Marriage and Money

Getting Down to Basics: Understanding The Home Buying Process

Understanding the basics of home buying may help guide you through the process. Protective Life offers some valuable information about how it all works.

Understanding The Home Buying Process

Getting down to the basics

As a newly married couple, you have a lot of “firsts” to look forward to. One of those first time events could include shopping for a new home. If you've budgeted and saved, you might be anxious to get the process going and find your dream house. However, if you're a newcomer to the world of house buying, you may find a lot of the language and terms surrounding the process confusing. The fact is, it's not just helpful to understand the verbiage relating to mortgages and escrow, but downright important! Not knowing the lingo of the house buying game could have a negative effect on your finances - something that you'll have to live with for many years to come.

In this article, we'll get you up to speed quickly on some of the basic terminology related to the home buying process, so that you can make informed financial decisions and budget more effectively.

Escrow Account.

This is simply an account that your lender uses to set aside money to cover the costs of certain expenses associated with a new home purchase. It typically includes enough cash to cover homeowner's and mortgage insurance, as well as property taxes. For example, instead of paying your property taxes and insurance out-of-pocket every month, your escrow account collects and then “holds” your money to pay these bills on your behalf. It's important to note that some lenders will allow you to pay taxes and insurance outside of escrow. If this is something you would prefer to do, be sure to discuss your options with your mortgage broker.

Mortgage Insurance.

Don't confuse mortgage insurance with a homeowner's policy. They are not the same! If you put less than 20 percent down on your new home, your lender could require that you carry mortgage insurance in the event that you default on your loan.

Earnest Money.

If you find a home and want to make an offer, the seller will require earnest money to ensure that you're truly serious about buying the property. If you change your mind, the seller can keep the money. If you move forward with the purchase, then the earnest money may become part of your down payment.

Closing Costs.

These are expenses that must be paid when you go to sign your paperwork and close on your new home. They typically include fees associated with the appraisal, running your credit reports, title search and recording fees, etc. According to the website, Realtor.com, closing costs are generally 3.5 percent of your loan amount.1 Sometimes you can negotiate with the seller, asking them to pay for a portion of the closing costs. It doesn't hurt to ask, especially if they're motivated to sell.

Now, let's get to know some mortgage types:

Adjustable-rate Mortgage (ARM).

An ARM means that your interest rate will adjust or change over time. When this happens, your monthly house payment will also change. Be sure to discuss with your lender just when these adjustments will be made (one year, five years, etc.), and if there is a cap to how high the rate can climb. An ARM loan typically begins with a lower rate than a fixed loan, but you'll have to feel comfortable with knowing that it will adjust.

Fixed-rate Mortgage.

Unlike an ARM, a fixed-rate loan maintains the same interest rate for the entire life of your loan. That means that you won't have to worry about overextending your budget if interest rates climb because your payment will stay the same.

Balloon Mortgage.

This type of loan typically provides you with relatively low monthly payment for a fixed period of time. Depending on your contract, that could be anywhere from 5, 10, 15, or more years. Upon completion of this initial period, you'll be obligated to make a large “balloon” payment on your loan. If you select this option, be sure that you plan accordingly so that you're not caught in a financial bind when your payment comes due.

Bridge or Swing Loan.

This is a short-term loan that essentially buys you the necessary time to sell one house so that you can move forward with the purchase of your new home. These types of loans can be risky because there is no guarantee of when your old home will sell.

Federal Housing Administration Mortgage (FHA).

These loans can be a good choice for first-time buyers because they typically offer a low down payment, low closing costs, and you don't need a superior credit rating to qualify. In 2016, the FHA minimum down payment is 3.50 percent of the purchase price of your home if your credit score is at least 580.2

Veteran's Administration (VA) Loan.

If you or your new spouse are veterans, a VA loan allows you to borrow 100 percent of your new home purchase. That means no down payment. For more information on VA loans, visit the Veteran Loan Center.

USDA Loans.

Offered by the U.S. Department of Agriculture, this loan program can be a good choice for rural residents who meet specific eligibility requirements. For more information, visit the USDA website.

Budgeting for your new home takes planning and preparation. Be prepared for the process by doing your homework and getting a better understanding of the home buying process.


1http://www.realtor.com/advice/whats-included-in-closing-costs/

2http://www.fha-world.com/fha-loan-down-payment-requirements-2016.html
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Managing Marriage and a Mortgage

As a newlywed couple, budget planning for a new home purchase is an important step because it's a long-term financial commitment. Before you go house hunting, take the time to learn a bit more about commonly used home buying terms, as well as different types of home loans. For more information, visit the Protective Life Learning Center.


All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

Learning Center articles may describe services and financial products not offered by Protective Life or its subsidiaries. Descriptions of financial products contained in Learning Center articles are not intended to represent those offered by Protective Life or its subsidiaries.

Neither Protective Life nor its representatives offer legal or tax advice. We encourage you to consult with your financial adviser and legal or tax adviser regarding your individual situations before making investment, social security, retirement planning, and tax-related decisions. For information about Protective Life and its products and services, visit www.protective.com.

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