (calculated as the difference between the sale price and the remaining loan balance). 

To calculate your LTV ratio, divide the total loan amount by the appraised property value (LTV = Loan amount / Property value). Remember, some closing costs financed by the lender, like loan fees, increase your LTV despite not adding to the property value. 

You can lower your LTV and qualify for better loans by putting down more money upfront, paying down your loan, or waiting for your home’s value to increase. 

EARNEST MONEY 

Earnest money, required in the real estate contract, is a sum paid shortly after signing to show your “good faith” intent to buy the house. Once successful closing, it is applied towards your down payment and other associated closing costs. 

Unlike a direct payment to the seller, earnest money is managed in an escrow account until the closing date. In case of a seller’s breach, the buyer receives a full refund. Successful completion of the transaction results in the money being applied to the final purchase price. 

TITLE COMPANY 

Like a referee in a game, a title company stays independent of both buyers and sellers. They make sure the sale follows the law and issue insurance (called title insurance) for the property.  

A title company’s main role is to scrutinize the property’s records, including: 

• Verify home ownership, ensure you are buying from the house’s true and legal owner 
• Uncover debts, taxes payable, court-related issues, and any other claims that could affect your ownership rights 
• Define boundaries as it confirms the exact measurements and boundaries of the land you are purchasing 

Don’t worry if an ownership issue pops up during the inspection. The title company is not likely to fix it themselves, but it accompanies you as a go-to guide. It will help you understand the issue, connect you with appropriate professionals, and ensure your ownership rights are protected throughout the process. 

TITLE DEED 

Imagine the title deed as the official baton passed between owners. This legal document proves the house has been transferred from the seller (grantor) to you (grantee). After the sale, the title company sends it to the government’s County Recorder’s office, where it’s stored to confirm your ownership and prevent future conflicts. 

Once your title insurance is finalized, both the official title deed and your title insurance documents will be delivered straight to your new home address, unless otherwise agreed upon. If ever the original title deed gets lost or misplaced, you can visit the Recorder’s office and request a duplicate copy. This copy will hold the same legal weight and validity as the original. 

HOMEOWNER ASSOCIATION – HOA 

In some communities and apartment buildings, you might become part of Homeowner’s Association (HOA). This group makes and enforces rules for everyone, covering things like painting your home, fixing things up, renting it out, and even having pets. 

Those who purchase real estate within an HOA’s management area automatically become members of the Association. This partnership ensures continued community improvement through shared contributions (membership fees). But if you cross the line, forget to respect noise restrictions in common areas or park improperly for example, a penalty or legal reminders might be issued. 

Reece Almond