Before You Start: Learn the Basics of Buying a Home

You don’t need to be ready right away, but once you’ve got a game plan to get your finances in order and the seeds of home ownership have been planted in your head, you can start doing your research. Give yourself some time to research exactly what you want and are capable of buying and you’ll be ready to pull the trigger once it’s time.

A few essentials before you start:

What is a mortgage?

A mortgage is a loan a homebuyer takes from a bank or other lender specifically to buy real estate. The collateral or security for this loan is the property itself, so if the buyer stops making payments, the bank can seize the property and foreclose on or repossess it to recover the balance of the loan.

What is a title?

A property’s title is its proof of ownership. In order to buy a property from a person or corporation, a title insurance company will do an extensive title search on the history of the property—any transfer of ownership, claims made against it, and mortgages associated with it. They will confirm that the title is in good standing and the seller has the legal right to transfer it to a new owner.

What is a FICO score?

FICO (originally Fair, Isaac and Company) is a software company that developed a credit scoring system in the 1950s. Their scoring system has since become the unofficial barometer to determine whether someone is creditworthy.

• FICO scores to assess general risk as a lender debuted in 1989
• FICO scores range from 300 to 850
• Fannie Mae and Freddie Mac started using FICO scores to assess mortgage borrowers in 1995
• In 2003, Congress issued a law that granted people the right to a free credit report every year

Your credit score isn’t the only factor in determining whether you will be able to buy a home, but it’s a good gauge of your ability to secure a loan and your overall finances.

Learn more about credit reports and FICO scores >>

Who are Fannie Mae and Freddie Mac?

They probably became household names during the 2007 mortgage crisis, but Fannie Mae and Freddie Mac aren’t people. The Federal National Mortgage Association (FNMA), known as “Fannie Mae,” and the Federal Home Loan Mortgage Corporation (FHLMC), known as “Freddie Mac,” are the two largest mortgage investors in the US. They are government-sponsored enterprises whose roles are to create stability and affordability in the housing market. They were created with the goal of expanding the secondary mortgage market—mortgages for low-, moderate-, and middle-income buyers.

In 2008, after the mortgage crisis, they were taken over by the government’s Federal Housing Finance Agency (FHFA) and they now operate under a congressional charter. Currently, the FHFA regulates the two companies to ensure they are financially sound and properly managing risk.

Learn more about Fannie Mae and Freddie Mac >>