March 2019
How A Home Loan Works
When you borrow money, it’s important to know how loans work. With a better understanding of loans, you can save money and make better decisions about debt, including when to avoid it. Learn how loans work before you start borrowing.
What does it take to get money? When you borrow, you have to pay back the amount you borrowed plus interest, of course. You may also have to pay fees.
Costs are a key part of understanding how loans work and which one to choose; in general, it’s best to minimize costs, but costs are not always easy to understand. Lenders don’t often show exactly how loans work and what they cost, so it pays to run the numbers yourself.
For most loans, a basic Loan Amortization Calculator (see sidebar) will illustrate how things work. If you really want to play with the numbers, use a spreadsheet to see what happens when you change the variables. Costs can be tricky, so be sure to consider interest rates and transaction fees as you study how a loan works.
Paying Down the Loan Balance
It’s only a loan if you repay it. As you figure out how loans work, you’ll see that most loans get paid off gradually over time. Each monthly payment is split into two parts: a portion of it repays the loan balance, and a portion of it is your interest cost. An amortization table shows how this works, and how interest costs go down over time.
A loan may or may not have a “term,” a length of time over which you repay it. Some mortgages last for 30 years, while other loans may only last 3 years. Credit cards are “revolving” loans, meaning you can borrow and repay as many times as you want without applying for a new loan. The term affects how your loan works; shorter terms require larger payments.
Qualifying for a Loan
To get a loan you’ll have to qualify. Lenders only make loans when they think they’ll be repaid. Your credit is important in helping you qualify since it shows how you’ve used loans in the past. Good credit means you’re more likely to get a loan at a reasonable rate. You may also need to show that you have enough income to repay the loan.
If you don’t have strong credit or if you’re borrowing a lot of money, you may also have to secure the loan with collateral. This allows the lender to take something and sell it if you’re unable to repay the loan. You might even have to have somebody with good credit co-sign the loan, which means they’ll promise to repay it if you can’t. Sometimes a well-written letter can help.
How Loans Work in Practice
Now you know more about borrowing in general, but how do loans work in everyday life? When you want to borrow, you visit with a lender and apply for a loan. Your bank or credit union is a good place to start; you can also work with specialized lenders like mortgage brokers and peer to peer lending services.
After you provide information about yourself, the lender will evaluate your application and decide whether or not to make the loan. If you’re approved, the lender will send funds to you (or it may go directly to another person; somebody you’re buying a house from, for example). Shortly after funding, you’ll start to repay, usually monthly.
If you want to save money, you can generally repay loans early. Figure out how your loan works to see if there’s any cost to prepay and make sure it makes sense before doing so.
For more detailed information about the entire home loan process, click Loan Approved
The Complete Home Buyer’s Guide
The steps outlined in this blog are a general home buying guide. You will encounter issues specific to your location and your transaction, issues that can best be explained and handled by a local real estate agent, your lender, your escrow officer or others who are helping you complete your home buying transaction.
Ask as many questions as necessary to help you understand the entire home buying process. You are making a long-term commitment and spending a major amount of money–you’ll feel much better about the transaction if you stay informed and understand what’s happening every step along the way.
The specific way you progress through a home buying transaction varies depending on the real estate laws and customs where you live. But you will discover many steps to buying a house that are standard, even though they might not be accomplished in the same order in every location.
You’ll feel more confident about your home buying journey when you understand what is required of you and every other person who is involved in the transaction. This guide takes you through it, and shows you that you’ve got only 11 steps to buying a house.
1. Get Your Finances in Order
Your credit reports are an ongoing record of how you manage your finances. You must know exactly what your credit reports say about your financial history before you apply for a mortgage, because the reports play an important role in the mortgage approval process and in determining the interest rate and other loan terms that a lender offers you.
If you haven’t looked at your credit reports, you might be surprised at their contents, because errors are common. Ideally, you don’t want any late payments. One late pay is bad; four will kill you.
Therefore, first obtain a free copy of your credit report to ascertain your credit score and fully review each entry to check for accuracy. If you think there are errors within your report, contact the credit reporting agency and have them corrected. If your credit score is below 680, work on cleaning up your report and improving your score.
2. Get Familiar with the Mortgage Industry
Finding the right loan and lender is crucial to your home buying success. It’s up to you to determine which lender is best for your needs and it’s always a good idea to have at least a bit of background about the loan process before you talk to a lender. Consider asking your real estate agent for a referral and feel free to ask them questions, such as:
a. Should I go through a mortgage broker or a bank loan officer? What’s the difference?
b.What does debt to income ratio mean? Will this affect my interest rate?
c. Should I choose an adjustable rate mortgage or a fixed rate? What are the pros and cons?
d. Or should I choose an FHA loan? What is an FHA loan?
e. If you’re a military veteran, ask about VA loans.
f. Should I buy discount points for my loan to lower the interest rate?
g. What is private mortgage insurance? Should I get it?
h. Will I have a mortgage or a deed of trust? What’s the difference? Why does it matter?
3. Get Pre-Approved for a Mortgage
Do you know how much house you can afford? Probably not, unless you’ve talked with a lender.
Pre-approval helps you in other ways. Consider this scenario. A home seller gets two similar offers. One is accompanied by a letter from the buyer’s bank that states she is pre-approved for a mortgage in the amount of the offer. The other has no supporting documents. Which offer do you think the seller will consider first? You’re right! The buyer that’s pre-approved.
Ask your real estate agent if you need a pre-qualification letter or a pre-approval letter to accompany your offer, and what’s the difference between the two.
Also, use my Mortgage Calculating under Lending Tips to analyze your loan possibilities and to see what you’re looking at as far as your monthly payment goes.
4. Determine Your Wants and Needs
Buying a home isn’t as difficult as you might think, even if you’re short on funds, but the process will go a lot smoother if you get familiar with your real estate market and narrow down your wants and needs before you start looking at houses.
For starters, figure out your Wants (swimming pool, single-story) from your Needs (neighborhood, school district). Next, consider resale potential and whether you need help with your down payment. If you don’t have the down payment but can afford house payments, ask your real estate agent about HUD or seller down payment gift assistance.
5. Learn to Work with Real Estate Agents
Real estate agents represent buyers, sellers or both at the same time. It’s essential to understand agent duties and loyalties before you make that first phone call. Ask your agent to explain what their fiduciary duty is to you. Also consider:
a. How to go about hiring a buyer’s agent
b. Does your agent work for you or are they an independent contractor?
c. What you should expect from a buyer’s agent
d. How a buyer’s agent becomes a dual agent
e. Your duties to your agent
6. Start Searching for a Home
Your real estate agent will typically send house listings to your cellphone. You can also pick up home sale magazines and read classified ads in your local newspaper. You’ll probably spend an inordinate amount of time surfing the Internet for homes. You might even plan afternoon drives to preview neighborhoods. Those are all excellent ways to see what’s available. Here are some tools to help you narrow your home buying search.
a. Consider the houses that others overlook
b. Search public versions of multiple listing service web sites
c. Find real estate agent web sites
d. Browse real estate search engines and networks
e. Find for sale by owner properties
f. Find home sale ads in print
e. Find foreclosed homes
7. Handle Pre-Offer Tasks
Deciding whether or not you want to buy a house involves not only looking at its location, but its structure and features; and there are many other considerations that are every bit as important to your purchase. Here are a few things you should explore before you make an offer.
a. Consider a home inspection
b. Check out the neighborhood at different times of the day
c. Talk to the neighbors
d. Check the comparable sales
8. Make an Offer
Real estate laws, local customs and the mechanics of making an offer and its specific contingencies depend greatly on your location. However, there are some home buying tips that can help you fine-tune your offer, no matter where you live, and this is where a real estate agent is vitally important to you. Consider these items:
a. What comes with the house?
b. What should the seller disclose?
c. Determine if lead paint disclosures are required
d. Decide how much should you offer
e. Asking for possession before closing
f. Special considerations for For Sale By Owner purchases
9. Home Inspections & Other Tests
In the state of CA, inspections take place after your offer is accepted by the seller. No matter when you do them, it’s critical to decide which inspections and tests you want to perform. Talk with your real estate agent or other advisor to find out when inspections should be handled and if additional types of testing are important for your specific area. Consider the following:
a. Ordering a full home inspection
b. Testing for radon gas
c. Looking for molds and mildew
d. Lead paint disclosures & inspections for pre-1978 homes
e. Is there a private well on the property?
f. Understanding and checking the septic system
g. Should you buy a home warranty?
10. Avoiding & Correcting Last Minute Problems
As your closing date nears, everyone involved in your real estate transaction should check its progress on a daily basis, because staying on top of things means you’ll know immediately if there’s a problem that must be dealt with. Here’s a bit of information that focuses on a few common problems that home buyers must deal with before they close on a house.
a. Get the facts about residential appraisal methods
b. How to deal with a low appraisal
11. You’re on the Way to Closing
Most of your home buying problems are behind you now and you’re on your way to closing, also called settlement, the event that transfers ownership of the property to you. Just a few more things to learn, a few more things to do, and you’re there!
a. Get the facts about title insurance
b. Take your final walk-through
A Guide To Selling Your Home
Choose a Listing Agent
A listing agent represents you and has a fiduciary responsibility to look out for your best interests. Interview agents and meet with at least three of them as you make a decision. Try to hire experience.
Ask questions about your listing agreement, including the length of time the home will be listed and fees, including escrow closing costs.
Find Out How Much Your Home Is Worth
A seller’s greatest mistake is often overpricing the home. Keep your price in line with sold homes that have been identified in a comparative market analysis report. Consider whether your market is hot, cold, or neutral and price your home according to the market temperature.
Get Your Home Ready for Sale
Prepare your home for sale by cleaning and decluttering it and improving curb appeal. Remove all family photos and personal items (children’s school art of fridge) so that the potential new owners can picture themselves in your home. You might want to consider hiring a professional stager to stage your home for showings or ask your real estate agent for help with this. You can often use your own furniture.
Market Your Home
You or your agent should identify the sizzling selling points of your home and choose the best advertising words to sell it. Approve your agent’s marketing campaign or figure out how to advertise your house for sale yourself. Hire a virtual tour company to take quality photographs and put a virtual tour online if possible.
Tweak marketing to increase traffic and showings. Confirm that your listing is posted online. You — or your agent — should saturate the internet with photographs and descriptions of your property.
Show Your Home 
Plain and simple: You’ll get more showings if you let agents use a lockbox to show your home rather than force them to make appointments.
Keep in mind that your home will show better if you sell in spring rather than in winter And selling during the holidays will likely result in a lower sales price.
Prepare for an open house but use this approach sparingly. Ask for buyer feedback so you can adjust your price, condition, or marketing campaigns accordingly.
Receive Purchase Offers and Negotiate
Be prepared to receive multiple offers if your home is priced right. Don’t ignore any even if you receive an insulting lowball offer. Negotiate by making a counteroffer.
Consider making a counteroffer that’s contingent on you buying a home if market conditions warrant it. And don’t be afraid to make a full-price counteroffer if your price is competitive and it’s warranted.
Ask for a kick-out clause or right of first refusal if the buyer’s offer is contingent on him selling a home.
Open Escrow and Order Title
Your agent or transaction coordinator will open escrow and order a title policy for you. Write down the contact information for the closing agent and select a date to close based on when the buyer’s loan will fund.
And don’t forget to ask for a receipt for the buyer’s earnest money deposit.
Schedule an Appraiser Appointment
Clean the house the day before the appraiser arrives. If you receive a low appraisal, ask your agent about alternatives.
You’re typically not entitled to receive a copy of the appraisal because you didn’t pay for it. If the buyer decides to cancel the contract based on an appraisal, ask your agent or lawyer about your rights.
Cooperate With the Home Inspection
Now get ready for the home inspector. Ask your agent to provide you with a home inspection checklist so you’ll know in advance what the inspector will want to see. Prepare the attic and basement for inspection, too. Move stuff away from the walls in the garage.
Prepare for the final walk-through inspection with the buyer as well. It usually takes place a few days before or even the morning of closing.
Obtain Seller-Required Inspections
If your contract calls for a roof certification, hire a reputable company to conduct the inspection. Keep in mind that states that allow for termite or pest inspections often make these reports a matter of public record. A sewer inspection might call for a new sewer line if your home was built before 1950 or so but trenchless sewers are typically less expensive to install.
The fees for all inspection reports, even if seller-mandated, are usually negotiable.
Delivery Seller Disclosures
All homes in the U.S. are subject to lead-based paint disclosures, even those built after 1978.
If you’re aware of any other material facts, disclose them. Your title company should provide CC&Rs, but additional documentation might be required if you belong to a homeowner’s association.
Negotiate Requests for Repair
You don’t ordinarily have to accept a buyer’s request to make repairs, but he can cancel the contract if you don’t. A buyer might accept a closing cost credit instead if you choose not to make repairs. You’re entitled to a copy of the home inspection report if the buyer requests repairs.
Ask the Buyer to Release Contingencies
The buyer isn’t obligated to provide a contingency release if you don’t demand it. In some states, you might have a right to cancel the contract if the buyer will not provide a release.
Sign the Title and Escrow Documents 
Depending on where you’re located, you might sign escrow documents shortly after opening escrow or you’ll sign them nearer to closing. It’s common in some states for everybody to sit around the table, buyers, and sellers, so ask your agent about the norm in your location.
And be sure to bring a valid photo ID.
Close Escrow
Your property deed, reconveyance, and deed of trust will record in public records. The title company will notify you and your agent when it records the deeds.
Depending on the buyer’s possession rights, you might be required to move on the day the home closes or even in advance. This should be specified in the contract.