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Real Estate Field Guide
FAQ

Frequently asked questions

Quick answers drawn from articles across the site, indexed in one place. Each answer links to the article where the topic is covered in full.

69 questions across 14 articles, grouped by source. Each question links to the section of the article where the topic is explained in context. The same answers also live as the FAQ section at the bottom of each individual article.

From Capital gains on a home sale, the § 121 exclusion and what it actually covers

Do I owe taxes when I sell my home?
It depends on the gain. Single filers can exclude up to $250,000 of gain on a primary residence under the §121 exclusion ($500,000 for married joint filers). Gain above the exclusion is taxed as long-term capital gain at 0%, 15%, or 20% federally, plus state tax in most states and the 3.8% Net Investment Income Tax for high-income sellers.
How is capital gain on a home calculated?
Gain equals the amount realized (sale price minus selling costs) minus the adjusted basis (original purchase price plus capital improvements minus any depreciation taken). Selling costs (commissions, transfer tax, attorney fees) reduce the gain. The mortgage payoff is NOT a selling cost, it's the seller's existing balance and doesn't enter the calculation.
Do I qualify for the §121 exclusion?
The §121 exclusion requires both an ownership test (the seller owned the property for at least 2 of the 5 years before the sale) and a use test (the seller used it as a primary residence for at least 2 of those same 5 years). The two-year periods don't have to be continuous or overlapping. The exclusion can only be claimed once every two years.
What home improvements count as basis additions?
Capital improvements that add value, prolong useful life, or adapt the home to new uses (kitchen and bathroom remodels, new roof, new HVAC, finished basement, added rooms, new windows, swimming pools) add to basis. Routine repairs and maintenance (painting, fixing leaks, patching a roof) don't. The distinction matters because basis additions directly reduce taxable gain at sale, often by tens of thousands of dollars over years of ownership.
What tax rate applies to the gain above the §121 exclusion?
Long-term capital gain on a home held more than a year is taxed at 0%, 15%, or 20% federally based on the seller's taxable income for the year. Most sellers fall in the 15% bracket. High-income sellers may also owe the 3.8% Net Investment Income Tax. State capital gains taxes apply on top in most states (California taxes gain as ordinary income; nine states have no income tax).

From Conventional, FHA, and VA loans, and what each one actually costs

What's the difference between conventional, FHA, and VA loans?
Conventional loans follow Fannie Mae and Freddie Mac guidelines and typically require 5–20% down with PMI under 20%. FHA loans accept lower credit scores and as little as 3.5% down, but carry MIP for life or 11 years depending on origination LTV. VA loans are reserved for eligible service members and veterans, require no down payment, and carry no monthly mortgage insurance, only an upfront funding fee.
When is FHA better than conventional?
FHA tends to be better when a borrower has a lower credit score (580–619 range), a smaller down payment, or a higher debt-to-income ratio than conventional accepts. The trade-off is the lifetime MIP on most FHA loans, which makes FHA more expensive over the long run for buyers who could qualify for conventional with PMI.
How does PMI work on conventional loans?
PMI applies when the down payment is under 20% on conventional loans. It's a monthly premium calculated from the loan balance, credit score, and LTV. The federal Homeowners Protection Act requires automatic PMI cancellation when the loan reaches 78% of the original property value, and homeowners can request cancellation at 80% LTV.
Can VA loans be used more than once?
Yes, VA loan eligibility can be reused as previous loans are paid off, and partial entitlement allows a second active VA loan in some cases. Each use may incur a different funding-fee tier (subsequent uses typically cost more than first use). Specific eligibility depends on the borrower's Certificate of Eligibility from the VA.
What credit score do I need for each loan type?
Conventional conforming loans typically require 620+ for the lowest qualifying tiers, with the best rates at 740+ and especially 760+. FHA accepts scores down to 580 with 3.5% down, and 500–579 with 10% down. VA loans don't have a hard minimum from the VA itself, but most lenders require 620+ in practice.

From How a mortgage works, in plain terms

What is a mortgage?
A mortgage is two things layered together, a loan (the borrower's promise to repay) and a lien (the lender's claim on the property if the loan isn't repaid). The borrower receives the loan principal up front, then pays it back over a set term (typically 15 or 30 years) with interest charged each month on the outstanding balance.
How is a mortgage payment split between principal and interest?
Early payments on a 30-year fixed-rate mortgage are mostly interest, because the outstanding balance is largest at the start. Later payments are mostly principal, because the balance has shrunk. On a typical 30-year loan, the crossover point (where each payment becomes more principal than interest) lands roughly halfway through the term. The full payment also includes property tax and homeowners insurance, often escrowed by the lender, plus PMI when the down payment is under 20%.
What's the difference between APR and the interest rate?
The interest rate is what the lender charges on the loan balance each year. The APR (annual percentage rate) folds the rate together with points and most lender fees, expressed as a single yearly rate, which is closer to the true cost of the loan. APR has its quirks (it assumes the borrower keeps the loan for the full term, which most don't), but on the Loan Estimate it's the most direct number for comparing offers.
What does a lender check before approving a mortgage?
Lenders evaluate four things, often called the four Cs, credit (payment history and score), capacity (income relative to debt), collateral (the appraised property value), and cash (down payment plus reserves). Preapproval is a preliminary review; full underwriting verifies each bucket against documentation before the loan funds at closing.
How are mortgage rates set?
Mortgage rates track the 10-year Treasury yield closely, with a spread that varies based on lender risk appetite, mortgage-backed-securities demand, and Federal Reserve policy. Rates aren't directly set by the Fed, they respond to the broader bond market. Day-to-day movement of 0.125%–0.250% is normal; longer-term swings of 1–2 points within a year are common.

From How much house you can afford, and why the lender's number isn't the answer

How much house can I afford?
A common rule of thumb is that total monthly housing costs (principal, interest, taxes, insurance, and HOA) shouldn't exceed 28–31% of gross monthly income, with all monthly debts combined under 36–43%. Lender preapproval often allows higher ratios than what's actually comfortable to live with, the comfortable budget and the qualifying budget are two different numbers.
What's the difference between a lender's preapproval and what I can comfortably afford?
Lender preapproval is the maximum a lender will let you borrow based on income, debts, and credit. Comfortable affordability factors in saving, emergencies, lifestyle, and future life changes. Lenders often preapprove higher amounts than borrowers can comfortably maintain, and anchoring to the preapproval number tends to produce stretched budgets in the first few years of homeownership.
How much should I have saved before buying a home?
Beyond the down payment (3–20% of price depending on loan program), buyers typically need 2–5% of the purchase price for closing costs, plus a maintenance reserve (industry guidance suggests 1–3% of home value annually). A common total cash position is the down payment plus six months of full housing payments held in reserve.
Does my credit score affect how much house I can afford?
Credit score affects the interest rate, which in turn affects what monthly payment a given loan amount produces. Higher scores (760+) typically qualify for the best advertised rates; lower scores produce higher rates and reduce purchasing power on the same income. FHA and VA programs accept lower credit scores than conventional conforming loans.
What is the 28/36 rule?
The 28/36 rule is a traditional underwriting guideline suggesting that monthly housing costs (PITI plus HOA) stay under 28% of gross monthly income, and total monthly debt payments stay under 36%. Modern lenders often allow higher ratios (up to 43% or 50% on some programs) but the 28/36 framing remains a useful comfort threshold separate from the qualifying maximum.

From How the appraisal contingency works, and what waiving it actually gives up

What is an appraisal contingency?
An appraisal contingency is a clause in the purchase contract that lets the buyer renegotiate or walk away if the home appraises for less than the contract price. Without it, a buyer is contractually committed to the full price even when the lender's appraisal comes in low, meaning the buyer must bring extra cash to make up the gap or risk losing earnest money.
What happens when the appraisal comes in low?
A low appraisal typically triggers one of three responses, the seller agrees to drop the price to the appraised value, the buyer brings additional cash to cover the gap, or the buyer invokes the appraisal contingency to terminate the contract and recover earnest money. Many transactions resolve through some combination of price reduction and additional buyer cash.
Can the appraisal contingency be waived?
Yes, and in tight markets buyers often waive it to make their offer more competitive. Waiving the contingency means the buyer commits to the full purchase price regardless of what the appraisal shows, which transfers the appraisal-gap risk from the seller to the buyer.
How long does the appraisal contingency period last?
The appraisal contingency period is set in the contract, typically 14–21 days after acceptance. The lender orders the appraisal, the appraiser inspects the property, and the report is delivered usually within 7–10 days of the order, leaving room for the buyer to respond if the value comes in low.
Does the appraisal contingency apply to cash offers?
No, appraisal contingencies are tied to financing. Cash buyers don't need a lender appraisal, so the clause typically isn't included. Cash offers are often more attractive to sellers in part because they remove appraisal risk from the transaction entirely.

From Rent vs. buy, the honest comparison

Is it better to rent or buy a home?
It depends on how long the buyer plans to stay, local price-to-rent ratios, expected home appreciation, the alternative investment return on the down payment, and rent inflation. The honest comparison models all of these and produces a breakeven year, the year buying overtakes renting on after-tax wealth.
How long do I need to stay in a home for buying to make sense?
Typical breakeven horizons run 4–7 years depending on the market. Shorter horizons usually favor renting because closing costs (2–5% of purchase price) and selling costs (5–7% of sale price) eat the small accumulated equity gain. Longer horizons (7+ years) usually favor buying assuming reasonable appreciation.
What costs do most rent-vs-buy comparisons miss?
Most comparisons understate ownership costs by omitting maintenance (1–3% of home value annually), property tax growth as the home appreciates, insurance inflation, HOA increases, and selling costs at exit. They also commonly assume the rent-side cash savings disappear instead of being invested at a market return.
Does buying make sense with a low down payment?
With less than 20% down, conventional loans carry PMI and FHA loans carry MIP, both of which raise the monthly carrying cost. Lower down payments also leave less equity cushion if home values dip. Buying can still make sense with a low down payment, but the math is closer than at 20% down.
Why do rent-vs-buy calculators give different answers?
Different calculators make different assumptions about appreciation rate, investment return on the alternative capital, maintenance percentage, tax-deduction availability, and selling costs. The conclusions can swing thousands of dollars per year based on which assumptions are used, which is why running scenarios (not just one calculation) produces a more honest read.

From Should you rent or buy right now, how to think about timing in a high-rate environment

Should I rent or buy right now?
The honest answer depends on holding period, the local price-to-rent ratio, expected appreciation, and the alternative investment return on the down payment. At mortgage rates well above the long-run average, the breakeven year for buying typically moves out by 1–3 years compared to lower-rate environments. Buyers planning to stay 7+ years in a market with reasonable appreciation often still come out ahead on the math, while shorter-tenure buyers in high-rate environments often don't.
Should I wait for mortgage rates to fall before buying?
Waiting for rates to fall is a real strategy but not a free one. Rents typically rise 3–5% annually, and home prices have historically risen even faster than rents in most US metros, so the same property often costs more when rates eventually drop. Whether the rate-driven monthly savings outweigh the price appreciation and the extra year of rent depends on the specific market and how far rates actually fall.
Does the "buy now, refinance later" strategy actually work?
Mathematically it works if rates fall enough to offset the cost of refinancing (typically 2–3% of the loan amount in closing costs) plus the extra months of higher payments before the refinance lands. A common rule of thumb is that the rate needs to fall at least 0.75–1.0 percentage points to make a refinance worth it on a typical loan. The strategy carries real risk because the rate path is unpredictable.
How do high mortgage rates change the rent-vs-buy breakeven?
At higher rates, more of each monthly payment goes to interest, which is an expense rather than equity building. The breakeven year typically moves out by 1–3 years compared to a lower-rate environment. For a buyer who would have broken even in year 5 at 5% rates, the same purchase at 7% rates may not break even until year 7 or 8. Long-tenure buyers can absorb this; short-tenure buyers often shouldn't.
What's the price-to-rent ratio and how does it help?
The price-to-rent ratio is the home's purchase price divided by its annual rent. Ratios below 15 generally favor buying (the home pays for itself in roughly 15 years of rent), ratios above 20 generally favor renting (the home would take 20+ years of rent to pay for itself), and ratios between 15 and 20 are a gray zone where personal factors dominate. The ratio is most useful as a same-market comparison tool over time.

From The Closing Disclosure and the Loan Estimate, side by side

What's the difference between a Loan Estimate and a Closing Disclosure?
The Loan Estimate (LE) is an estimate sent within three business days of a complete loan application. The Closing Disclosure (CD) is the final locked-in number, sent at least three business days before closing per federal rule. Both are standardized three-page forms with parallel layouts so buyers can compare them line by line, the comparison is the buyer's main protection against unexpected charges at the closing table.
What information is on each form?
Both forms are three pages with the same structure. Page 1 has the loan terms (amount, rate, monthly payment), the projected payment over time, costs at closing summary, and key dates. Page 2 itemizes closing costs in three sections, Origination Charges (lender fees), Services You Cannot Shop For (lender-assigned services like appraisal), and Services You Can Shop For (title insurance, inspections). Page 3 has totals and contact information.
What can change between the Loan Estimate and Closing Disclosure?
Three categories. Costs that CANNOT increase, lender origination charges, lender-chosen services, and transfer taxes (locked unless a "changed circumstance" triggers a redisclosure). Costs that can increase by up to 10% in aggregate, services the buyer could shop for but didn't, recording fees, lender-list third-party services. Costs that can change without limit, prepaid interest (depends on closing date), tax and insurance reserves, and services the buyer chose from outside the lender's list. When something changes outside these limits, the lender owes a refund within 60 days.
How should I compare the two forms?
Open the LE and CD side by side and go page by page, line by line. Flag anything that differs. Differences are often legitimate (closing date shifted, seller agreed to cover certain costs, property tax bill arrived with a different number) but each one deserves an explanation. Things to specifically check, the loan amount and rate on page 1, the lender fees in section A, lender-assigned services in section B, and the cash-to-close total in section J.
When does closing have to be delayed?
If the Closing Disclosure reveals a change that triggers a new three-day waiting period (a meaningful APR increase, a change in loan product, or the addition of a prepayment penalty), closing must be pushed back. The federal rule is designed to prevent last-minute pressure to close with a problem. Last-minute lender requirements (additional documentation, updated employment verification) can also delay closing; these are usually solvable with a few days of clear communication.

From The inspection contingency, what it actually protects buyers from

What is an inspection contingency?
An inspection contingency is a clause in a residential purchase contract that gives the buyer a defined window (typically 7-14 days) to have the home professionally inspected and to respond to the findings. Response options usually include terminating the contract with earnest money returned, requesting specific repairs, asking for a credit, or proceeding as-is.
What does a home inspection actually cover?
A standard home inspection is a visual, non-invasive examination of the structure, roof and attic, exterior, plumbing, electrical, HVAC, major appliances, and interior. It typically takes 2-4 hours. It doesn't cover pests, sewer lines, radon, mold, asbestos, wells, septic, or specialty systems (pools, fireplaces) — those require separate specialist inspections, often during the same contingency window.
What can a buyer do with inspection findings?
Buyers typically have three response options. They can ask the seller to fix specific big-ticket items before closing, ask for a credit (price reduction or closing-cost contribution) in lieu of repairs, or accept the home as-is. The seller can agree, counter, or refuse. Negotiation patterns depend on market conditions, the specific issues, and the contract's framework (some contracts use "objections and resolutions"; others limit the buyer to terminate-or-accept).
What does buying "as-is" actually mean?
An as-is sale means the seller won't make repairs or offer credits for inspection findings. It doesn't waive the buyer's right to inspect or to terminate within the contingency window if findings are material. As-is is common on estate sales, foreclosures, and properties marketed as fixer-uppers; the price typically reflects the buyer taking on repair risk.
How long is the inspection contingency period?
Inspection periods are set in the contract, typically 7-14 days from acceptance, sometimes shorter in tight markets and longer for vacation homes or unusual properties. The window covers the inspection itself, the buyer's review of the report, any specialist follow-ups, and the negotiation with the seller. Missing the deadline usually means the contingency is deemed satisfied and the buyer loses the right to walk away over inspection findings.

From What escrow actually means, and why people use the word three different ways

What does escrow mean in real estate?
Escrow
What is the escrow period?
The escrow period is the time between contract signing and closing, when a neutral third party (usually a title or escrow company) holds the buyer's deposit and coordinates inspections, appraisals, lien searches, and document signatures. On the West Coast, the period is called "in escrow"; in the eastern US, the same period is more often called "under contract" with the work split among an attorney, a title company, and the lender. The labels differ; the work is similar.
What is an earnest money escrow account?
The earnest money escrow account is held by a neutral party (a title company, attorney's trust account, or broker's trust account, depending on state) and holds the buyer's deposit (typically a few percent of the purchase price) from contract signing through closing. At closing, the earnest money is applied to the down payment or closing costs. If the deal falls through, the contract's contingencies determine whether the deposit returns to the buyer or goes to the seller.
What is the lender's escrow account?
The lender's escrow account (also called an impound account) holds 1/12 of the annual property tax bill and 1/12 of the annual insurance premium each month, alongside the principal-and-interest payment. When the tax or insurance bill comes due, the lender pays it directly. This mechanism exists for the lender's protection, a tax lien outranks the lender's mortgage, and a lapsed insurance policy leaves collateral uninsured. The practical effect for the borrower is a monthly payment 30-50% larger than the P&I figure on the rate sheet.
What are common escrow gotchas?
Three common ones. (1) Lender escrow accounts get analyzed annually and can come up short if tax or insurance rates rose, triggering an adjusted monthly payment to catch up. (2) Earnest money disputes can take weeks or months to resolve when both sides claim entitlement, the escrow holder typically won't release without a written agreement or court order. (3) Some loans require lender escrow (typically under 20% down or in high-cost states); others don't, and borrowers who waive it must pay tax and insurance bills directly and document it when the lender asks.

From What loan underwriting actually checks, between contract and closing

What does a mortgage underwriter check?
An underwriter verifies four buckets, often called the four Cs, credit (payment history and score), capacity (income relative to debt), collateral (the appraised property and clear title), and cash (down payment plus reserves). The window typically runs 30-45 days between contract acceptance and closing, with documentation requests flowing back and forth until the lender issues "clear to close."
What are the four Cs of underwriting?
Credit is verified through a fresh credit pull confirming score and recent payment history. Capacity is verified through W-2s, pay stubs, two years of tax returns for self-employed borrowers, and direct employment verification. Collateral is verified through the appraisal and title search. Cash is verified through two months of bank statements across all accounts, with every large deposit sourced via paper trail. Gift funds are allowed under most programs but require a formal gift letter.
What can derail a loan during underwriting?
The most common causes are borrower actions during the under-contract window that change the qualification picture, opening new credit (cards, store credit, car loans), job changes (especially career changes or commission-based roles), large unsourced deposits, late payments on existing debts, and address-history or identity-verification discrepancies. The conventional posture during underwriting is no major credit or financial moves until after closing.
What is conditional approval versus clear-to-close?
Conditional approval means the loan will be approved if specific conditions are met, typically documentation requests like an updated bank statement, a CPA letter, or a written explanation of a credit-report item. Clear-to-close is the final approval after all conditions are satisfied, allowing the closing date to be scheduled. Federal rule requires the Closing Disclosure to be sent at least three business days before closing.
What happens if underwriting denies the loan?
A denial typically traces to one of four causes, insufficient income relative to debt, credit score below the program threshold, an appraisal that came in too low, or unresolvable issues with the property's title. The buyer's options depend on the contract's financing contingency, an active contingency lets the buyer terminate and recover earnest money. Sometimes a denial is reversible by switching loan products (FHA instead of conventional, for instance) or by another lender with different overlays.

From What private mortgage insurance is, and how to make it go away

What is PMI?
Private mortgage insurance (PMI) is an insurance policy on conventional mortgages where the borrower has less than 20% equity. It protects the lender against loss if the borrower defaults, it doesn't protect the borrower. PMI is typically charged monthly as part of the mortgage payment.
When does PMI automatically cancel?
Under the federal Homeowners Protection Act, PMI must terminate automatically when the loan balance reaches 78% of the original property value, based on the original amortization schedule (not on subsequent appraisals). The cancellation happens regardless of whether the homeowner requests it.
Can I cancel PMI early?
Yes. Borrowers can request cancellation at 80% LTV based on either the original purchase price or a current appraisal showing increased value. The lender may require an appraisal at the borrower's expense, and the loan must be current. Some lenders also have seasoning requirements, often 24 months.
How is FHA mortgage insurance different from PMI?
FHA loans use MIP (Mortgage Insurance Premium), not PMI. Unlike PMI, MIP includes both an upfront fee (typically 1.75% of the loan amount, often financed) and a monthly premium. For most FHA loans originated with under 10% down, MIP lasts the life of the loan, it doesn't auto-cancel like PMI does on conventional.
How much does PMI cost?
PMI typically runs 0.3%–1.5% of the loan amount annually, charged monthly. The exact rate depends on credit score, LTV, and loan term. On a $400,000 loan at 0.5% annual PMI, the monthly cost is roughly $167, and the cumulative cost over the years before cancellation can reach $5,000–$15,000 or more.

From What the seller signs at closing, in plain language

What does a seller sign at closing?
At a residential closing, the seller signs documents that do five specific things, transfer ownership (the deed), close out the existing mortgage (payoff acknowledgments), account for the money (the settlement statement), make legal commitments (title affidavits and FIRPTA), and set up tax reporting (1099-S and any state forms). The full sit-down typically takes 30-90 minutes at the closing professional's office.
What is a deed and what does the seller sign?
The deed is the document that transfers ownership from seller to buyer, recorded with the county after closing as the public record of the new owner. Common types include the general warranty deed (strongest, warranties against all title defects), special warranty deed (warranties only during the seller's ownership), and quitclaim deed (transfers whatever interest the seller has, no warranties). Most residential transactions use general warranty deeds. The seller signs before a notary; the signature is irreversible at recording.
What is the closing or settlement statement?
The closing statement (formally the ALTA Settlement Statement) is the master accounting of the transaction, showing sale price, mortgage payoff, commissions, closing costs, prorations, and net proceeds. The seller should review it line by line before signing, confirming the sale price matches the contract, the mortgage payoff matches the lender's statement, commissions match the listing agreement, and prorations are computed correctly through the closing date.
What title-related affidavits does the seller sign?
Sellers typically sign three categories of affidavit. The owner's affidavit affirms ownership, no undisclosed liens or claims, no recent unpaid work that could trigger mechanic's liens, and no parties in possession other than as disclosed, supporting the buyer's title insurance. The FIRPTA affidavit affirms non-foreign status (foreign sellers face IRS withholding). Identity affidavits confirm the seller is who they claim to be and document any prior name changes. These representations expose the seller to liability if wrong.
What tax forms are signed at closing?
The closing professional issues a Form 1099-S to the IRS reporting the gross sale proceeds; the seller receives a copy. This is the trigger for tax reporting on next year's return (gain and any §121 exclusion go on Form 8949 and Schedule D, with the reported gain aligning to the 1099-S figure). A certification of nonforeign status accompanies the FIRPTA affidavit. Some states require additional state-tax forms or withholding declarations at closing.

From What title insurance is, and what it actually covers

What does title insurance cover?
Title insurance covers ownership problems that already existed when a property changed hands but weren't discovered during the title search, undisclosed liens, forged signatures in the chain of ownership, missing heirs, mis-recorded deeds, and similar defects in the public record. The premium is paid once at closing, and the policy lasts as long as the buyer owns the home (or, for the lender's policy, as long as the loan is outstanding).
What's the difference between owner's and lender's title insurance?
Lender's title insurance protects the lender against defects that wipe out the mortgage lien; coverage is for the loan amount and decreases as principal is paid down. Owner's title insurance protects the buyer; coverage is for the purchase price and stays at that amount for the life of ownership. The lender's policy is required by the lender as a condition of funding; the owner's policy is technically optional in most states. Both are issued by the same title company at the same closing.
What does an owner's title policy actually cover?
Standard owner's title insurance covers forged deeds and mortgages earlier in the chain, undisclosed or missing heirs, errors and omissions in public records or the title search itself, missed liens (taxes, contractors, judgments) against prior owners, encroachments and boundary disputes the survey missed, and defective recordings. It typically does NOT cover zoning violations, building code violations, environmental hazards, or anything the buyer agreed to in writing before closing.
How much does title insurance cost?
Owner's title insurance typically runs 0.4%–0.8% of the purchase price, paid once at closing. On a $400,000 home, that's $1,600–$3,200. The lender's policy is usually less because it covers the loan amount and decreases over time. A handful of states (Florida, New Mexico, Texas) have state-promulgated rates so every insurer charges the same; in most other states, rates are filed by individual insurers and shopping around can save money.