How to Buy a House in South Dakota: A Homebuyer’s Guide

Real estate agents understand the real estate market and can advise their clients based on that knowledge. They guide clients from the beginning of the homebuying process to closing.

Ask friends and family to recommend real estate agents. Look for agents who are:

• Licensed and knowledgeable
• Proactive
• Reputable

It’s a good idea to research and interview at least three agents before making a selection.

Many people look closely at the cost of living when considering a new location. If you're in the market for a new home and need to set a budget, a mortgage calculator can give you an idea of the cost of living in your chosen city.

Consider the following factors when calculating the cost of living:

• Utilities
• Food
• Education
• Healthcare
• Insurance
• Transportation

Use the MoneyGeek Cost of Living Calculator to estimate the cost of living based on data from the Council for Community and Economic Research's Cost of Living Index, employment data from the U.S. Bureau of Labor Statistics and demographic data from the U.S. Census Bureau.

While South Dakota is known for its affordability, some options are more affordable than others. To search for cheaper homes in South Dakota, look at outlying neighborhoods outside the more popular areas.

Huron, Dell Rapids and Rapid Valley are some of the most affordable towns in South Dakota. When deciding where to live, consider the pros and cons of less popular areas. For example, neighborhoods near the city center are often more expensive than those in outlying areas but generally have better access to social amenities. However, these neighborhoods may not be as safe as those farther from downtown.

Home mortgages in South Dakota have varying interest rates depending on the type of mortgage. The applicant’s qualifications — such as credit score, whether they are a military member, and debt-to-income ratio — also affect the interest rate.

South Dakota homeowners can choose from a range of lenders. The average interest rates in South Dakota for different types of mortgages are as follows:

• Conventional home loans: 6.0-7.4%
• VA loans: 5.9-6.3%
• USDA loans: as low as 1.0-3.3%
• FHA loans: 5.9-6.3%

Not all loan types are for everyone. For example, VA loans are only for military members and their families.

If you're considering buying a home, use a mortgage calculator to estimate your monthly payments. Once you see how much you'll be paying each month, you can decide if a house is worth its price tag. It's also important to know how much interest you'll be paying over the life of your loan.

MoneyGeek's mortgage calculator estimates how much you can borrow at different interest rates. In addition, compare FHA and conventional mortgages to decide which loan option is best for you.

Lenders evaluate your financial profile to determine the likelihood that you can repay a mortgage loan. The factors they consider include:

• Your credit score: This is an important number that can affect your mortgage’s interest rate. If you have a good credit score, you'll likely pay less interest than if you have a low score.
• Your income and employment history: Lenders evaluate your current income and employment status to determine whether you are likely to make payments on time.
• Your debt load: If you already have substantial debt, such as student loans or credit card balances, lenders will want to ensure your other obligations won’t prevent you from making timely mortgage payments. A lender may ask you to provide a list of all your debts, including car loans and credit cards.
• Your assets: Lenders want to know if you have financial resources beyond your monthly income to help with loan payments if needed. If you have an investment portfolio, expect to be asked about it as part of your application process.
• Your down payment: Lenders want to see that you have enough money saved up to cover closing costs and some of the down payment on your home. It's common for first-time buyers to put down 20% or more of their own money.

Lenders usually require a 20% down payment for conventional home loans, but there are exceptions. For example, VA and USDA home loans don't require a down payment; however, borrowers must meet eligibility requirements to take advantage of them. Typically, this includes having a good credit score and a low debt-to-income ratio. Additionally, people who make larger down payments receive lower monthly mortgage bills.

Private mortgage insurance (PMI) protects the lender from the risk of default on home loans. It is commonly required for conventional loan borrowers who put down less than 20% of the purchase price of a house.

USDA and FHA loans may not require PMI, but these loans ask borrowers to pay a mortgage insurance premium (MIP) upfront. VA loans, however, do not require PMI.

Down payment assistance programs in South Dakota can help first-time homebuyers. Several government organizations and non-profit groups also offer financial aid to those who want to buy a new house but don’t have enough saved for the down payment. Some of these programs are:

• South Dakota Housing Development Authority's Fixed Rate Plus: Allows for down payment amounts of 3% or 5% of the first mortgage loan but also comes with a second mortgage at a 0% interest rate. The second mortgage requires no payments or additional fees.
• The SDHDA First-time Homebuyer Program: For those who have not owned a home in the last three years. The program provides a maximum loan of $340,000 at a low-interest rate.

When you apply for a mortgage, your lender will ask you to supply documentation verifying your identity and showing that you can make the payments.

It's a good idea to have everything in order before starting the application process to avoid delays. You'll likely need to provide the following documents:

• A copy of your driver's license (or other state-issued photo ID.
• Proof of your current employment, such as paycheck stubs from the past two months or a letter from your employer stating how long you've worked there and how much you make.
• Recent bank statements showing you’ve deposited at least $500 within the last 90 days.
• Savings statements and/or investment account statements showing account balances within the last 90 days.
• The most recent tax return you filed.
• The previous three years' W-2 forms or 1099s if you're self-employed.

Pre-approval allows the borrower to shop for a home, knowing how much they can afford. Pre-approval only takes a few days and lasts for 30 to 60 days.

MoneyGeek recommends that you use this time frame to address issues that may arise during the approval phase, such as improving your credit score or sorting out documentation to prove your ability to repay your loan.

A pre-approval letter outlines the maximum loan amount the lender will let you borrow. The letter also gives you an idea of the interest rate, fees, closing costs and other relevant information about the loan.

Getting multiple letters may help you compare options, but remember they expire. Try to purchase your home within the pre-approval validity period to avoid having to reapply, which can affect your credit score.

To ensure that you're getting an accurate assessment of a property’s condition, MoneyGeek recommends hiring a licensed home inspector. A licensed home inspector is trained to thoroughly evaluate your new home, pinpointing areas where problems exist and alerting you to potential issues. Inspectors review the following:

• Roofing
• Plumbing
• Furnace/AC
• Electrical wiring
• Ceilings and floors
• Walls and windows
• Chimneys and fireplaces

Once the inspection is complete, you will receive a written report. Having this information before going through with the purchase could save you a lot of money and stress in the long run.

In some parts of South Dakota, homes must undergo certain safety inspections before they can be sold. The South Dakota Real Estate Commission licenses and regulates home inspectors, the state's real estate brokers and salespersons. The commission also regulates property managers, time-share agents, and real estate auctioneers.

The agency's regulations help ensure that only qualified individuals inspect homes and other properties, conduct thorough inspections, and report their findings accurately.

A home appraisal is a professional estimate of the current market value of a house. The lender usually orders one to prove you're getting enough value for your money.

The process is straightforward. The appraiser will visit the home and look at the property inside and out. They will take measurements, photographs, make notes on the property and provide a written evaluation based on their findings.

Most lenders will ask you to sign the following documents at closing:

• Closing disclosure statement: Lists all the lender’s fees and charges that may apply at closing. It also shows the estimated annual amount for property taxes and homeowner's insurance.
• Mortgage note: Represents your debt obligation to the lender and lists the terms under which you'll repay your loan. It includes information about early payoff options and loan servicing rights. You must sign this document before closing.
• Mortgage deed of trust: Establishes how much money you owe on your mortgage and serves as collateral for the loan (it secures payment). It also names the trustee who oversees payments made on behalf of the borrower.

Before signing any loan document, read it carefully and have your loan officer explain any parts that may be unclear. Also, make sure that you get any promises or verbal agreements in writing.

Closing costs are fees charged to homebuyers when they take ownership of their property. Typical closing costs include:

• Loan origination fee: The charge for processing your loan application and ensuring you're eligible for the mortgage. The fee covers items like document preparation, credit reports and underwriting. Lenders charge this fee whether or not you get a loan.
• Appraisal fee: The cost of hiring an appraiser to analyze the value of your home so that you can get a mortgage that doesn't exceed its worth.
• Credit report fee: A hard inquiry occurs when someone pulls an official copy of your credit report from one or more national credit bureaus (Experian, Equifax and TransUnion).
• Lender's attorney fee or settlement fees: Fees paid to an attorney who handles legal matters relating to your closing. The amount varies based on where you live and your transaction's complexity.

As with any major purchase, home buying is a big decision that requires careful consideration and research. Before you buy a home, you should know your options, gather the necessary documents and make an informed decision. Allocating planning time before looking for a home will help smooth the process.