US Residential Real Estate

US real estate transactions are governed primarily by state law, creating significant variation across the country. A California transaction differs meaningfully from a New York or Texas transaction. This slice covers federal programs and common patterns, but always verify state-specific requirements.

Transaction Process Variations

Attorney states (New York, New Jersey, Massachusetts, Connecticut, Georgia, others) require or strongly encourage attorney involvement. Attorneys handle contract review, title examination, and closing. In escrow states (California, Arizona, Washington, others), title companies handle most functions. Hybrid states fall somewhere between.

Closing mechanics vary: In attorney states, buyers and sellers typically attend a closing meeting with attorneys present. In escrow states, documents are signed separately and escrow agents coordinate. Some states allow fully remote closings with remote online notarization (RON); others require in-person notarization for certain documents.

Earnest money (also called good faith deposit) is typically 1-3% of purchase price, held by the listing brokerage, title company, or attorney. This becomes part of the down payment at closing. If buyer breaches contract after contingencies are removed, seller may be entitled to earnest money as liquidated damages.

Title Insurance and Closing

Title insurance is nearly universal in US transactions. Lenders require a lender's policy; buyers should purchase an owner's policy (often the seller pays, varies by state). Unlike other insurance, you pay once at closing and the policy covers as long as you (or your heirs) own the property.

Title insurance protects against: undiscovered liens, forgery, recording errors, unknown heirs, boundary issues. It does not protect against: known defects, issues arising after policy date, matters you agreed to accept.

Title search and commitment: Before closing, the title company examines public records and issues a commitment showing discovered liens, easements, and requirements. Address these before closing. The final policy is issued after closing.

Closing disclosure (CD) must be provided at least 3 business days before closing. Compare to your Loan Estimate carefully—significant changes may indicate problems. The CD itemizes all costs, prorations, and amounts due.

Escrow account (also called impound account) is the lender holding funds for property taxes and insurance, paying them on your behalf. Required for loans with less than 20% down, optional otherwise. Your monthly payment includes escrow contributions. Escrow analysis annually adjusts for rate changes.

Loan Programs and Financing

Conventional loans follow Fannie Mae/Freddie Mac guidelines. Down payment minimum 3-5%, credit score minimum around 620-640 (varies by lender), DTI limits 36-45%. Private mortgage insurance (PMI) required below 20% down, cancellable when you reach 20% equity.

FHA loans are government-insured through the Federal Housing Administration. Down payment minimum 3.5% (with 580+ credit), more lenient DTI (up to 50%), lower credit requirements (around 500 minimum with 10% down). Mortgage insurance premium (MIP) required for the life of the loan if less than 10% down. Popular with first-time buyers.

VA loans for eligible veterans, active-duty service members, and surviving spouses. No down payment required, no private mortgage insurance, competitive rates. Funding fee (0.5-3.6% depending on down payment and service type) can be financed into loan. Requires VA appraisal with specific property requirements.

USDA loans for rural areas (definition broader than expected—many suburban areas qualify). No down payment, income limits apply (115% of area median income), property must be in eligible area. Check USDA eligibility maps.

Jumbo loans exceed conforming loan limits ($766,550 in most areas for 2024, higher in high-cost areas). Stricter requirements: higher credit scores, larger down payments (typically 10-20%), more reserves required. Rates may be higher or competitive depending on borrower profile.

Key Numbers and Thresholds

Down payment tiers: 0% (VA, USDA), 3% (conventional with restrictions), 3.5% (FHA), 5% (conventional standard), 10% (avoids FHA lifetime MIP), 20% (avoids PMI, best rates), 25%+ (investment property minimum).

DTI limits: 28% front-end (housing costs only), 36% back-end (all debt) for conventional with strong profile. Up to 43% back-end with compensating factors. FHA allows up to 50% with automated approval.

Credit score tiers: 620 conventional minimum (some lenders require 640), 580 FHA with 3.5% down, 500-579 FHA with 10% down. Higher scores get better rates—740+ is considered excellent.

Closing costs typically 2-5% of purchase price. Buyer costs include: origination fee (0-1%), appraisal ($400-700), title insurance (0.5-1%), recording fees, attorney fees (if applicable), prepaid taxes and insurance. Seller costs include: agent commission (5-6%), transfer tax (varies by state), title insurance (if customary).

Reserve requirements: Lenders want 2-6 months of mortgage payments in reserves after closing. Investment properties require more reserves than primary residences.

State-Specific Considerations

Property taxes vary enormously: Texas has no state income tax but high property taxes (1.6-2.5%); California's Prop 13 limits assessment increases; New Jersey has the highest effective rates (around 2.5%); Hawaii among the lowest (around 0.3%). Understand local rates before calculating affordability.

Transfer taxes (also called documentary stamps, excise tax): Some states charge substantial taxes on sale (New York, California in some areas, Pennsylvania). Others have minimal or no transfer tax (most of Texas, Indiana). Can add 1-2% to closing costs.

Disclosure requirements: States require varying seller disclosures. California has extensive requirements; some states allow "as-is" sales with minimal disclosure. Always request and review whatever disclosures are available.

Foreclosure process: Judicial foreclosure states (New York, Florida, Illinois) require court involvement and take longer. Non-judicial states (California, Texas, Georgia) allow foreclosure without court if deed of trust was used. This affects how quickly defaulting borrowers lose property.

Homestead and Tax Benefits

Mortgage interest deduction: Interest on up to $750,000 of mortgage debt ($375,000 married filing separately) is deductible if you itemize. The standard deduction increase in 2018 reduced the benefit for many taxpayers. State and local tax (SALT) deduction is capped at $10,000.

Homestead exemptions reduce property tax burden in many states. Must apply and meet requirements (primary residence, sometimes age or income requirements). Texas offers significant homestead protection from creditors as well.

Capital gains exclusion: Up to $250,000 gain ($500,000 married filing jointly) excluded from tax on sale of primary residence if you've lived there 2 of the past 5 years. Must not have claimed exclusion in past 2 years. Partial exclusion available for job relocation, health, or unforeseen circumstances.

Common Misconceptions

"Pre-approval means I'll get the loan." Pre-approval is conditional. Lenders still verify employment before closing, and changes (new debt, job loss, large deposits) can derail approval. Don't change jobs, open credit cards, or make large purchases after pre-approval.

"I need 20% down." Many programs allow far less. But less than 20% means mortgage insurance costs, and lower down payment often means higher rate. Weigh total cost, not just down payment amount.

"The appraisal protects me." The appraisal protects the lender. It establishes that the property is worth at least the loan amount. It doesn't mean you're getting a good deal or that the property is free of defects.

"My credit score is what Credit Karma shows." Mortgage lenders use different scoring models (FICO 2, 4, 5 depending on bureau). Scores from free services often differ by 20-50 points. Get actual mortgage credit scores when pre-approving.

"I can't buy with student loans." Income-driven repayment plans count only the monthly payment, not the full balance. FHA and conventional have specific rules for deferred loans. Student debt complicates but doesn't preclude buying.

"Cash offers always win." Cash offers are attractive (faster close, no financing contingency) but don't automatically win. Sellers weigh price, terms, and certainty. A well-structured financed offer can compete by reducing contingency periods and demonstrating strong qualification.