Most Common Home Buyer Questions

Buying a home is probably one of the biggest decisions of your life, and it likely doesn’t happen very often. But when it does, there’s a lot involved. Naturally, that leaves most people with plenty of questions about the home buying process. Whether you’re looking for a trendy place in downtown Sioux Falls or a spacious home in a quiet East Sioux Falls neighborhood, here are our answers to some of the most common home buyer questions, from qualifying for a loan to paying closing costs.

For questions about houses during an open house or showing, check out our open house tips for first-time home buyers.

How much house can I afford?

This is one of the biggest home buyer questions out there, and the answer has a lot to do with your financial situation and ability to pay back what you borrow. To get an idea of what you can afford, you’ll have to factor in how much other debt you have and how much money you earn.

An industry guideline advises that your debt-to-income ratio should be no more than 43%. If you estimate your monthly earnings and multiply that by .43, you’ll get a suggested limit on your monthly debt capacity. Then subtract the monthly payment for any car loans, student loans and credit card debt. What’s left is the maximum available for a mortgage payment. If you have uncommonly high expenses for utilities, other insurance, groceries, medical expenses or savings goals, consider adjusting your housing limit accordingly.

How much should my down payment be?

The standard recommendation is to aim for a down payment of 20% or more of the purchase price, though you may be able to buy a home while putting down less than that. The caveat to watch out for is that if your down payment isn’t 20%, you may have to pay a monthly private mortgage insurance premium until your home equity reaches 20%.

Keep in mind that earnest money is part of your down payment, but there may be other closing costs that are not. Earnest money is like a security deposit you pay when your offer has been accepted to show you’re serious about buying.

Which home buying program is best for me?

Another one of the top home buyer questions is how to go about getting a home loan. Banks, credit unions, specialty lenders and the government all offer programs for obtaining a mortgage loan. Depending on your circumstances and the type of real estate you’re looking to buy, here are some of the most common loan program options:

Conventional loan

These are the standard mortgages offered by banks, credit unions and specialty lenders, and you’ll need to meet their individual requirements in order to qualify.

FHA loan

The Federal Housing Administration insures FHA loans to help a home buyer who may have issues that disqualify them from a conventional loan, like a lower credit score, a previous bankruptcy, or less money for a down payment or closing costs.

USDA loan

The U.S. Department of Agriculture’s Single Family Housing Guaranteed Loan Program helps low-income or moderate-income households buy a home in eligible rural areas.

VA loans

The U.S. Department of Veteran Affairs helps servicemembers, veterans and eligible surviving spouses become homeowners.

If you qualify for a USDA loan or VA loan, you might be able to get a mortgage loan with no down payment. An FHA loan or conventional loan may require as little as 3% down, but keep in mind that you still may have to pay private mortgage insurance to compensate your lender for that additional risk.

What costs are involved in buying a home?

Typically lumped into the catch-all term closing costs, you may have to pay an initial portion of ongoing costs like real estate taxes, also called property taxes, and homeowners insurance.

In addition, sometimes banks or lenders will offer or require you to put away money every month to pay future installments of these costs by setting up an escrow account and adjusting it annually as cost amounts change.

Then there are some one-time fees like the loan origination fee and title insurance. The seller usually pays the real estate agent commissions, though sometimes a split can be negotiated in a counteroffer.

Depending on the property, there may also be conditional costs like homeowners association fees.

Prior to closing, you’ll receive a disclosure statement that lists out all costs associated with the purchase.

How much are closing costs?

Closing costs encompass various fees, including lender charges, title insurance, and appraisal fees. These costs usually range from 2% to 6% of the home's purchase price.

What do I need to qualify for a loan?

Loan qualification requirements vary by lender, but here are some of the most common ones:

To begin with, you’ll need to provide personal information like your ID, Social Security Number and contact information.

Most lenders will also ask for documents related to your employment history or job security, credit score and debt-to-income ratio. That may include your most recent paystubs, two years worth of W-2s or tax returns, and financial statements from banks, credit cards and investments.

Do I need a mortgage pre-approval or pre-qualification?

When it comes to buying a home, a mortgage pre-approval or pre-qualification can make a difference. These terms refer to different stages of the evaluation process.

Pre-qualification is an initial assessment based on the information you provide. It gives you an estimate of the mortgage amount you might qualify for but lacks thorough verification. On the other hand, pre-approval involves a rigorous evaluation of your financial background, including credit checks, income verification, and documentation. It provides a more accurate assessment of loan amount and interest rates.

Obtaining a mortgage pre-approval is generally recommended for several reasons. First, it enhances your credibility as a serious buyer. Additionally, it helps you determine your budget accurately and can expedite the mortgage approval process when you find your desired home.

To make an informed decision, consulting a mortgage professional or lender is advisable. They can provide personalized advice tailored to your situation and guide you through the process.

What credit score is needed to buy a home?

Your credit score is only one of many factors that are considered by your lender, but credit rating company Experian lists a minimum credit score of 620 for conventional and VA loans, 580 for USDA loans and 500 for FHA loans.

A good credit score falls between 670 and 739, while a 740 or above will land you in very good territory and an 800 or above is considered exceptional.

Should I get a fixed-rate or adjustable-rate mortgage?

The advantage of a fixed-rate mortgage is that your interest rate is locked in for the life of your loan, and therefore your mortgage payment won’t change (unless your escrow amount is slightly adjusted). The vast majority of home buyers opt for fixed-rate mortgages, especially during times when interest rates are expected to rise in the future.

With an adjustable-rate mortgage (ARM), the interest rate changes constantly with economic conditions. If the mortgage rate rises, you’ll pay more, but if mortgage rates drop, you’ll pay less. Adjustable-rate mortgages are most advantageous when interest rates are falling or when you don’t expect to be paying your mortgage for very long, as ARMs often come with lower interest rates than comparable fixed-rate mortgages.

Should I get a 15- or 30-year mortgage?

This is a consideration based on your unique financial situation. Assuming the loan amount is the same, a 15-year mortgage would require a higher monthly payment, but you’d pay less in total interest over the life of your loan.

A 30-year mortgage offers a lower mortgage payment every month, but interest accrues over a longer period of time.

Home buyers who can afford a higher monthly payment and want to pay off their mortgage as fast as possible often consider the 15-year option, while home buyers looking to maximize their purchasing power or lock in a low interest rate for longer often consider the 30-year loan.

There are often additional options available as well, like a 20-year mortgage. And other factors, like how long you anticipate living in the house and whether you anticipate refinancing your mortgage in the future, can also play into your decision.

What is Private Mortgage Insurance (PMI), and will I need it?

PMI protects your lender from losing money if, for example, you foreclose on your mortgage and the value of your home drops below your loan balance.

Few home buyers want to pay for private mortgage insurance, but it may be required by your lender, especially if your down payment is less than 20% of the purchase price and you’re borrowing through an FHA or conventional loan program. With a USDA or VA loan, you may be able to buy a home with less than 20% down while not paying PMI.

PMI protects your lender from losing money if, for example, you foreclose on your mortgage and the value of your home drops below your loan balance.

What are mortgage points?

Mortgage points are a one-time upfront fee you can choose to pay to get a lower interest rate. They’re also called discount points, and they’re most useful when you can afford to pay more upfront in order to save money over the life of your mortgage.

The particular cost of a mortgage point varies depending on the total loan amount and the incremental reductions in interest rate offered by your lender.

Do I have to pay a real estate agent when buying a home?

In most cases, buyers do not directly pay their real estate agent. The buyer’s agent is typically compensated through a commission that's paid by the seller, which is split between the buyer’s and seller’s agents as part of the home sale transaction. 

In addition to helping you find properties, a buyer’s agent provides expert guidance throughout the entire process—from making competitive offers and negotiating terms to navigating inspections and closing paperwork. Their market knowledge and advocacy can help you avoid costly mistakes and ensure you get the best possible deal. And when you choose to work with the Tyler Goff Group, you get the benefit of our entire team working for you.