BUSINESS

Fact checked by Suzanne Kvilhaug

Buying a home is one of life’s most exciting (and expensive) milestones. Whether you’ve decided the time to buy is now to take advantage of tax benefits, build a sense of community, grow your wealth through appreciation and equity, or simply paint the walls whatever color you want, understanding each step can help you make smart and confident decisions about the house you’ll call home.

This guide walks you through the homebuying steps, offering tips and vital information to prepare you for this journey.

Key Takeaways

• Assess your financial readiness and credit score before buying a house.
• Determine your budget and calculate how much you can afford to spend.
• Research various financing options, such as conventional, FHA, and VA loans.
• Get pre-approved for a mortgage to strengthen your offer and streamline the buying process.
• Conduct a thorough home inspection and appraisal before finalizing the purchase.

1. Make Sure You Are Ready

Buying a home is a long-term commitment, so the first step in the homebuying process is ensuring you’re financially prepared. Review your income, expenses, debts, and savings to assess your current financial health. You should also consider your job stability in making these determinations. A solid job history and reliable income improve your chances of mortgage approval.

To further determine readiness, check your credit score. Your credit can impact mortgage approval and affect the interest rates you’re offered. 

Tip

Credit scores range from 300-850, with most lenders requiring a score of 620 for approval. Higher credit scores mean more favorable rates. To check your score and get a detailed report, visit AnnualCreditReport.com.

Before deciding you’re ready to put a ring cam on it, consider how homeownership aligns with your long-term financial goals. If buying a home interferes with saving for other priorities like retirement or education, you may not be ready.

2. Set a Budget

To determine what you can afford, start with the monthly mortgage payment you can handle. Various factors—beyond just the home’s price—affect this payment, known as “PITI”: principal, interest, taxes, and insurance.

Most lenders ask for a down payment between 3% and 20% of the home’s price. Remember, If you put down less than 20%, lenders will require you to pay private mortgage insurance (PMI), which increases your monthly mortgage payments and affects how much house you can afford.

Home prices vary widely across the United States. The median home price nationwide is $357,138, but that figure can translate to vastly different types of properties—from a spacious mansion in one area to a compact studio in another.

For example, in Mississippi, one of the most affordable states, the average home price is $179,182. Meanwhile, in Kansas City, Missouri—located in the heart of the American Midwest—the average cost is $236,159.

On the higher end of the spectrum, homebuyers in California face significantly steeper prices. The average home price statewide is $784,840. In major urban hubs like San Diego, that number climbs even higher, with average prices reaching $1,020,394.

Similarly, in New York City, the average home costs $763,358. However, in the upstate area of Albany, New York, homes average around $298,756.

After figuring out your monthly budget, you can estimate the home price you can afford in your area.

But wait! That’s not all. Your monthly payment may also fluctuate based on your home insurance premiums and HOA fees. In addition to your down payment, you should account for other upfront costs, such as closing fees, inspections, and moving expenses, in your budgetary calculations. 

3. Find the Right Property

Finding the right property is like assembling a puzzle. After determining your budget, consider key factors such as location, proximity to work, schools, and amenities, as well as property size. 

Location is crucial; a home near frequently visited places such as work or school can save time and money. Additionally, assess the safety and potential growth of the neighborhood, as it can affect property value. 

Creating a wish list of your wants versus needs can help narrow your search. Homebuyers typically filter by home type, number of bedrooms and bathrooms, square footage, lot size, and age.

Properties needing renovations often come at lower prices. When budgeting, also evaluate how much sweaty equity you’re willing to invest in improvements through renovations or DIY projects.

4. Shop for Financing Options

You have options for your mortgage, and finding the best mortgage is easier than you think. Your monthly mortgage payment will vary based on your loan type, repayment term, borrowed amount, interest rate, taxes, and insurance. 

Here are the most common mortgages to consider:

Conventional Loans: These loans are through private mortgage lenders such as banks, credit unions, or other financial institutions. Conventional mortgages require good or excellent credit and, typically, a 20% down payment. If you put down less, you may need to pay PMI, which increases your monthly mortgage costs. These loans have competitive interest rates and current 30-year mortgage rates for borrowers with good credit averages around 6.83%.

Federal Housing Administration (FHA) Loans: Backed by the Federal Housing Administration, FHA loans have lower minimum requirements and are available only for primary residences. Borrowers with a credit score above 580 can put down as little as 3.5%, while borrowers under 580 may still qualify with a down payment of 10%. These loans also may require PMI for borrowers without 20% down payments. Interest rates average 7.35%, which is slightly higher than conventional loans.

VA Loans: Available only to military service members, veterans, and their surviving spouses, these loans require a 0% down payment and do not require PMI. VA loans have competitive rates, with current rates averaging around 6.42% for a 30-year mortgage.

Jumbo Loans: For properties exceeding Federal Housing Finance Agency (FHFA) lending limits, these loans require excellent credit and a substantial down payment. These loans are most common in high-cost areas or for large or luxury homes. Current average rates are around 6.79% for a 30-year jumbo loan.

Renovation Loans: Ideal for buyers of fixer-uppers, these loans finance both the home purchase and renovation costs in one. Conventional renovation loans are available for well-qualified borrowers, but the government also has FHA 203(k) loans for borrowers needing extra help updating their dream home. Rates are typically 0.75-1.00% higher than FHA loan rates due to renovation risks.

5. Get Pre-Approved

Getting pre-approved for a mortgage offers several advantages. It confirms how much you can afford, narrowing your home search to properties within your budget. A pre-approval letter strengthens your offers, which is crucial in a competitive seller’s market.

During the pre-approval process, lenders require proof of income (like pay stubs and tax returns), check your credit report and score, and may verify your employment for stable income. Note that pre-approval counts as a “hard inquiry” on your credit report, lasting for two years, but will not affect your score after one year. A pre-approval letter is typically valid for 60-90 days, so it’s wise to obtain one when you’re ready to seriously start house hunting.

Note

Pre-approval streamlines the buying process and gives you a competitive edge when making offers.

6. Find a Real Estate Agent

Finding the right real estate agent is one of the most important steps in the homebuying process. Your real estate agent is your advocate in all things homebuying, from finding the perfect house to negotiating the best deal to walking you through all the necessary steps to secure your mortgage. 

When choosing an agent, consider their market knowledge, local expertise, experience, and communication style. Trust and reliability are also key traits; your agent should keep you informed throughout the process. To find the right fit, read online reviews, and ask for referrals from trusted friends, family, or colleagues. You may also want to interview a few agents to feel confident in your decisions before committing to an agent. 

Be clear about the agent’s commission, which typically ranges from 5%-6% of the sale price and is often covered by the seller. Still, clarifying their commission structure upfront helps you understand how their pay may impact your finances.

7. Go House Hunting and Make an Offer

Finding your dream home can take anywhere from a few weeks to a few months, depending on market conditions. Once you’ve identified a property you love, you’ll need to make a competitive offer based on a comparative market analysis (CMA), which determines a fair price based on similar homes in the area. 

After deciding on an offer price, your agent will explain the contingencies in your offer, such as an inspection contingency to ensure the home has no significant structural issues, an appraisal contingency to confirm the home is worth the amount you settle on, and a financing contingency to protect you in case your mortgage falls through before closing. 

Your agent also negotiates with the seller’s agent to finalize the terms and price, which may require more volleys than a tennis match before all parties agree. Keep in mind that you might lose out to a more competitive offer during negotiations. Trust your instincts and rely on your agent’s expertise in market conditions and seller expectations to craft a standout offer without overextending your budget.

8. Get Your Mortgage

Once the seller accepts your offer, you’ll need to finalize your mortgage to continue the homebuying process. Pre-approvals aren’t binding, so you can choose to proceed with your lender or shop for better rates and terms. 

After selecting a lender, you’ll need to provide various documents to verify your financial status, including W-2s, tax returns, proof of identity, proof of assets, proof of employment, and recent bank statements. Once your lender has all the necessary documents, your loan file enters underwriting, where the loan officer reviews your information and may request additional documentation. 

Final approval comes after they review your documents and verify your ability to repay the loan.   

9. Get Homeowners Insurance, a Home Inspection, and a Home Appraisal

As you near the homebuying finish line, you must clear three final hurdles to safeguard your investment: homeowners insurance, a home inspection, and a home appraisal.

Homeowners Insurance

Before closing, most lenders require proof of homeowners insurance. This insurance protects against unexpected events like fire, storms, or floods and covers liability for injuries on your property. While you can choose your insurance provider, ensure your policy meets your lender’s minimum requirements. Shop around for the best rates to fit your needs.

Home Inspection

Though not legally required and typically costing between $300 and $500, a home inspection provides a clear picture of your home’s condition before you buy it. A licensed inspector checks for safety hazards, necessary repairs, and maintenance issues, including electrical, plumbing, HVAC, and structural integrity.

If your inspection reveals significant problems, you and your agent may want to request repairs, credits, or negotiations to the purchase price before closing.

Home Appraisal

A home appraisal assesses your home based on location, condition, and market conditions to determine its fair market value, ensuring that your offer price aligns with the current value.  

As the buyer, you pay for the appraisal, but your lender will hire the appraiser from an independent pool of licensed appraisers.

If your appraisal comes in below your offer, you may need to renegotiate the price with the seller or make up the difference between the assessed and the offered value in cash.

These three items in this step of the home-buying process protect you and your investment from any problems that may arise with your property. 

10. Negotiate With the Seller

After your home inspection and appraisal, you can renegotiate your offer price or request repairs.

In a buyer’s market, where supply exceeds demand, you’ll likely have more leverage and success in getting sellers to accommodate your requests. However, in a seller’s market, where demand outpaces supply, your negotiating power may be limited, especially if the seller’s home is priced competitively.

It’s in your best interest to focus on the big picture when renegotiating by:

• Prioritizing safety or structural issues.
• Getting repair estimates to strengthen your case for pre-closing repairs or credits.
• Compromising on minor or cosmetic fixes, as needed.
• Keeping communication open and respectful.

11. Close the Deal

Your lender will send the final closing statement a few days before your closing date. This statement offers a detailed breakdown of all property details, loan terms, interest rates, and closing costs which may include:

• Appraisal fees
• Title insurance
• Home inspection fees
• Attorney fees (if applicable)
• Recording fees
• Property taxes
• Mortgage origination fees

On closing day, you’ll review and sign various documents, including the mortgage agreement and transfer forms. After paying your closing costs—either upfront or by rolling them into your mortgage—and signing the necessary documents, ownership of the property is officially transferred to you.

Moving in and Beyond

You have the keys—now it’s time to move! Early planning makes moving into your dream home a breeze.

Start by organizing your move early and getting quotes for movers or packers if needed. If you’re taking a DIY approach, pack in stages and label boxes with room and contents to make unpacking easier.

Tip

Transfer utilities like electricity, water, trash, and gas into your name weeks before closing, and schedule installations for services like internet and cable before you move in.

Once you sign for your home, establish good habits for regular home maintenance and basic tasks like lawn care, gutter cleaning, HVAC filter replacements, testing smoke alarms, and cleaning out dryer vents.

Ongoing Expenses of Homeownership

Homeownership involves more than just unpacking and picking wall colors. Beyond your monthly mortgage payments, you’ll face occasional costs to keep your home in tip-top shape, making an emergency fund and essential preparation for expenses not covered by insurance.

Your mortgage payment often includes homeowner’s insurance and property taxes, which can fluctuate. Insurance rates vary by location and coverage. As coverages and rates change, so do payments.

Property taxes typically range from 1%-2% of your home’s value and may increase with reassessments, which happen every few years in many states.

Your home may also require Homeowners Association (HOA) fees. Depending on your community and the amenities provided, these fees can range from $30 to $500 a month.

By budgeting for these ongoing costs, you can keep your dream home from becoming a financial nightmare. 

The Bottom Line

Homebuying is an exciting journey with multiple steps, each requiring careful financial planning and clear expectations. From assessing your financial readiness to receiving the keys to your new home, each step plays a key role in ensuring you purchase with confidence. With the proper preparation and mindset, homeownership is a gift you continue to give yourself for years. 

Reviewed by David Kindness
Fact checked by Ryan Eichler

Outsourcing is the process of hiring an outside organization that is not affiliated with the company to complete specific tasks. Insourcing, on the other hand, is a business practice performed within the operational infrastructure of the organization. The main difference between outsourcing and insourcing is the methods in which work, projects, or tasks are divided between various companies and departments for strategic purposes.

Outsourcing

Outsourcing uses the developed workforce of an outside organization to perform tasks and also the resources of an outside organization for services and manufacturing products. Saving money on costs is typically the motivation for outsourcing work to another company. Industries such as healthcare, travel, transport, energy/utility companies, retail, and even government often rely on outsourcing to complete important projects or tasks.

Key Takeaways

• Outsourcing enlists the help of outside organizations not affiliated with the company to complete specific tasks.
• Insourcing, on the other hand, is a business practice performed within an organization’s operational infrastructure.
• The organization’s control over operations and decisions will differ depending on whether the company is using outsourcing or insourcing.
• Insourcing generally places new operations and processes on-site within the organization, while outsourcing involves an outside organization that is separate from the primary organization’s operations.

Companies can use outsourcing to better focus on the core aspects of the business. That is, outsourcing non-core activities can improve efficiency and productivity. At the same time, outsourcing can affect jobs ranging from customer support to manufacturing, as well as technology and the back office. 

The organization’s control over operations and decisions will differ when using outsourcing and insourcing. Organizations that use outsourcing for a particular service or manufacturing process have minimal managerial control over the methods of the outside organization that was hired for the project. For instance, an organization that is known for friendly customer service does not have the ability to enforce or manage how an outside support center interacts with customers.

Insourcing

Insourcing assigns a project to a person or department within the company instead of hiring an outside person or company. It utilizes developed resources within the organization to perform tasks or to achieve a goal. For example, an organization might insource technical support for a new product because the company already has existing technical support for another product within the organization.

Further, insourcing generally places new operations and processes on-site within the organization. For that reason, insourcing can be more expensive for a company because it often involves the implementation of new processes to start a different division within the organization.

Law Firms Example

While outsourcing jobs and work are often a major discussion regarding the U.S. economy, insourcing is relatively common and is seeing greater usage by companies seeking better control of important projects and tasks.

Law firms are an example of companies that use insourcing. In 2023, results of a survey in a Law Department Management Benchmarking Report indicated that the majority of law firms are still completing their work in-house.

Reviewed by Charlene Rhinehart
Fact checked by Yarilet Perez

Private equity fund accounting is unlike that of other investment vehicles because private equity funds are not like other types of investments.

They are one part hedge fund, one part venture capital firm, and one part something all their own, and it is evident in their accounting. The same accounting rules you see in other companies still apply, but they often have to be modified to accommodate privately held companies.

Key Takeaways

• Private equity (PE) funds are pooled investment vehicles that invest their investors’ capital to generate returns.
• PE funds invest in long-term projects; they mainly purchase other companies, improve them, and sell them for a profit or take them public through an IPO.
• Accounting in private equity can be complex because it has to account for ownership stakes, investment structures, and various international standards.
• Fund structures, tax strategies, and valuation methods influence financial statement preparation and reporting.

Understanding Private Equity Funds

Private equity funds typically invest in companies directly. Private equity funds often purchase private companies and can sometimes buy the stock shares of publicly-traded companies as well.

Private equity funds seek to acquire a controlling interest in a private company. Once a company has been acquired, experts are signed to the company to improve and guide management and implement improvements. 

Private equity funds employ various strategies to improve a company, including a change of management, improved operational efficiency, and expanding the company or its product lines. The goal of a private equity fund is to make the company as profitable as possible with the intent of selling its controlling interest for a profit once the company becomes more valuable.

The result could also end in an initial public offering (IPO), which is when a private company issues equity shares to the public to raise capital or funds. Private equity firms also have a hand in helping companies merge with one another. In either case, there is a period of years during which a precise value of the private equity fund’s investments is not objectively defined.

Private Equity Funds vs. Hedge Funds

Private equity funds are akin to hedge funds in that they have similar payment structures. Hedge funds are an investment containing pooled funds that invest in various securities and assets to achieve returns for investors.

Typically, a hedge fund’s goal is to earn as much return in the shortest time frame. The portfolio allocation can include commodities, options, stocks, bonds, derivatives, and futures contracts. Leverage—or borrowed funds—is often employed to magnify returns.

Private equity funds are different from hedge funds because private equity is focused more on a long-term strategy to maximize profits and investor returns by partly owning the companies directly. Investors can liquidate their hedge fund holdings when needed, while an investment in a private equity fund usually needs to be held for a longer period of time, sometimes 10 years or longer.

However, there are similarities between the two funds. Investors pay management fees and a percentage of the profits earned. Both types of funds maintain portfolios of different investments, but they have very different focuses.

Private equity has a long-term outlook, and this affects its accounting. While hedge funds invest in anything and everything, most of these positions are highly liquid, meaning the positions can be readily sold to generate cash. Conversely, private equity funds tend to be very illiquid.

Private equity funds are akin to venture capital firms, which are funds that invest in private companies with high-growth potential. Venture capital funds often involve investing in start-ups. Private equity funds also invest directly in private companies and, depending on the investment, may not be able to touch their investments for years.

Important

Both private equity funds and hedge funds are generally only available to accredited investors, meaning that the average retail investor won’t have access to either.

Fund Structure

Private equity funds tend to be structured as limited partnership agreements (LPAs) with several classes of partners. There is often a founder partner (FP) class, as well as a general partner (GP) class and a limited partner (LP) class.

Fund expenses and distributions have to be allocated across these partner classes. The rules for this are to be stipulated in the limited partnership agreement (LPA), and there can be wide variance between firms.

The type of private equity fund structure can impact how the accounting information for each investment and that of the company as a whole are recorded. The level of analysis the private equity fund uses may also be affected by the structure. 

The country of jurisdiction can also impact both the private equity fund structure and accounting. Most U.S. private equity funds are in Delaware, but private equity funds may also go offshore, as in a Cayman Limited Partnership, or they may be based in another country.

For instance, in Europe, an English Limited Partnership is very common, even for funds not based in the United Kingdom.

Private Equity Investments

Also, keep in mind that many private equity funds create complex investment structures to limit the tax burdens of their investments, which vary depending on the state or country of jurisdiction, and that complicates the accounting.

Controls may be put in place, or need to be put in place, to reduce tax risk, and some structures may need to be adjusted as time goes on depending on changing legislation or the accepted interpretation of tax legislation.

Further, the agreements that private equity funds have with the companies in which they invest also make a difference. For example, some private equity funds invest in a business through both equity and debt, which acts as a loan for the business.

If so, interest payments have to be reconciled. In other cases, the company may have an agreement to pay dividends to the private equity fund, and the distribution of those profits has to be handled.

Accounting Standards

Private equity firms must adhere to the standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

For the most part, accounting standards were not written with private equity in mind, so the format for private equity fund accounting has to be modified to clearly illustrate the operations and financial situation of the private equity fund.

There is also variance in the terms the private equity fund has with each company in which it invests, the purpose of the private equity fund’s activities, and the needs of its investors as far as financial statements are concerned.

Private equity fund accounting may also be affected by the amount of control the fund has over an entity.

Note

One of the most traditional ways to enter a career in private equity is to first start in traditional investment banking roles.

For instance, under the U.K. version of generally accepted accounting principles (GAAP), equity accounting is necessary if the investment gives the fund an influential minority (20% or more) stake in the company and is not held as part of a larger portfolio, while U.S. GAAP does not require equity accounting for influential minority positions.

In contrast, the International Financial Reporting Standards (IFRS) requires equity accounting for influential minority positions when they are not valued fairly through a profit and loss.

The accounting standard that a private equity fund adopts also affects how partner capital is treated. Under U.S. GAAP, partner capital is treated as equity unless the partners have an agreement that allows them to redeem their investment at a particular time. In contrast, the U.K. GAAP and IFRS treat partner capital as debt that has a finite life.

Valuation Methodologies

When looking at private equity accounting, valuation is a critical element. The choice of accounting standards impacts how investments are valued.

While all accounting standards require investments to be listed at fair value, the definition of fair value differs considerably between standards. In certain cases, a private equity fund might be able to discount the value of an investment by claiming there is a contractual or regulatory restriction that affects the market price.

In other cases, investments are listed at what the fund paid for them minus any provisions or are valued at the sale price of the investment if it were put on the market.

Financial Statements

The financial statements prepared for investors also vary depending on the accounting standard. Private equity funds under U.S. generally accepted accounting principles (GAAP) follow the framework outlined in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide.

This includes a cash flow statement, a statement of assets and liabilities, a schedule of investments, a statement of operations, notes to the financial statements, and a separate listing of financial highlights.

In contrast, the IFRS requires an income statement, balance sheet, and cash flow statement, as well as applicable notes and an account of any changes in the net assets attributable to the fund partners. U.K. GAAP asks for a profit and loss statement, a balance sheet, a cash flow statement, a statement of the gains and losses the fund recognizes, as well as any notes.

What Is Private Equity?

Private equity is the process of buying an underperforming company, improving it to increase its value, and then selling it for a profit or taking it public via an initial public offering (IPO). PE firms raise money from investors and use the raised capital to make acquisitions. The targeted companies are usually struggling or underperforming. Once purchased, the PE firms make various changes over time to improve the purchased company’s profitability. During this time, the acquired company is private. Once profitability has improved, PE firms seek to sell the company for a profit or take it public.

What Is a Hedge Fund?

A hedge fund is an investment vehicle that uses a variety of strategies, including many risky ones, to generate returns that outperform the market. Due to their nature, hedge funds are only available to accredited investors, which includes high-net-worth individuals and financial institutions; in essence, you need to have a lot of money to invest in a hedge fund.

This is because these types of investors have the financial ability to absorb potential losses that may arise from the unique strategies that hedge funds employ; however, not all hedge funds are risky. Unlike mutual funds, hedge funds have high fees and often require investors’ money to be locked up for a long period.

What Is the Difference Between U.S. GAAP and IFRS?

U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) are two different types of accounting standards. GAAP is primarily used in the U.S., while IFRS is used in many countries around the world. The primary difference between the two is how they are structured: GAAP is a rules-based accounting framework, whereas IFRS is a principles-based accounting framework.

What this means is that GAAP requires strict accounting rules to be followed, whereas IFRS allows for more flexibility in the interpretation of how its principles should be applied.

The Bottom Line

Private equity accounting is specialized because PE funds take a long-term investment approach, acquiring and improving companies before selling them for a profit. Their structure, investment methods, and illiquid nature require adjustments to standard accounting rules.

Different regulations and valuation methods across jurisdictions add to the complexity, making private equity fund accounting more intricate than that of other investment vehicles.