How to Buy a House: A Housing Guide to Buying or Building a Home

When there are changes in the housing market, everyone seems to be talking about buying or selling houses. If you’ve thought about buying a house, it’s important to do the right research, because this is one of the biggest financial decisions you will make.  A house is the place where you and your family will spend countless hours together making memories. The kitchen is a central gathering place, and a backyard is a special place for playing together as a family. There are many options to consider when you want to own: buying, building, rent-to-own, and more. 

But a house can also be the source of extreme financial stress if you’re not ready to buy or build a home. To help you figure out how to buy a house, we’ve prepared this guide that will discuss the financial steps on how to buy a house and answer some of your questions about financing a home. 

Here’s what we’ll cover in this piece:

  • Financing a Home
    • Loans
    • Mortgage Terms
    • Qualifying for a Mortgage
    • Should You Pay Off Your Mortgage Early?
    • The Infinite Banking Concept
  • How to Buy a House Step-by-Step
  • How Much Does It Cost to Build a House
  • The Bottom Line

Financing a Home

One of the most important things to focus on when buying a house is how to finance it. Here are some of the most common ways to finance a house. 

Loans

Loans may seem like one homogeneous category, but there are several types of loans that you can use to finance your house. Here are the details on different types of loans:

  • Conventional loans. These are the most common types of loans to finance a house. Within conventional loans, you can choose two different types of interest rates: fixed or adjustable. Fixed rate conventional loans have a set interest rate that you pay for the duration of your mortgage, regardless of the housing market interest rates. An adjustable rate loan has an interest rate that mirrors the current housing market rate. Your payments vary as the interest rates change. An adjustable rate conventional loan may seem initially appealing because it could cost less at first, but it could cost you more in the long term when housing market interest rates increase. 
  • FHA loan. While conventional loans aren’t guaranteed, FHA loans are government-backed. That means you could put as low as 3.5% down, unlike the typical 20% of conventional loans. FHA loans are a good option for those who want to pay a smaller down payment. These loans only come as fixed 15 or 30 year loans with a set interest rate. FHA loans also require mortgage insurance in addition to the mortgage payments unless you put 20% down or until the loan is paid down to 78% loan-to-value (LTV). 
  • Bridge loan. This loan is for people who are buying a new house before selling their previous home. Lenders will combine your current and new mortgage payments together into one payment. Bridge loans require excellent credit, and the maximum total financing is usually limited to 80% of the combined value of your current home and the home you want to buy. 
  • USDA loans. These loans are specifically designed for people who live in rural and suburban areas. These loans are government financed for USDA eligible homes. They require no down payments, but they do have to meet the qualifying criteria for USDA. They also require mortgage insurance similar to FHA loans.

Types of Mortgage Terms

There are many options available for mortgage lengths with custom terms and rates, but these are the most common options offered by lenders. 

Here are some of the advantages and disadvantages of each term length: 

  • 15 year mortgages. These are a fairly common mortgage because many people are determined to pay off their mortgage as soon as possible. The advantage of this loan type is that the mortgage is paid off sooner, but the disadvantage is the higher monthly payments reduce your free cash flow, and could prevent you from investing sooner.
  • 30 year mortgages. This is the other most common mortgage term. With this mortgage, you have lower monthly payments, which gives you more free cash flow to invest with. But the disadvantage is that you end up paying more in interest over the course of the mortgage.  (This interest can be recovered completely with the right planning. I’ll show you how below).

Qualifying for a Mortgage

When you apply for any of the above types of loans, they fall into two categories: qualifying and non-qualifying. Qualified loans meet the requirements of the Consumer Financial Protection Bureau, and non-qualified loans do not. These requirements ensure that lenders are offering fair terms. Non-qualified loans require extra research before signing. 

Once you’ve determined the loan you would like, you need to make sure that you qualify for it. You will most likely need to show that you have the following: 

  • A reliable source of income (like a work salary, SS income, or income from rental properties). You can show your income through documentation like tax returns or W2s. 
  • A debt-to-income ratio that falls within permissible guidelines of your lender. To determine your ratio, total all your monthly debt, and divide this number by your gross income. The higher the number, the greater the risk of lending to you. It should be lower than 45% for most conventional mortgages, lower than 43% for FHA, and lower than 41-46% for USDA. 
  • A fair or good credit score. Your credit score is based on your past history with credit. A good credit score for a mortgage typically starts at 670. A fair credit score is between 580 and 669. For conventional loans, most lenders require a score of at least 620 to qualify. USDA loans do not specify a minimum credit score, but the nationwide minimum requirement is about 640. FHA allows lower scores—as low as 500—with a 10% down payment. 
  • A down payment. Lenders will usually want proof of where the down payment will come from. Some ways to show this is with a checking or savings account, 401k, or cash value life insurance statements & account balances. 

Should You Pay Off Your Mortgage Early?

When you’re considering buying a home, you will get a lot of advice, and the most common may be to pay off your mortgage early, so you can own your house. It seems to be part of the American dream to pay off your mortgage. But is it actually in your best interest to pay off your mortgage? It can be in some cases, but more often, it’s better not to pay off your mortgage, and here’s why. 

When you’re making extra mortgage payments, you are essentially parking your money in a non-liquid asset that you’re not able to access. You will have less capital to use for everything from emergencies to family vacations when your money is tied up in mortgage payments. More importantly, you will have less money that you’re able to keep or invest until you pay off your mortgage. With investments, you’ll want a return earlier on instead of waiting for fifteen years until a mortgage is paid off. If you start only after your house is paid off, then you won’t be gaining as much to use or save for retirement. 

An alternative to paying off your mortgage early is buying whole life insurance. If you continue making your regular mortgage payments, you can have extra money to put in life insurance, instead of making extra payments. Your life insurance policies can then accumulate cash value for the duration of your mortgage and beyond, leaving you with more cash value you can use now. Then when you do finish paying off your mortgage, you already have capital saved up that can be used to save for retirement and to leave a financial legacy. But it’s crucial to start your money growing early on, which may not be possible if you focus on paying off your mortgage. To see how this process works, this video illustrates how much money you can accumulate by not paying your mortgage off early. 

The Infinite Banking Concept

A down payment, interest rates, and mortgage payments all begin to add up. Because of all these payments, you can often end up owing the bank a lot of money and paying them a lot of interest. But there is a way to ease the financial burden with whole life insurance. This is called the infinite banking principle. 

When using the infinite banking principle, you work on accumulating a high cash value in your whole life insurance policy. This capital is like equity in the death benefit and can be used when you are still alive. It can also be used to help finance your house. Instead of borrowing from a bank and paying interest to the bank, you could use the cash value in your life insurance policy. Essentially, you are then paying interest to yourself. That’s why it’s called the infinite banking principle: you are using your own insurance policy to help pay for your house. 

In addition, the cash value from a whole life insurance policy can also be used to help fund some of those payments, like the down payment. These policies, once funded, will help you accumulate wealth that you can use today and in the future.

Self-financing your entire mortgage using the infinite banking principle, can give you more flexibility, but may not be the best financial decision.

In the current environment with low interest rates it usually makes the most sense to finance your house with a bank loan, and make “extra” discretionary payments to build a whole life insurance policy while you pay off your mortgage as described in the previous section.

How to Buy a House Step-by-Step

If building or rent-to-own aren’t what you want, you may decide to buy an existing house. If you’ve decided to buy a house, these are the basic steps to go about buying a house. 

  1. Prepare financially. You should try and save three to six months for emergency funds. An emergency fund before buying a house is beneficial because what happens if you move in and a pipe bursts? You don’t want all of your accounts to be wiped so clean from the down payment that you can’t cover a rainy day accident.
  2. Get preapproved for a mortgage, if you’re using a loan. Take the time to meet with lenders and financial advisors to determine the right financial approach to a mortgage for your individual needs. 
  3. Find a real estate agent. It might sound silly, but you should find a good real estate agent to help you through the process of buying a house. You can do a lot of the research yourself, but it can be very beneficial in the long run to have an expert guiding you through.
  4. Find your perfect home. This step is the fun part of the house buying process. Make sure you have your budget in mind and a clear picture of what you’re looking to find. 
  5. Submit an offer. Your agent will help you submit a good offer with all of the necessary parts. The offer will include basic information, like what you’re willing to offer as earnest money and other conditions that make you favorable. 
  6. Get a home appraisal. If your offer is accepted, you’re officially under contract for your new home. You’ll want to get a home inspection to make sure there aren’t any hidden repairs or surprises waiting for you when you move in. You’ll also want to get a home appraisal to determine the value of the property. 
  7. Close on your house. All of the work has paid off, and you can close on your very own home. Once you sign, you’re a homeowner. Congratulations!

How Much Does it Cost to Build a House? 

There are a lot of factors that can go into whether or not building or buying is better for your individual situation. The first thing to consider is the housing market. That can cause differences in what is currently available in the area you want to live, and the housing market can also determine if it’s better to build. But you may be wondering, “Can it be cheaper than buying a house?”

While it’s fairly simple to find out how much an existing house costs, how much does it cost to build a house? Again, the answer can vary depending on who you ask and what type of home you are trying to build, where you’re building, and the current housing market. On average, building a home can cost between $147,000 to $436,000. So building a house could be more expensive or more affordable than buying an existing house, but it can depend on where you live and what you want to do. 

One of the best ways to determine the approximate cost is to consider that the average cost per square foot is about $103 and then to multiply that by the amount of square footage you would like. The cost will vary by where you live, and based on the current housing market as well. 

To finance building a house, you can also get a loan. But the process of getting a loan to build is slightly different than for buying a house. Instead of getting a typical mortgage loan, you will get a construction loan. Keep in mind that a construction loan is considered higher risk because the house doesn’t exist yet, so your credit score will be much more important when getting approved for this type of loan.

 To get the loan, you’ll have to provide a lot of information on your construction plan including floor plans, materials needed, and even the type of insulation that will be used. You may also need to pay approximately 20% for the down payment on a construction loan, but it could end up being even higher. 

A construction loan typically only lasts a year, and after that, you can pay off the entirety of the construction loan, or you can turn your construction loan into a regular mortgage loan. 

The Bottom Line

There are so many options for owning your own home, even with variations in the housing market. You can buy—following the above steps—or you can build. All of these options have their own benefits and drawbacks. Each one works for different people and different situations. 

Don’t hesitate to find financial advice to determine which options will be best for you. Here at Life Benefits, we can help you recover the money you pay on your mortgage interest by building wealth in whole life insurance rather than making extra mortgage payments. Whether you are currently in the housing market, or looking to build, you can use this strategy to start building your wealth at the same time.