Home Ownership Archives | Page 14 of 114

Oct

2024

10 First-Time Homebuyer Mistakes to Avoid & 6 Smart Moves to Make

By Timothy Moore | Financial Independence, Home Ownership, mortgage | No Comments

Buying a house for the first time is a major life moment, both emotionally and financially. For many people, it’s the biggest investment they will ever make. With the median price of a house hitting $436,800 in 2023 (ka-ching), it’s not a purchase to be made lightly.

If you’re buying your first home, you may expect it to be the same as those quick, fun-and-done experiences portrayed on reality TV shows. In truth, however, it’s a process with a steep learning curve and many moving parts, from figuring out your home-shopping budget to satisfying your final mortgage contingencies. There can be minor hiccups and major missteps along the way.

There are so many things to know as a first-time homebuyer, it’s better to educate yourself in advance rather than learn as you go. To that end, this guide will cover the 10 most common first-time homebuyer mistakes to avoid, including:

• Not knowing how much house you can afford

• Failing to include other factors, like insurance and repairs, in your budget

• Waiving an inspection because you’ve found your dream house

10 Home-Buying Mistakes to Avoid

Home-buying mistakes are easy to make, especially when buying a house for the first time. Review these 10 common first-time homebuyer mistakes before searching for your dream home — so you can ensure you’ll avoid them.

1. Forgetting to Check Your Credit

When’s the last time you checked your credit? It’s absolutely crucial to know your credit score when buying a house.

Why? You may not qualify for a mortgage if your credit score is too low. For most types of mortgage loans, you’ll need a 620, though lenders also consider other factors, like your down payment and your debt-to-income (DTI) ratio. You’ll get better rates if you wait to apply for a mortgage until your score is 740 or above.

The lesson? Don’t let a low credit score rule out buying your first home, but if it’s on the lower side, maybe consider taking some time to build your credit score before shopping for a house.

Recommended: Tips for Buying a House with Bad Credit

2. Not Being Realistic About What You Can Afford

Before you start looking at listings online or working with a real estate agent — and certainly before you try to get preapproved for a mortgage — calculate how much house you can afford.

Once you know the number, avoid looking at houses above your limit. In an April 2024 SoFi survey of 500 potential homebuyers, 54% of those whose home budget was $500,000 or more had a household income of less than $100,000 — hinting that at least some buyers have unrealistic expectations of what they can afford.

So how do you calculate how much house you can afford? There are a few easy methods:

• DTI: Think about your debt-to-income ratio (your debts divided by your gross income). When adding a monthly mortgage payment into your current DTI calculation, the percentage shouldn’t pass 43%. That’s typically the highest ratio mortgage lenders will accept.

• 28/36 rule: With this method, your max mortgage payment should be 28% of your gross income, and your total debts — mortgage and otherwise — should be no more than 36% of your gross income.

• 35/45 rule: Spend no more than 35% of your gross income on debt and no more than 45% of your after-tax income on debt.

• 25% after-tax rule: After adjusting for taxes, your mortgage should not account for more than 25% of your income.

💡 Quick Tip: You deserve a more zen mortgage. SoFi Mortgage Loan Officers are dedicated to closing your loan on time — backed by a $5,000 guarantee offer.‡

3. Putting Too Much or Too Little Down

In their eagerness to become homeowners, many first-time buyers make the mistake of going overboard and directing every bit of money they have to the purchase. (A notable 14% of potential homebuyers in SoFi’s survey said not having saved enough for a down payment was the biggest challenge they are facing.)

If you have to drain your emergency savings to manage the down payment on a home, you might want to dial down the amount or wait and save up a bit more. Consider what could happen if the home needs a costly repair or, worse, if you or someone in your family suddenly has an expensive medical bill. That’s a good example of when to use an emergency fund.

Conventional wisdom says to put 20% down (and it does help you to avoid paying private mortgage insurance (PMI). But with housing costs so high, that’s all but impossible for most homebuyers. Instead, focus on the minimum down payments required for the type of loan you’re considering:

• Conventional loan: As low as 3%

• FHA loan: As low as 3.5%

• VA loan: As low as 0%

Remember, though, that if you put down very little, you’ll need to borrow more. Your monthly payments will be higher, and you could pay more interest over the life of the loan.

4. Forgetting About Homeowners Insurance and Property Taxes

Your monthly mortgage loan payment is more than just the cost of your home. You’ll also need to cover the cost of homeowners insurance and property taxes, which are often paid into an escrow account. Depending on the type of mortgage and how much you’ve paid, you may also have to pay for PMI. Together, these all increase your monthly payment — sometimes substantially. (Indeed, in SoFi’s survey of potential homeowners, 46% of respondents were concerned about property tax costs.)

When you look at a home, the real estate agent should be able to show you property tax history so you can get an idea of what you’d pay each year. You can also work with an insurance agent to simulate insurance quotes for various homes you’re considering.

Property taxes will change from year to year, and you can always change your homeowners insurance to lower the cost, even if you pay for it through the escrow account. It may be a good idea to bundle home and auto policies together to take advantage of a discount.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

5. Failing to Budget for Home Repairs and Maintenance

Forgetting to budget for homeowners insurance and property taxes is one of the most common first-time homebuyer mistakes — but those expenses aren’t the only ones people forget to budget for when buying a house for the first time.

If you’ve been accustomed to calling a landlord whenever something breaks in a rental, reset your expectations. Now, you’ll have to take care of basic home maintenance — like replacing air filters, cleaning the gutter, resealing wood decks, and cleaning the chimney — and repairs. When the air conditioner is blowing hot air, the oven stops working, or your roof starts leaking, you’re on the hook for the repairs.

Some issues may be covered by homeowners insurance (but there’s still a deductible!), but other issues caused by general wear and tear are solely your responsibility. And then there are other possible costs, like higher utility bills and homeowners association fees, that can eat into your budget.

6. Not Hiring a Qualified Home Inspector

It may be tempting to waive the home inspection when you’re trying to buy the home of your dreams — especially if you have some stiff competition to be the winning bidder for an in-demand property.

Sorry to say, this is a risky strategy. A home inspection might reveal critical information about the condition of a home and its systems, from electrical problems to hidden mold; from a failing septic system to a leaky roof. What you learn in an inspection could reveal that your dream home is actually a money pit.

What’s more, your inspection report might serve as a useful negotiating tool: You could use it to ask for repairs or to work out a better price from the seller. And if you really aren’t happy with the inspection results, you may be able to use it to cancel the offer to buy.

And in the grand scheme of things, an inspection isn’t too expensive. The average home inspection costs $300 to $500.

Recommended: The Ultimate Home Inspection Checklist

7. Overlooking the Neighborhood and Surrounding Area

You may have fallen in love with a specific home, but when you buy a house, you’re also buying the neighborhood that comes with it, so to speak.

How are the surrounding properties maintained? Do the people seem friendly? If you have kids or are planning on having them, do you see other families with young children? How are the schools in the area? What’s the traffic like? How’s the noise level? What restaurants and stores are nearby?

Think about your ideal community — and then try to find a dream home in that type of community.

8. Letting Your Emotions Get the Best of You

Buying your first home or any home thereafter can be a roller coaster, so it’s important to prepare yourself psychologically as well as financially. If you’ve ever talked to someone buying a house, you know there are potential pitfalls all through the purchasing process.

You might fall in love with the perfect house and find it’s way over your budget. You might get annoyed with the sellers or their real estate agent, especially during the negotiation process. You might disagree with your partner about priorities.

All of these scenarios can cause a person to behave emotionally. It might make you want to walk away from a great deal. It might lead you to barrel ahead with a purchase, even when warning lights are flashing.

Our advice to a first-time homebuyer? Recognizing that this will be a challenging and, at times, stressful process (especially because you are new to it), take a deep breath, and proceed calmly. Find tools that help you move ahead with patience and a sense of calm, best as you can. With your eye on the prize — namely, your first home — you’ll get there.

Recommended: Improving Your Relationship With Money

9. Not Considering Future Resale Value

Houses are more than a place to live — they’re an investment. While you certainly want to prioritize buying a home you’ll be happy in, it’s also a good idea to think about how much the property might be worth in five, 10, 15 years and beyond.

It’s impossible to predict the market, but you can feel more confident about strong future resale value by choosing a house with multiple bedrooms and bathrooms, a well-appointed kitchen, and a yard. Other features, like a finished basement or a garage, may also make it easier to sell the home in the future.

10. Not Having an Emergency Fund

One of the basic tenets of personal finance is building an emergency fund. And here’s some blunt advice for first-time homebuyers: You’re going to need an emergency fund.

House emergencies can happen at any time: A tree falls on your roof, a toilet starts to leak, your dog destroys the carpet, you name it. Having money socked away to cover these expenses is crucial when buying a home.

Dream Home Quiz

6 Smart Moves for First-Time Homebuyers

We’ve covered some of the most common first-time homebuyer mistakes, so let’s shift gear to smart moves you can make when buying your first home.

1. Get Paperwork Moving ASAP

What do first-time homebuyers need when getting a mortgage? Here are some of the most common docs to start putting together:

• Proof of income: Lenders will often want to see two months’ worth of pay stubs or bank statements that confirm your income. They’ll also want your tax returns from the previous two years.

• Proof of funds: To take you seriously, lenders want to know you have enough money to cover a down payment and closing costs.

• Proof of identification: This could include a government ID, a passport, or your driver’s license.

Early in the process, you can furnish this basic information to get prequalified at various lenders. They’ll also run a credit check during the prequalification process.

Being prequalified simply allows lenders to give you an idea of what types of mortgages (fixed rate vs. variable rate, 15-year vs. 30-year, etc.) you might get approved for. It’s not a promise of approval, but it does help set expectations as you start to browse listings.

💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

2. Check Out First-Time Homebuyer Programs

It’s wise to shop around for a few different mortgage quotes, but it would be a rookie mistake to overlook some great, government-sponsored programs that make buying a house more affordable. These include:

• FHA loans: These mortgages are designed for those with low to moderate incomes. They typically offer low down-payment requirements, low interest rates, and the ability to get approval even if you have a fair credit score.

• USDA loans: These provide affordable mortgages to those with a lower income who are planning on buying a home in a qualifying rural area.

• VA loans: These mortgages help those on active military duty, veterans, and eligible surviving spouses become homeowners. If you can check one of those boxes, you may be eligible for a home loan with no down payment requirement and no PMI.

3. Consider Additional Costs Beyond the Mortgage

As we’ve discussed above, the actual monthly house payment is not your only cost. Your full mortgage payment includes property taxes, homeowners insurance, and, potentially, PMI.

But before you even get to the point of making monthly payments, consider these upfront costs of buying a house:

• Closing costs, which are traditionally paid for by the buyer.

• Home inspections, which we highly recommend.

• Moving costs, whether just renting a truck or hiring movers.

4. Get Preapproved

Mortgage prequalification isn’t a commitment for the lender or buyer — it’s just a first step. If you appear to meet a lender’s standards, you could move on to the preapproval stage.

Getting preapproved for a home loan involves submitting additional income and asset documentation for a more in-depth review of your finances.

Once the lender approves these aspects of your loan application, you’ll receive a conditional commitment for a designated loan amount — called a preapproval letter — and have a better idea of what your loan terms will be.

Mortgage preapproval can help demonstrate to sellers that you’ve completed the first step in getting a mortgage because your credit, income, and assets have already been reviewed by an underwriter. This can smooth the bidding process and could give you an edge over others in a competitive situation with multiple offers.

5. Choose the Right Type of Mortgage

You may qualify for various types of mortgage loans. Spend some time researching the different types so you have a better understanding of how they’ll impact your payments for the next several decades.

For instance, you’ll want to know the difference between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). You’ll also want to understand how a 15-year term affects your monthly payments when compared to a 30-year term — but also how a longer term increases the amount you’ll pay in interest.

Other mortgage types to understand include:

• Conventional loans vs. government-issued loans

• Conforming vs. nonconforming loans

• Reverse mortgages, jumbo mortgages, and interest-only mortgages

6. Shop Around for the Best Mortgage Rates

Finally, remember that you don’t have to go with the first mortgage offer you get. It’s worth your while to get multiple offers so you can compare interest rates, down payment requirements, terms, and more.

The Takeaway

Buying a house for the first time can be a stressful experience, but remember: At the end of it all, you’ll have a place you can call yours. You’ll build equity over time, and the house may increase in value. Just make sure you research the most common first-time homebuyer mistakes so you know how to avoid them.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What are some common mistakes first-time homebuyers make?

Some common home-buying mistakes for first-time homebuyers include forgetting to check (and improve) their credit, not calculating how much home they can actually afford, and forgetting to consider additional expenses, like inspections, homeowners insurance, property taxes, closing costs, and increased utilities. First-timers may also forget to consider the neighborhood as a whole or the future resale of the home.

What are the two largest obstacles for first-time homebuyers?

Two large obstacles for first-time homebuyers include rising housing prices and credit score requirements. Those who don’t already have equity in a current home may have more trouble coming up with a down payment on a new home. First-time homebuyers may also lack the credit score needed to get the best possible rate on a new mortgage.

What are three common mortgage mistakes?

Three common mortgage mistakes are 1) buying up to the limit you’re approved for rather than calculating how much you’re comfortable paying; 2) skipping the home inspection to expedite the process or make your offer more appealing to buyers; and 3) not considering related expenses you’ll have to budget for, including homeowners insurance, property taxes, and repairs and maintenance.

What are the most common mistakes that homebuyers make?

Homebuyers make a number of common mistakes, such as making an unnecessarily large down payment, forgetting to budget for related costs, buying more house than they can afford, and not shopping around for the best mortgage loans.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOHL-Q324-107

Oct

2024

6 Tips for Buying a House Sight Unseen

By Kevin Brouillard | Financial Independence, Home Ownership, mortgage | Comments Off

Whether relocating for a new job or competing in a seller’s market, many buyers need to move quickly. When time is of the essence, some may make an offer on a home without touring it in person.

Although this sounds complex, it’s nothing new, and the practice saw a resurgence during the COVID-19 pandemic. But even now that we have returned to the days of live open houses, 40% of home-shoppers say they’re willing to buy a home sight unseen if it meets their criteria and budget, according to an April 2024 SoFi survey of 500 people. (More than a third, 39%, said they wouldn’t buy sight unseen, and another 21% weren’t sure.)

Thinking about buying a house sight unseen? Here are six tips for navigating risk in the remote real estate market.

1. Get Preapproved for a Home Loan

Before making an offer, prospective buyers can do some front-end work to expedite the purchase process if they need financing. Becoming prequalified for a home loan is a quick first step to get an estimate of how large a mortgage a buyer would likely qualify for. This helps house hunters focus their search on homes they can reasonably expect to obtain financing for.

Lenders determine prequalification according to basic financial information, such as income, debt, and assets. Often buyers simply self-report their finances at this stage.

Then there’s mortgage preapproval, a much deeper dive into qualifying for a mortgage. Becoming preapproved often requires bank statements, proof of assets, and a look at credit history.

When buying a house sight unseen, especially in a hot market, getting preapproved can reasonably assure sellers that buyers can get financing for the amount they’ve offered.

In a superheated market, with bidding wars, cash offers, and skipped inspections, some agents suggest going through full underwriting, with only the appraisal left in order to close the deal.

If you’re buying a vacation home or investment property, you’ll be evaluated by lenders in a similar fashion to your first home loan.

💡 Quick Tip: You deserve a more zen mortgage loan. When you buy a home, SoFi offers a guarantee that your loan will close on time. Backed by a $5,000 credit.‡

2. Research the Neighborhood

Whether you’re looking to buy in your favorite vacation destination or have never set foot in the area, there are resources available to better inform your search.

While listings can do a good job of capturing a house in its best light, they do not give buyers the full picture of the property’s curb appeal and neighborhood. To get the lay of the land, Google Maps and Google Earth are easy tools for exploring the property and neighborhood via street view and satellite imagery. Walk Score is useful to determine a home’s proximity to amenities like grocery stores, restaurants, and coffee shops.

Other apps can give insight into community characteristics and local happenings. NeighborhoodScout provides localized information on crime, school rankings, and real estate prices. Another option is Nextdoor, which lets users connect with neighbors, local businesses, and other resources.

A look at housing market trends in select cities can help you home in popular neighborhoods, home prices, demographics, and more.

3. Find a Trusted Real Estate Agent

Once you’ve taken care of financing and focused your search geographically, finding a reputable real estate agent can help take the guesswork out of buying a house sight unseen.

Since you won’t be able to tour the house in person, a buyer’s agent can act as your eyes and ears on the ground. Without their assistance, the sight-unseen house cost could rise significantly, thanks to unforeseen repairs and upgrades.

Finding a real estate agent who is familiar with the area can be advantageous for evaluating sight-unseen house prices. Their experience in the local market makes it easier to find comparable listings and weigh options.

When interviewing potential agents, you can ask if they’ve helped clients buy sight unseen before. Because your relationship will be virtual leading up to inspection or move-in day, it’s important to consider communication skills and style.

In SoFi’s survey, among people willing to buy a home sight unseen, getting additional information and thorough documentation from the seller (usually via the real estate agent) was the top way buyers planned to mitigate risk.

4. Take a Virtual Tour

Starting with online listing photos and virtual walk-throughs is helpful to determine if a house is worth a closer look. What’s more, photo editing and wide-angle shots can misrepresent a space, so organizing a guided virtual tour with a friend, relative, or real estate agent onsite may serve a buyer well. In SoFi’s survey of potential homebuyers, 39% of people had used a virtual tour to evaluate a property.

Using FaceTime, Zoom, or similar video chat apps can let buyers ask questions in real-time and get a more intimate sense of the property. Seeing the space firsthand (albeit virtually) may give a more realistic impression than measurements and square footage alone can convey.

💡 Quick Tip: If you refinance your mortgage and shorten your loan term, you could save a substantial amount in interest over the lifetime of the loan.

5. Touch Base After the Inspection, If You Have One

A home inspection is common with most real estate transactions.

A home inspector examines a house’s physical and interior structure, as well as major systems like plumbing, HVAC, and electrical. The resulting inspection report highlights any visible problems, necessary repairs, and potential risks.

When buying a house sight unseen, it can be beneficial to have your real estate agent attend and video call to walk you through any notable issues that arise.

A home inspection contingency in an offer generally allows buyers to pull out of the purchase if major issues are found. It may also be possible to negotiate with the seller to have repairs addressed or costs deducted from the purchase price.

In a supercharged market, buyers may choose to waive the home inspection contingency to improve their candidacy in a multiple-offer situation. Those who take this path may still be able to arrange a pre-offer home inspection. The results won’t be negotiable or permit backing out without losing the deposit.

Waiving the home inspection is a risk that may be best reserved for buyers with sufficient cash for repairs.

6. Arrange a Virtual Closing

If you have to buy sight unseen and can’t attend the closing in person, there are options for closing remotely, depending on the state and lender.

Certain documents, such as the deed and affidavit of title, need to be notarized to finalize the home purchase. Remote online notarization allows buyers to sign closing documents with an electronic signature and allows all parties to meet virtually.

The process is authorized in most states, but certain documents, including promissory notes, may need to be signed in person. Also, be sure to check if your state requires a lawyer to be physically present at the closing.

Lenders will usually need an appraisal of the property to finalize a home loan. This process can be arranged from afar or coordinated through your real estate agent.

At a virtual closing, closing costs can be paid electronically with a bank-to-bank or wire transfer.

Giving your lender, real estate agent, and the title company ample notice that you intend to close virtually can help seal the deal without a hitch.

The Takeaway

Do people put offers on homes without seeing them? Some do, yes. Having your mortgage financing in order, working with a knowledgeable real estate agent, and doing virtual research can be helpful when buying a house sight unseen.

SoFi Mortgages: simple, smart, and so affordable.

Photo credit: iStock/MicroStockHub

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

^‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOHL-Q324-107

Oct

2024

What to Look for When Buying a New House

By Janet Siroto | Home Ownership, mortgage | No Comments

Having a list of what you want in your dream house makes house hunting fun and exciting. But to be a smart homebuyer and get the most for your money, it’s important to focus on some of the more mundane, nuts-and-bolts aspects of a house as you tour. Looking for potential flaws that could be pricey to fix will help put your mind at ease. After all, maintenance and repair costs are the top concern of would-be homeowners, according to an April 2024 SoFi survey of 500 people. The concern — expressed by 47% of respondents — even beat out worries over mortgage costs or utility bills.

While home inspections play an important role in making sure you don’t buy a money pit, you can do a bit of detective work yourself. Follow this guidance on what to look for when buying a house.

1. The Exterior

While you’re focusing on where you might put a basketball hoop or admiring the property’s beautiful trees, you’d be wise to take a look at these things to consider when buying a house as well.

Roof Damage

Your roof protects you and your possessions from sun, rain, and snow. And roof damage can quickly turn homeownership dreams into a pricey nightmare. To put a price tag on it, a new roof can run $10,000.

Check for obviously cracked or missing shingles. Look for signs of water damage on the ceilings inside, indicating that the roof isn’t keeping rain out. Later, since the roof is hard to see from the ground, you may want to have your home inspection professional take a closer look. You might also invest in a pro roof evaluation to determine how many years the roof has before it needs to be replaced.

You can also avoid future problems by eyeballing the gutters. Are there telltale depressions, muddy spots, or rust stains outside the house which might indicate gutters are leaking?

Siding Issues

Be on the lookout for cracked or warped siding, or for blisters or bubbles that have formed underneath, which can indicate hidden water damage. Siding’s job is to prevent water from entering the house, so water stains on the inside could also signal siding issues.

Bad Foundation

Obvious cracks in the foundation or exterior walls are a warning sign, but pay attention when you step inside the house as well. Signs a foundation might be faulty include: floors that slope, crack, or sink; cabinets that are pulled away from the wall; interior cracks; and doors that stick.

Yard Problems

Most yard issues can be fixed with a little landscaping muscle, but drainage issues can be more costly to resolve. Look for standing water or soggy, low-lying areas in the yard, signs that the space has drainage problems that can compromise the foundation or cause mosquitoes to invade.

💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.

2. The HVAC

You’ll want to find out how the home is heated and cooled, and if possible, learn as much as you can about the annual or monthly cost. Then look for these red flags.

Damaged A/C Unit or Furnace

When touring with your real estate agent, ask the agent to turn on the heating and air conditioning system. Listen for any loud noises. Watch for water around the unit itself, a sign of possible drain line or refrigerant problems.

Broken Thermostat

Locate the thermostat and confirm that it appears to be receiving power. If the heat or air cycles on and off in brief cycles while you are touring the home, there may be a thermostat or power issue.

3. The Plumbing

Problems related to water are one of the most important things to look for when buying a house. Be aware of these issues:

Strong Smells (Good or Bad)

As you walk through a potential home, give it a good sniff. Your nose might know if mold or a damp basement is present. If you notice air fresheners or potpourri, don’t assume the homeowner is just a big fan of floral scents. Scents could be a sign that a plumbing issue, water drainage problem, or basement leak will siphon away a lot of your hard-earned cash. Buying a house out of state? Ask your real estate agent to sniff around for you, but plan on visiting in person once you have narrowed the field.

Recommended: Housing Market Trends By Location

Water Spots and Stains

Look at the ceilings and walls, especially those adjacent to bathrooms, for hints of water seeping in. Do you smell fresh paint? It might be covering up mildew. Ask the seller’s real estate agent if any new color is covering up any old mold or possibly water-damaged walls or ceilings.

Rusty or Corroded Pipes

Poke around the basement as well as under and behind bathroom and kitchen fixtures. Look for rust stains in sink basins, or blue stains under pipes, which may be a sign of corrosion.

Low Water Pressure

Ask the real estate agent if you can run the water in the kitchen and bathrooms, then run the sink and shower simultaneously. You’re doing an informal check for low water pressure. If the water is coming from a well on the property, taste it. While unpleasant flavor or odor in well water isn’t always a sign of problems, you’ll want to be aware of it before buying, and you’ll also want to have well water tested for contaminants by a professional during a home inspection. Most well water issues can be fixed, but it would be important to factor the costs into any offer you might make.

Slow Drainage

While the water is running, check that it is also draining properly.

4. The Electrical System

Particularly in an older home, you’ll want to have the electrical system evaluated as part of the home inspection. Here are some things you can look for before that stage.

Small Electrical Panel

Ask the real estate agent to show you the panel where the electrical service comes into the home. There is usually a number on it to indicate the number of amps the home has. (Ask the agent if you don’t see it.) An older single-family home, especially, may not have adequate service. To power a small home without electric heating, 100 amps could be sufficient. But 200 amps is the standard for newer homes and updated ones. And even that may not be enough power for an electric heating system, depending on the size of the house. If you plan to add electric heat, a home workshop, or do an addition, you’ll probably need 300-amp service. The cost to upgrade the panel can range from $1,300 to $3,000.

While you are at the panel, look for signs of rust or rodents. Are circuit breakers corroded? If you see visible wiring, is it free from cracks or other damage?

Inadequate Outlets

Outlets in the kitchen or bath that are likely to be exposed to water should be ground fault circuit interrupter (GFCI) protected. (Look for “test” and “reset” buttons in the middle of the outlet.) Plugs that sit loosely in an outlet may indicate the outlets are old. Look for outlets with power strips or splitters plugged in, or with many electrical appliances crowded around them — all signs that the home doesn’t have adequate outlets for modern life.

5. The Functionality

Knowing whether a home would need costly upgrades, especially to the kitchen or baths, is important to your overall budget. If you’re in a hot real estate market and are likely to get into a bidding war, nailing down potential extra costs before you get into negotiations will be especially important.

Number of Bedrooms

Make sure the home has adequate sleeping space for your present needs, and don’t forget to think about the future (are kids in the plan?) as well as the occasional guest when you’re buying a house.

Kitchen Conditions

Kitchens are a big-ticket item, so survey the design and functionality of the kitchen, eyeballing the appliances and cabinetry especially. A major renovation, with new appliances, cabinets, and countertops, can run $14,000 to $40,000, according to home-improvement site Angi. To keep kitchen remodeling costs down, evaluate if the bones of a kitchen are good. Is there enough countertop space to do meal prep? Could you repaint or refinish the cabinets rather than rip them out?

Bathroom Basics

One homebuyer’s cute retro tile and toilet is another’s remodeling nightmare. And adding a bathroom or moving plumbing lines can get time-consuming and expensive. So check to see if the home has the right number of baths and think about how much work, if any, they might need to suit your style.

Whether your taste trends to luxurious rainfall showers or you’re happy with fixtures from the local home center, it’s unlikely to be a low-budget endeavor to redo a bathroom that’s dated or worn. The average bath remodel can cost approximately $11,000 before special fixtures or features.

The price tag heads farther north if you are planning to add a bath. Moving plumbing lines around a structure can get quite time-consuming and expensive. You’ll need permits, and ratcheting up the number of baths can also send your property taxes soaring. Home-improvement shows may make bathroom remodels and additions seem like no big deal, but it could actually wind up being a major endeavor.

Stairs

You probably already know whether a relaxed, one-floor ranch or a tall townhouse suits your style. But while you are touring a home, think about the number of stairs and how you might use the space in the house as you live there. Are the washer and dryer two flights down from the bedrooms, where most of the laundry originates? Is the main bedroom a flight below what would be the baby’s room?

Hardwood or Carpet?

You might tour a home that is fully carpeted and picture in your mind’s eye the gleaming hardwood floors you would reveal in a renovation. Don’t assume that hardwood hides under all carpets. Homes built in the 1950s and after may have carpet over plywood. Ask the real estate agent what is underneath the carpeting.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.

6. The Aesthetic

Creating your homebuying wish list can help you zero in on the things that are important to you in a new home.

Views

There are as many ideal vistas as there are homebuyers, but as you look at a home’s views, think about the seasons. If trees lose their leaves, will the neighbor’s messy backyard be front and center? Especially in urban areas, think about who owns adjoining properties, what might be built there in the future, and how that could affect the view.

Natural Light

Take note of a home’s windows, and especially whether natural light is abundant in the rooms where you will spend the most time. You might love lots of natural light, but in the summer, it can mean high air-conditioning costs. Take window coverings into consideration in your budget.

Water Access

A water view or water access might be a priority for you. Normally, water views are a good thing — picturesque and calming. But in this era of “crazy weather,” a tranquil bay or babbling creek could soon swamp your home. According to a report by the National Oceanic and Atmospheric Administration, rising sea levels are accelerating instances of flooding.

So before you feel as if you’ve got to have a home that’s near a body of water, do your due diligence. Check the home’s flood factor; also find out if your lender would require flood insurance (which typically costs $700 a year but can go much higher) in addition to homeowners insurance before approving a loan.

Recommended: How Much of a House Can I Afford?

Noise

You’ll want to listen as well as look when you tour a property. Can you hear the sound of cars on the nearby road? How heavy is the traffic? Is the house near a train track or an airport, which could mean low-flying planes? In an urban setting, who are your neighbors? A bar or concert venue could mean late-night noise.

Essential Questions to Ask When Buying a House

Most real estate agents will offer some basic information about a house right upfront. By law, they are required to disclose the possible presence of lead hazards if a residence was built prior to 1978; some states also require disclosure of asbestos. Ask these questions to dig a little deeper. If there are already multiple offers on a house, you’ll want to choose priorities from this list — asking too many questions could work against you if you decide to throw your hat in the ring.

• How old is the heating and air-conditioning system?

• When was the water heater last replaced?

• How old is the roof?

• If there is a septic system, when was the tank last replaced or inspected?

• What is the water source? Does the home have city water or rely on a well?

• Does the home have any history of flooding or mold?

• Is the seller aware of any materials containing asbestos on the property?

• What comes with the house? (Sellers sometimes remove fixtures, appliances, sheds, or play equipment so don’t rely on things being left behind.)

• Has the owner made any major improvements in the home since the last property tax assessment? (This could result in a tax hike on the next assessment.)

• What do you know about the neighbors?

• Are there any easements on the property? (For example, if power lines cross the property the local electrical supplier may have an easement which allows them to prune or remove trees.)

• Is there a homeowners association? If so, what are the annual fees?

• When touring a co-op or condominium, ask whether there are any special assessments currently in place or being discussed.

Becoming a Homeowner

Whether you’re a first-time homebuyer or a home-buying pro, you’ll want to be careful and comprehensive when buying a house. Keeping your eye out for potential problems can save you from falling in love with the wrong house.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What are the five most important things to look for in a new home?

Make sure the home’s size, floor plan, and general aesthetic suit your lifestyle and budget. Then consider the amount of work a home might need. (Maintenance and repair costs are the top concern for homebuyers, with 47% of shoppers worried about these expenses according to an April 2024 SoFi survey of 500 adults.) Factor any big-ticket needs such as a bad roof or foundation, or a kitchen or bathroom that require remodeling, into your overall budget.

What should you look for in an initial walk-through of a new home?

Don’t just look at a home: Use all your senses. Listen for dripping water or traffic noises. Sniff the air — does it smell musty or moldy? Feel the floor underneath you. Does it slope or squeak? And listen to your gut as you will likely feel quickly whether a home is right for you.

What are must-haves when buying a new home?

Must-haves are unique to every buyer. For one person, a great view is essential while another may require a certain school district. The important thing is to talk about these early in your home search, and revisit the list as you begin to see properties.

Oct

2024

How to Winterize a House

By Kelly Boyer Sagert | Budgeting & Goals, Home Ownership, personal_loan | Comments Off

As winter approaches, it may make sense — practically and financially — to prepare for the season ahead. Seasonal weather can transform minor issues into major ones, and cracks and holes around doors and windows can allow the money you spend on heating to literally fly away.

Here, some smart moves for protecting your home, from the top of the chimney to the water heater in the basement. Plus, you’ll learn ways to finance improvements that will help get (and keep) your property in top condition.

Ways to Winterize a House

While the steps to winterize a home may differ in Alaska vs. Texas, it still helps to get ahead of any issues that may arise. No one wants to wind up with a leaky roof or an ice-cold home during a cold snap.

It can be a smart move to start planning to winterize several months before the season arrives. The timing of the first frost varies from state to state, and of course, there are some regions of the U.S. that enjoy mild temperatures year-round. It may help to check the National Weather Service’s data that forecasts the first frost for each state to assist in your winterization preparation timeline.

The following tips for winterizing a house may help you reduce future repair costs and heating bills.

Protect Pipes or Pay the Piper

When deciding how to winterize a house, you may first consider how to address plumbing leaks and other issues.

Angi.com reports that the average burst pipe repair costs $500, but charges of up to $3,000 are not uncommon. Pipes in unheated areas of a home, including basements, attics, and garages, are among the most likely to sustain damage. But pipes running through exterior walls (including those in kitchens and bathrooms) in the heated parts of your home can also freeze.

Protecting the plumbing is clearly a situation where being proactive may save you a bundle. Pipe insulation can range from $0.50 to $1.50 or more per foot depending on whether you opt for tubular foam, spray foam, fiberglass, rubber or other kinds of insulation. Compare that to the $3,000 figure above to repair a significant leak, and the rewards of winterization can quickly become clear.

Adding insulation to attics (typically a $1,500 to $6,000 job), crawl spaces, and basements can help to keep those areas warmer, which can also help to keep pipes from freezing. (Yes, many houses have pipes in the attic.) What’s more, the E.P.A. says that homeowners can save up to 15% on heating and cooling costs by pumping up their home’s insulation. The higher an insulation’s R value, the better it may keep your home toasty. It can be a wise move to check the U.S. Department of Energy’s map and guide for more details on this topic.

Address HVAC Maintenance and Repair

Nobody wants the heating system to perform poorly during the winter — much less have it break down.

It’s a good idea to schedule a professional maintenance appointment (about $300 on average), including a filter change, before freezing temperatures arrive. Afterward, it’s best to change the filter at least every 90 days to keep your system operating optimally.

Additionally, maintenance and repairs to the heating, ventilation, and air conditioning (HVAC) system and cleaning out vents can improve airflow in your home.

One good move (if you haven’t already made it) can be to install a smart thermostat. If people in a home are away during reasonably regular times of the day or you want to lower the thermostat at night, it can make sense to install a programmable thermostat to save on energy costs. You could quickly shave $140 off your annual energy bill and plunk that into a high-yield savings account or your emergency fund.

It may be time to consider a new HVAC system for some people. The Department of Energy’s Energy Star program provides tips to homeowners to decide if replacing an HVAC system would be a good move.

Signs that it might be time to replace the unit include:

The heat pump is more than 10 years old.

The furnace or boiler is more than 15 years old.

The system needs frequent repairs, and/or energy bills are increasing.

Rooms in the home can be too hot or too cold.

The HVAC system is noisy.

And if you are contemplating making a move to, say, a heat pump or other new system, definitely do an online search about rebates and tax deductions that may be available. The Internal Revenue Service (IRS) shares some details on the IRS website.

Check the Roof, Gutters, and Chimney

Before winter hits, clearing the roof and gutters of leaves and other debris will help prevent snow and ice from building up and damaging the gutters — or, worse, the roof.

If ice or snow gets beneath roof shingles, it can lead to leaks and interior water damage. You may want to check if you need to replace your gutters. Do any shingles need to be glued down or replaced? Do any small leaks in these areas need to be repaired before they become big ones?

Plus, a chimney inspection can make sense before winter arrives. A chimney could have an animal nest lodged within, and there can also be structural problems. If the home has a wood-burning fireplace, creosote buildup can create both a fire and health hazard, so keeping up with regular cleaning is also important. With a gas fireplace, a blocked chimney could lead to carbon monoxide backup, which can be life-threatening.

Prices for these services can range widely, with a chimney inspection costing an average of $450 and a cleaning costing $254 on average.

Addressing all these issues before winter comes can help you prevent damage, reduce future repair costs and energy bills, and avoid a potentially hazardous situation.

Examine the Water Heater

You may want to check your water heater before temperatures plunge to avoid a chilly shower during winter. The usual lifespan of a heater is eight to 12 years, but various factors can impact that. Rust and corrosion can occur and lead to leaks, so it’s in your best interest to check on it regularly.

A professional can examine your water heater, bleed the system to remove trapped air and mineral deposits, clean the pipes, and recommend and do repairs.

How much could this important aspect of home maintenance cost? The average repair can cost $600, according to Angi.com, and a replacement can run from $882 to $1,800 or higher.

Think About Outdoor Equipment and Plants

Preventive winterization isn’t just about your home. It can also be a good time to take care of your outdoor equipment, like a lawn mower or other power tools, to protect them as well. Another smart move: Take care of plants that could benefit from moving indoors. Some pointers:

• Draining the oil from the appropriate equipment and taking it to a local recycling or hazardous-waste site can be your first step.

• You also want to take care of general maintenance on equipment, including replacing old parts. That way, when spring rolls around and you need to mow your lawn or trim your bushes, you should be ready to go.

• Additionally, inspect gas caps to ensure O-rings are intact on this kind of equipment. If not, get replacements from the manufacturer. Also, replace filters and lubricate what needs lubricating.

• You may need to bring in the plants you initially placed outside to enjoy the summer sun when temperatures drop. Before doing so, check the plants for mealybugs, aphids, and other insects. Remove them and treat plants as needed so the problem doesn’t spread to other plants. Read up on how to get plants acclimated to the indoors and give them the best shot at survival over the winter.

• You may want to prune and repot some plants too. An online search of reputable sources, specific to the kinds of plants you have, will likely provide good advice.

Recommended: How HELOCs Affect Your Taxes

What’s the Cost of Winterizing a Home?

The cost of winterizing your home will vary greatly depending on your home’s size, age, needs, location (pricey suburb vs. a more affordable one), and climate. You might spend a couple of hundred dollars or (if you need a major roof repair or HVAC replacement) several thousand dollars or more.

Pipe insulation, as noted earlier, can be relatively cheap: as little as 50 cents per linear foot. If a homeowner decides to insulate further, perhaps an attic, costs can range between $1,500 to $6,000 or more.

To hire someone to clean gutters, you may pay an average of $167. An HVAC inspection might cost $300, while the cost to replace an HVAC system averages $7,500 but could tip into a five-figure price tag, depending upon the size of the home and type of system, among other factors.

Yes, there is a huge variation in prices, but you probably want to protect your home. It’s not only your shelter; it’s also likely to be your biggest financial asset. To that end, there are websites that allow a homeowner to enter a ZIP code and get an estimate of what a winterizing activity may cost. It can make sense to get quotes from local professionals to get an exact price, compare proposals and references, and then budget accordingly once you are ready to take the next steps.

Financing Winterization Projects

Some people pay for their home winterization costs out of pocket, while others may decide to get a home improvement loan.

If you’re leaning toward a loan, there are options, such as different types of home equity loans. These secured loans — which include a home equity line of credit (HELOC), a home equity loan, and a cash-out refinance — use your home as collateral for the loan.

Another option is to get an unsecured loan, such as a personal loan, to finance your costs.

Here, take a closer look at two popular options, a HELOC and a personal loan.

A HELOC, as noted, uses your home as collateral. For this to be an option, there needs to be enough equity in the property to borrow against it. The equity is your property’s current value minus the amount remaining on your mortgage. Some points to consider:

• Usually, you will need at least 15% to 20% equity. If you have that much, and the loan amount required is large, it could make sense to apply for a HELOC.

• You can typically borrow up to 85% of your equity.

• The way a HELOC works is you have a draw period (typically 10 years) during which you withdraw funds up to your limit as needed. Then, you enter the repayment period, which is often up to 20 years, during which you pay back the amount you’ve used.

• Typically, HELOCs have variable rates, but fixed-rate options may be available. Also, since these are secured loans, meaning your property acts as collateral, the interest rates may be lower than those for a personal loan.

• Another plus is that in some cases, interest payments may be tax-deductible if the funds are used in the way specified by IRS guidelines.

• An important note: A major downside of a HELOC (or any loan with your property as collateral) is that if you default on your loan, the lender could seize your house.

• Also, the process of securing a HELOC can take weeks, as it usually involves a home appraisal and other steps.

A personal loan can make sense for recent homebuyers who haven’t built enough equity or those who don’t want to use their home as collateral. Details to note:

• For people contemplating both small and large projects, a personal loan may make sense; the amounts available typically run from $1,000 or $5,000 to $100,000.

• Unlike with a HELOC, there is typically no tax deduction possible for the interest you pay on these loans.

• A personal loan for home improvements (aka a home improvement loan) typically has a fixed interest rate, but variable-rate loans are often available, too.

• The loan usually provides a lump sum, and then principal and interest are paid off (most often with monthly payments) over a term of one to seven years.

• Applying for and receiving money from an unsecured personal loan is typically much faster than with a HELOC, partly because no appraisal is required for the loan. Lenders may offer same-day approval, with funds becoming available just a few days after.

• Having an excellent credit score can help a borrower get approved or receive favorable loan terms. Those with lower credit scores will likely pay a higher interest rate.

Deciding which type of funding might be best for your home winterization needs will depend on many factors. It’s worthwhile to shop around and compare offers so you can find the right financial product to suit your situation. It’s also wise to familiarize yourself with how to apply for a loan so you can know what to expect and how long the process will take.

Recommended: Personal Loan Calculator

The Takeaway

Preparing your home for winter weather can be an important step to protect your property, hopefully heading off major repairs and potentially reducing your energy bills. Such steps as cleaning your gutters, having your HVAC system inspected, and adding insulation can be worthwhile.

Winterizing your house can involve a wide range of costs. Fortunately, there are usually ways to finance home improvement projects, such as home equity loans (including HELOCs) and personal loans, depending on your needs.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

What do I need to do to winterize my house?

Some important steps to winterize your house can include cleaning the gutters, inspecting the roof and attic, adding insulation (both to prevent heat loss and protect pipes), having your chimneys checked, servicing your HVAC system, and prepping your outdoor equipment and plants for the colder weather.

How do you close up a house for the winter?

If you are closing up a house for the winter, it’s wise to get necessary inspections done (such as the roof and HVAC system); clean out gutters; shut off the water wherever possible to avoid pipes freezing and bursting; set the thermostat to no less than 55 degrees Fahrenheit; unplug appliances; fill exterior holes that could allow critters inside; and move plants and outdoor equipment inside.

How do you winterize a house so pipes don’t freeze?

It’s wise to set your home’s thermostat to no lower than 55 degrees Fahrenheit at any time of day. Insulating pipes well, especially ones near the home’s exterior, can also help prevent pipes from freezing.

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All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24.
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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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SOPL-Q324-043

Oct

2024

What Is Escrow & How Does It Work?

By Jody McMaster | Home Ownership, mortgage | Comments Off

Escrow isn’t the most euphonious word, but it’s important when you’re a homebuyer and homeowner. In real estate transactions, escrow is the process of keeping money in trust until certain conditions are met. There are a couple different ways that escrow might be used, so let’s look more closely at this important process.

Key Points

• Escrow involves a neutral third party holding money and documents during the home sale process to ensure both parties meet agreed terms.

• During home buying, the buyer’s earnest money is held in escrow until the sale is finalized.

• Post-purchase, escrow accounts help mortgage lenders ensure timely payment of property taxes and insurance.

• Escrow protects buyers, sellers, and lenders.

• Escrow costs typically range from 1% to 2% of the home’s sale price, varying by location.

What Is Escrow?

There are a couple of ways that escrow is used. The first time you might encounter it is during the home-buying process, when your good-faith deposit (also known as “earnest money”) is held in escrow until the sale is finalized.

The funds are kept in the care of an escrow agent, who ensures that the deal terms are met by both sides. This protects both the buyer and the seller during the homebuying journey, which can sometimes be bumpy.

After you purchase a home, an escrow account is often used again as a way to help the mortgage lender ensure that an owner pays property taxes and home insurance fees in a timely and consistent fashion (more on that later). In this scenario, your mortgage loan payments will include taxes and insurance. An escrow account set up by the lender or mortgage servicer will accrue that portion of your monthly payment and pay the tax and insurance bills when they’re due.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

When you make an offer on a home and the seller accepts it, you’ll typically submit some earnest money. This good-faith deposit shows the seller that you are serious about buying the property. Once the seller accepts your offer, the buyer’s or seller’s agent opens an escrow account with an escrow provider, often a title company. The earnest money, as well as the purchase agreement, the seller’s deed, and other documents are held there in escrow until the sale is final.

The earnest money deposit (typically 1% to 3% of the purchase price, though it can be more in a hot market) is verified by the escrow agent, and evidence is sent to the lender in writing.

Buyers who minimize contingencies in their purchase agreement risk forfeiting their earnest money deposit.

Common contingencies include the mortgage contingency, which allows either party to walk away from the deal if the buyers are unable to secure financing by the agreed-upon deadline, and the sale of current home contingency, when buyers need the proceeds from the sale of their existing home to afford the new home.

Others are appraisal and home inspection contingencies. These will all be written into the purchase contract.

As the process moves forward, the escrow agent is responsible for ordering a title search, and tracking and verifying the items laid out in the escrow instructions for the home sale.

The earnest money deposit is held in escrow and when the sale goes through it is used toward the down payment and closing costs.

Sometimes, funds are held in escrow beyond the closing. When this happens, it’s called an escrow holdback. It might occur if, for example, you and the seller make an arrangement that allows the seller to stay in the house for a month after the closing. Money would be held in escrow to pay the seller’s final utility bills. Or perhaps the seller has agreed to make a repair to the home but the work is not completed at the time of closing. Funds might be held in escrow to cover the cost until the repair is made.

What’s the Benefit of Escrow?

Escrow is designed to protect the buyer, seller, and lender until the transaction is complete. Having a neutral third party handle the paperwork and transfer of funds can benefit all parties in a real estate sale.

Escrow is required when you obtain financing, but it is used in cash sales as well. As a buyer, it can be comforting to know that all the transaction details are being handled by the appropriate parties.

As a seller, escrow provides a safeguard if anything goes wrong with the sale. For example, if the borrower backs out of the sale and breaks terms of the contract, the earnest money deposit may be forfeited by the buyer.

Recommended: Selling a House With a Mortgage

How Much Does Escrow Cost?

Escrow companies usually charge a base fee plus a percentage of the purchase price. That typically comes to 1% to 2% of a home’s sale price, but the cost varies by state and county.

For a $400,000 house, an escrow charge of 2% would be $8,000.

You may want to ask your real estate agent or mortgage lender to recommend a title company with low rates.

In many states, the buyer and seller split escrow fees or negotiate how they will be divided. The market temperature — buyer’s or seller’s market — can affect the negotiation.

Escrow After the Sale of the House

If you put less than 20% down on a conventional loan or take out a government-backed loan, your lender will typically establish an escrow account at closing where you will place money to pay homeowner’s insurance, property taxes, and, if necessary, private mortgage insurance (commonly called PMI). If your home is required to have flood insurance, then your lender is, in turn, required to escrow your insurance fees for this policy.

Once established, the account is maintained by monthly contributions that you make as part of your mortgage payment. When taxes and insurance are due, the lender or servicer pays them.

The escrow amount will be reflected on your mortgage statements. Once a year, your lender or loan servicer will examine your escrow account to make sure it is collecting the proper amount to cover your property taxes and insurance, and adjust your monthly payment as necessary.

If an excess of more than $50 is anticipated, you’ll receive an escrow refund. If the excess is less than $50, the loan servicer can choose whether to send you a refund or apply the overage to the following year. In the event of an escrow shortage, the homeowner might be asked to make an extra payment to escrow (this happens, for example, if there is an unexpected increase in property taxes). A loan servicer may also allow the homeowner to make up the shortage by adding to their monthly payments going forward. Either way, the monthly payment will be adjusted to ensure that, going forward, it reflects the true cost of the year’s taxes and insurance bills.

Using an escrow account for taxes and insurance helps protect you and your lender by ensuring that you maintain proper insurance coverage and pay your taxes on time. Consider what could happen if a property owner allows home insurance to lapse and then the home is damaged or destroyed: There would be no insurance funds to pay to repair or rebuild the home, and both the owner and lender would take a loss financially.

Recommended: What Is PMI and How to Avoid It

The Takeaway

What is escrow in real estate? It’s the holding of money and documents by an impartial third party during a home sale, or the lender’s collection of funds from a mortgage holder so that the lender can ensure that insurance fees and taxes are paid. Escrow is intended to protect buyer, seller, and lender and should bring peace of mind to all involved in a real estate transaction or mortgage.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

What is an escrow balance?

The escrow balance is the money that is held in a mortgagor’s escrow account to pay taxes, insurance, and if applicable, private mortgage insurance and flood insurance.

What is an escrow agreement?

An escrow agreement is a contract that outlines the terms and conditions of a transaction for something of value, which a third party holds until all conditions have been met.

What does it mean to be in escrow?

It means that an escrow agent is holding the earnest money, loan funds, and property deed until an appraisal and title search are done and financing has been approved. The earnest money typically will be applied to the down payment or closing costs as the closing progresses.

SOHL-Q324-114

10 First-Time Homebuyer Mistakes to Avoid & 6 Smart Moves to Make

10 Home-Buying Mistakes to Avoid

1. Forgetting to Check Your Credit

2. Not Being Realistic About What You Can Afford

3. Putting Too Much or Too Little Down

4. Forgetting About Homeowners Insurance and Property Taxes

First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.

5. Failing to Budget for Home Repairs and Maintenance

6. Not Hiring a Qualified Home Inspector

7. Overlooking the Neighborhood and Surrounding Area

8. Letting Your Emotions Get the Best of You

9. Not Considering Future Resale Value

10. Not Having an Emergency Fund

Dream Home Quiz

6 Smart Moves for First-Time Homebuyers

1. Get Paperwork Moving ASAP

2. Check Out First-Time Homebuyer Programs

3. Consider Additional Costs Beyond the Mortgage

4. Get Preapproved

5. Choose the Right Type of Mortgage

6. Shop Around for the Best Mortgage Rates

The Takeaway

FAQ

What are some common mistakes first-time homebuyers make?

What are the two largest obstacles for first-time homebuyers?

What are three common mortgage mistakes?

What are the most common mistakes that homebuyers make?

6 Tips for Buying a House Sight Unseen

1. Get Preapproved for a Home Loan

2. Research the Neighborhood

3. Find a Trusted Real Estate Agent

4. Take a Virtual Tour

5. Touch Base After the Inspection, If You Have One

6. Arrange a Virtual Closing

The Takeaway

What to Look for When Buying a New House

1. The Exterior

Roof Damage

Siding Issues

Bad Foundation

Yard Problems

2. The HVAC

Damaged A/C Unit or Furnace

Broken Thermostat

3. The Plumbing

Strong Smells (Good or Bad)

Water Spots and Stains

Rusty or Corroded Pipes

Low Water Pressure

Slow Drainage

4. The Electrical System

Small Electrical Panel

Inadequate Outlets

5. The Functionality

Number of Bedrooms

Kitchen Conditions

Bathroom Basics

Stairs

Hardwood or Carpet?

First-time homebuyers can prequalify for a SoFi mortgage loan, with as little as 3% down.

6. The Aesthetic

Views

Natural Light

Water Access

Noise

Essential Questions to Ask When Buying a House

Becoming a Homeowner

FAQ

What are the five most important things to look for in a new home?

What should you look for in an initial walk-through of a new home?

What are must-haves when buying a new home?

How to Winterize a House

Ways to Winterize a House

Protect Pipes or Pay the Piper

Address HVAC Maintenance and Repair

Check the Roof, Gutters, and Chimney

Examine the Water Heater

Think About Outdoor Equipment and Plants

What’s the Cost of Winterizing a Home?

Financing Winterization Projects

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

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