If you’re considering purchasing a home, you may feel overwhelmed by the process. Buying a home can be a very exciting process, but it can also be stressful, especially if you feel unprepared for the many steps that lie ahead. This step-by-step guide to buying a house will help prepare you for one of the biggest and most exciting purchases of your life.
Step 1: Make Sure You're Ready to Buy a Home
The very first step is to assess your readiness to buy a home. A home is a huge purchase, and you shouldn’t rush into homeownership if you’re not financially or emotionally ready.
Since a home is such a major purchase, you want to be sure that you have a stable income and some money saved up. Most home buyers can’t afford to purchase a home outright, so they’ll need to get a mortgage loan to help them buy the house. But if you don’t have a stable income or you have a very poor credit score, it can be hard or in some cases impossible to secure a mortgage loan. It’s also harder to get a loan if you don’t have a down payment. Luckily, there are several types of mortgage loans, with some having much lower down payment requirements than others.
You’ll also need to consider whether you are ready to commit to living in the same place long-term. If you’re not sure you want to stay in the area for more than a couple of years, it may be smarter to rent until you’re ready to put down roots. Home ownership makes it much harder to pack up and move to a new city, since you’ll have to go through the selling process rather than just ending your lease early and moving on your own timeline.
Step 2: Set Your Budget
Before you seriously get into looking for a home, you need to determine how much house you can afford. The Federal Housing Administration recommends that you spend no more than 31% of your monthly income on housing. If you need to spend more than that to get the house of your dreams, you’re more likely to struggle to make payments each month, which can lead to you losing the home in the worst-case scenario.
It’s a good idea to keep track of your spending habits for a few months to get an idea of how much you’re spending on needs (like groceries and bills) and wants (like dining out or buying new clothes). How much do you have left over after you pay for those things? You might need to consider cutting back on unnecessary expenses, especially if you don’t have much saved to use as a down payment. Cutting back on a few unnecessary expenses each month can add up more quickly than you would think, and you’ll have a down payment saved much faster.
You’ll also need to remember to take into account down payment and closing costs, property tax and homeowners insurance, and mortgage insurance if your lender requires it. Once you know your budget, you can start looking more seriously at houses that fit both your needs and your available budget.
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Step 3: Get Pre-Approved for a Mortgage
When the housing market is competitive, many real estate agents won’t even consider working with buyers who aren’t pre-approved for a mortgage. A pre-approval tells buyers that your offer is valid and you’re serious about purchasing, which makes it more likely your offer will be accepted by the home sellers.
In order to get pre-approved, you’ll need to fill out an application with your chosen lender. You will provide proof of income, proof of employment, and proof of assets, and the lender will perform a credit check. If your credit score is good, you shouldn’t have much trouble getting pre-approved. For borrowers with a lower credit score, it can be harder, but it’s not impossible as there are many options when it comes to types of mortgages. We will go into that in more detail below.
Factors That Lenders Consider
When you apply for a mortgage, there are several factors that the lender will take into account before determining whether to lend you the money to purchase your home. They include the following factors.
- Income and employment status: You will need to provide proof of income so the lender knows how much money you bring home each month. If you have a steady, salaried job, that’s as easy as providing some pay stubs to show how much you make. If your income is less predictable (for example, if you are a server who relies on tips or a self-employed freelance writer or graphic designer), it’ll be a little trickier to prove your income. That might involve submitting your tax returns or other documentation, depending on what the lender requires.
- Debt-to-income ratio: Your debt-to-income ratio shows the lender how much of your monthly income you’re currently spending on debt repayment. This is calculated by dividing your monthly debt by your gross monthly income. If you have a high debt-to-income ratio, it’ll be harder to secure a mortgage.
- Liquid assets: This refers to how much money you have in savings. That’s important because lenders typically require the buyer to pay a down payment when purchasing the house, and there are other costs involved in home-buying like closing costs. If you don’t have money for a down payment, it makes you riskier to lend to because you have less of your own funds in the home and therefore have less to lose by not paying back your mortgage loan.
- Credit score: Your credit score comes into play whenever you want to borrow money or open a new line of credit with a financial institution. Borrowers with a high credit score are safer to lend to because they have a proven history of paying back loans and paying off credit cards. Borrowers with a lower credit score are riskier, and they may find it harder to get approved for a mortgage.
Type of Mortgages
There are several types of mortgage available: conventional, FHA, USDA, and VA. Let’s take a closer look at each of them.
- Conventional loans: Most of the mortgages in the U.S. are conventional loans. These are private loans and are not backed by the government. They typically require buyers to put down at least 3% at the time of purchase. It can be hard to get a conventional loan if your credit is less than stellar.
- FHA loans: FHA loans are backed by the U.S. Federal Housing Administration. They are more attainable for borrowers with lower credit scores, because the FHA insures the loan if you were to stop making payments.
- USDA loans: USDA loans are typically offered to buyers in rural areas who may not otherwise be able to purchase a house. Like FHA loans, USDA loans are backed by the U.S. government, this time by the U.S. Department of Agriculture. USDA loans are often available with a 0% down payment, which is ideal for rural dwellers who may not have much (or any) money saved up.
- VA loans: VA loans are intended specifically for U.S. service members, veterans, and surviving spouses. They usually allow a 0% down payment and are backed by the Department of Veterans Affairs.
Types of Mortgage Interest
Lenders make money by charging borrowers interest on their mortgage. Mortgage interest is expressed as a percentage and comes in two types: fixed rate and adjustable rate.
- Fixed-rate mortgages: With a fixed rate mortgage, the lender offers you an interest rate when you take out the loan, and that is the same interest rate you’ll pay for the life of the loan. That means your monthly payments are predictable, which makes budgeting easier.
- Adjustable-rate mortgages: Adjustable-rate mortgages have interest rates based on the market. They are typically an attractive option because they usually start out with a lower interest rate that fixed-rate mortgages do. But after an initial period, the interest rate will fluctuate, which can make your payment less predictable and could surprise you with a much higher payment than you’re capable of making if interest rates rise.
Mortgage Insurance
If you aren’t able to put down 20% of the purchase price at closing, your conventional lender will likely require you to take out mortgage insurance. This offers the lender additional peace of mind and makes you a lower risk to lend to. With a conventional loan, you can cancel your mortgage insurance once you have paid off the first 20% of the loan. You can pay your premium alongside your monthly mortgage payment, in a lump sum at closing, or both. FHA and USDA mortgages also typically require borrowers to take out mortgage insurance, but VA loans do not.
Step 4: Choose a Neighborhood
Once you have determined your budget and gotten pre-approved for a mortgage, it’s time to choose a neighborhood in which you want to buy. To do this, you can drive around the area where you want to purchase and take note of the neighborhoods that are the most appealing. Do you want a neighborhood that has amenities like a clubhouse and a communal pool? Would you prefer a more established neighborhood with a lot of old-growth trees? Or do you want a brand-new build in a new subdivision? Make a note of the neighborhoods you like best in case there aren’t any homes on the market in your top choice.
Step 5: Find a Real Estate Broker
Now you know the area where you want to live, you need to find a real estate broker who can help you find your dream home. There are a lot of real estate agents out there, which can make it hard to choose the right one. If you have friends or family in the area, ask for their recommendations to determine who to go with. If you don’t know anyone locally, do some research and read reviews online of each real estate agent to decide who to meet with.
Once you have chosen a few options, make appointments to meet with them and go over your requirements for a home. Make sure you tell them your budget, requirements, and “wants” (i.e. things you’d like in a home but could do without). You can also tell them the areas you want to look in so they know where to narrow their search. When you decide upon an agent, they will send you any relevant listings in the area when they come on the market so you can check them out online.
Something to keep in mind is that you’ll need to pay a commission fee when using a real estate broker. That percentage depends on the agent, but typically works out at a total of 6% split between the buyer’s agent and the seller’s agent. That money comes out of the sale proceedings, so you’ll need to factor that in when determining your budget.
Step 6: Search for a Home
With your real estate agent’s help, it’s time to start looking for a home. As you receive listings from your realtor, let them know which (if any) you would like to view in person. Your agent will schedule viewings for you and accompany you to see what you think of each house you view. They’ll use your feedback to narrow their search and send you more relevant listings to view.
Depending on the market, you may find a home you like quickly, or it may take a lot of searching to find the perfect place. A buyer’s market is when there is a lot of inventory on the market, and the buyer has a lot to choose from and can generally negotiate the price of the house down under the listing price. In this market, the buyer may also be able to negotiate extras, such as asking the seller to pay the closing costs or asking the seller to provide a home warranty.
A seller’s market, on the other hand, is when there aren’t many houses on the market and the seller can demand a higher price and might even receive multiple offers to choose from. In a seller’s market, it’ll likely take you longer to find a house because houses may go under contract as soon as they are listed.
Step 7: Make an Offer
Once you’ve found the perfect home, you will make an offer with the help of your real estate agent. Your agent will look at recent sales of similar homes in the area to help you determine the amount you should offer. Depending on the market, your agent might recommend offering slightly under or slightly over asking price.
In a competitive market, you may find that you have to make offers on several houses before one is accepted. In this type of market, there are a lot of buyers looking for the perfect home, but there’s not a lot on the market. That means the seller may receive several offers on their home and be able to choose the best one for them. In this situation, offering over the asking price gives you an edge—but it can also push your budget up higher than you’d like, so you need to consider whether the house is really worth making such a high offer.
You’ll also need to determine the conditions of the offer. It’s a good idea to make the offer contingent on the findings of your home inspection (more on that later) so that you can back out if the inspection uncovers a major (read: expensive) issue with the home. In a less competitive market, you might also want to ask the seller to pay closing costs, but if the market is hot that might not be as realistic.
Step 8: Get a Mortgage
Now you have an offer accepted you’ll need to officially get a mortgage. Even if you’re pre-approved, that doesn’t mean you’re guaranteed a loan. You can apply for a mortgage with the lender who pre-approved you, or ask your real estate agent for any recommendations. Realtors typically know many professionals in the housing business, including mortgage lenders, and they may be able to point you in the direction of one that is highly recommended and can offer competitive interest rates.
Once you have your list narrowed down to just a few lenders, you’ll need to go through the official application process. During this process, you’ll supply information to each lender about your finances, debts, assets, employment, the property, and the loan. The application process does include a credit check, but if you submit all applications within 45 days of each other it won’t negatively affect your credit score.
One you have offers, it’s time to compare them to see which one will give you the best term and interest rate. The offers will also list how much you’ll pay in closing costs so you can make sure you have the money on-hand to cover that.
After choosing a lender, they will take over processing the loan. The lender will verify your employment, look at your tax record, and more, to make sure you are a trustworthy borrower. If the lender has any questions, they will reach out to you, but if your credit and employment history is pretty straightforward you may not hear at all. Once the lender is satisfied that you’re not a risky borrower, you’ll get a notification that your loan has been cleared to close.
Step 9: Get Homeowners Insurance
Most lenders require the borrower to take out homeowners insurance. That’s because, if anything happened to the house to cause it to need major repairs or to be rebuilt, the lender stands to lose a lot of money if the home is uninsured. And even if you could afford to buy the property outright without a mortgage, it would still be advisable to take out homeowners insurance to protect your investment.
Homeowners insurance generally covers accidental damage to your home, your personal property inside the home, personal liability for damages or injuries, and the cost of home or hotel rental while your house is being repaired or rebuilt.
As with choosing a mortgage lender, it’s a good idea to shop around and get quotes from several different homeowners insurance providers before settling. You want to make sure the premiums are affordable, which might mean signing up for a higher deductible if you have the savings to pay it. Your insurance premiums are determined by your credit and insurance claim history, along with several other factors that the insurer will use to determine how risky it is to insure your home.
Step 10: Get a Home Appraisal
Your lender will also need to see an official home appraisal to make sure that the selling price reflects the actual value of a home. In general, lenders don’t want to lend more money than the property is worth, because if you skip payments and the lender forecloses on the property, they stand to lose a lot of money.
A qualified appraiser will do an in-person inspection of the home, as well as look at recent sales of similar properties in the area to come up with a reasonable and unbiased valuation of the property. Your real estate agent can likely point you in the direction of a trustworthy home appraiser.
Step 11: Get a Home Inspection
Once you have the mortgage and insurance sorted out, you’ll need to have a professional home inspector come out to take a look at the house. In fact, many lenders won’t approve a loan until the borrower has had a professional home inspection completed.
The inspector will look for any red flags or things that need attention from the seller. They will check the exterior walls, foundation, grading, and roof first to see if there are any major repairs needed. Inside the house, they will check the plumbing, electrical systems, HVAC systems, water heater, kitchen appliances, bathrooms, and fire safety.
Step 12: Negotiate Repairs or Credits With the Seller
After the inspection, you’ll receive a report that lists out any major and minor issues, and you will work with the seller to see what they are willing to fix or if they are willing to lower the purchase price to account for the extra money you’ll need to spend on the fixes. If there are major issues that the seller refuses to fix and that you aren’t willing to fix yourself, you can walk away from your offer.
Step 13: Do a Final Walkthrough
Before you officially close on the home, you should do a final walkthrough. This will help determine whether the sellers have addressed any issues you've asked them to fix, as well as make sure the seller has left all fixtures they agreed to leave (such as light fixtures).
It’s a good idea to take your real estate agent with you for the final walkthrough. Your agent is an expert in their field and may spot things you wouldn’t notice on your own.
Step 14: Close on Your New Home
Once you have completed the walkthrough and are satisfied, it’s time to close on your new home. The buyers are required to bring a check with them to cover closing costs, which include title search fees, attorney fees, transfer taxes, and homeowners insurance.
At closing, all parties will meet to sign the paperwork and make it official. That includes the buyers, the sellers, and all their representatives (such as real estate agents and lawyers). If you aren’t able to attend in person, you’ll typically be able to sign virtually using DocuSign or a similar service.
Once all parties have signed the paperwork, the deed of ownership is transferred to the buyers and they are free to move in as soon as they would like. It’s a momentous occasion for many, and you might choose to go straight to your new home to start decorating it even if you’re not officially moving your belongings in for a few days.
Buying a home is a long and stressful process, but the feeling of knowing that you own your home can’t be beat. Follow these steps and enlist the help of a professional to help you through the process of finding your ideal home.