There's no place like home, especially when your name's on the deed
There’s nothing quite like walking into your own house for the first time. The renovation and decoration possibilities are endless, and you can customize it inside and out to make it your dream home.
However, you need to learn the steps to buying a house to achieve that once-in-a-lifetime moment. Like cooking and baking, as long as you read the recipe first, you'll be prepared for what's ahead. And what's more, you won't do it alone. The right local real estate agent will walk you through the process to ensure it goes smoothly. Follow our step-by-step guide to how to buy a house to get started.
You may never find that golden moment when the market, your finances, and your schedule all fall into place. But if you focus on what's in your control, you can dodge avoidable stress down the line. Determining whether you're ready to buy a house, especially for the first time, is the first step of the process. Here's a checklist of items to consider before buying a house.
It’s important to understand the current status of the housing market in your desired area before diving into the home-buying process. For example, if you're exploring how to buy a house in a seller's market, you need to prepare yourself for harsher competition. You may come up against higher bids, higher down payments, all-cash offers, and, in some cases, higher interest rates.
A competitive housing market is not a reason to pump the brakes on your search, but you may need to prepare an even stronger financial application to get ahead of other home buyers.
It's time to get real about your finances. Start by determining how much house you can afford based on your monthly income, debts, and other expenses. During the mortgage pre-approval process, a mortgage lender will look at your debt-to-income ratio, credit score, and employment history to determine.
In addition to evaluating your budget for monthly mortgage payments, you also need to set funds aside for a down payment and closing costs. If you feel that your finances need a tune-up, make a several-year plan to reach these goals before jumping into home buying.
It can be tricky to align your housing situations to move directly from one home to another. The average timeline to buy a house ranges from one to seven months between the pre-approval process and the closing date. Make sure you can live in your current space for at least that long. If you're renting, confirm that you can sign a month-to-month lease and review how much notice you need to give your landlord once you're ready to move.
Mortgages last between 15 to 30 years on average. While it is possible to sell your home before paying off your mortgage, buying a home is a large financial and time-consuming commitment, so you need to feel confident about your choice, especially if you're a first-time home buyer. Be sure to conduct ample research on the neighborhood, local market trends, and make a must-have list for your dream home compared to what you're willing to compromise.
So, you've weighed the pros and cons, researched the local housing market, and chosen your dream neighborhood. Now it's time to get your ducks in a row. Here's how to prepare your finances for buying a house.
Build a home-buying budget before you speak with a prospective mortgage lender. It's important to have a snapshot of what you feel comfortable paying while also running the numbers the bank will use to determine your pre-approval number. Your budget should include:
Your household's combined annual income before tax
Monthly debt payments for credit cards and loans
Your cash savings for a down payment
Approximate monthly mortgage payments based on 15 or 30-year mortgages
Local property tax payments
Homeowner's insurance payments
Private mortgage insurance
Closing costs
Homeowners association fees
Do you know your current credit score? Pull your credit report to review your current score and double-check for any discrepancies. There are several free resources for checking your score, but many banks also provide free options.
Your mortgage lender will use your credit score as a major determining factor to set your interest rates and loan amount. Credit score requirements vary by loan type, but most banks consider scores of over 620 for approval and over 720 for the best rates.
Mortgage lenders will request information to prove that you have steady income and consistent employment. Some types of mortgages require that you must have at least two years from the same company to qualify.
Get ahead of the game by gathering your W-2s, paystubs, and letter of employment. Contract workers may also need to prove consistent income with tax returns and W-9s from the past several years.
Now that you have a clear snapshot of your financial health, it's time to jump in. Here are the steps to buying a house once you have your financial plan in order.
Home buyers have several types of mortgages and countless lenders to choose from. You can apply for a mortgage through a bank, a credit union, online lenders, and government entities. While hiring a local mortgage broker is optional, these pros can act as an intermediary to help you find the right mortgage lender, especially if you're buying for the first time.
Mortgage options break down into these categories:
Conventional loans: This is the most common loan type, often with down payments from 3 to 20 percent.
Conforming loans: Conforming and non-comforming loans technically fall into the conventional loan category, but it's important to note the difference. A conforming loan meets the standards of Fannie Mae and Freddie Mac, while nonconforming loans can be larger than the standards set that year by the associations.
VA loans: Veterans, active-duty members, and surviving spouses may qualify for direct loans from the U.S. Department of Veteran Affairs (VA) or a private company backed by the VA. These loans offer lower interest rates than conventional loans and don’t require a down payment.
FHA loans: The Federal House Administration (FHA) distributes and insures loans to borrowers with lower credit scores, low down payments, and first-time home buyers. You may be required to pay a Mortgage Insurance Premium for a set portion of the mortgage.
USDA loans: The US Department of Agriculture (USDA) offers government-backed loans for those living in qualifying small suburbs or rural areas. This loan type doesn't require a down payment.
In a competitive market, it's important to have a pre-approval letter from your mortgage lender before starting your home search. Some real estate agents will not show homes without it. Your pre-approval letter states how much the bank is willing to lend you based on your financial information.
As you apply for pre-approval, remember that you can apply to more than one lender to compare rates and offers. It is also a time to get to know your lender and gauge how helpful they are in the loan process.
Your agent is the professional by your side during a critical and complex process, so take your time finding the best real estate agent for you. Many real estate agents rely on local word of mouth, so get recommendations from family and friends from the area where you plan to buy.
If possible, meet in person with your prospective agent to discuss their availability, common timeline, and general history with the area. Large agencies may come with additional stipulations like a dual agency—when the agent works with you and the seller—or a set process on closing day.
Let's step away from the paperwork for a moment and daydream about buying a house. Make a wishlist for your new home before you visit your first open house. It's important to get on the same wavelength with your household members about which factors are deal breakers.
You should also decide whether this is a starter home or a forever home. Starter homes may require more upkeep and opportunities to raise their value before selling them in several years. On the other hand, a forever home is somewhere you plan to stay for the foreseeable future.
Grab that wishlist, discuss it with your real estate agent, and start shopping. You can find listings online or by driving through your desired area and searching for “for sale” signs. Your real estate agent will also pull listed homes from the multiple listing service (MLS).
It's important to keep a cool head when touring a potential home. Take pictures, videos, and notes, and give yourself some time to think about your impression before leaping into making an offer. Yes, the market will move quickly in a seller's market, but remember that it's better to be sure about your decision than nab the first house you see.
Here's where your real estate agent truly shines. When you're ready to make an offer on a potential home, your agent will help you write—or sometimes write themselves—an official offer letter. The letter includes your offer amount, down payment, and loan pre-approval letter.
Your agent will also specify how long the seller has to respond and the amount of your proposed earnest money deposit, which is typically one to two percent of the sale amount. The earnest money deposit may include an appraisal contingency clause and a home inspection clause, which allow the buyer to back out if the house gets appraised too far below the offer price or if the inspector finds major issues with the house.
The buyer can accept, decline, or counter your offer, depending on the competition for the house. Lean on your real estate agent for the negotiation portion of this process—they know when to push for better terms or walk away from the potential sale.
When the seller accepts your offer, you will sign a purchase agreement outlining the details of the earnest money deposit and contingencies. Review this real estate contract carefully with the help of your agent or a real estate attorney.
With a green light on the offer, you can begin the underwriting process. Underwriting is when the lender double and triple checks that you can afford the home and if your home is worth what you're offering.
Hire a home inspector as an early part of the underwriting process. The average cost of a home inspection is $340. A qualified home inspector will ensure the home is safe and that the buyer is aware of any potential issues. If the inspector finds any unforeseen problems, you can negotiate repairs with the home sellers to determine if they should cover the cost before closing if the offer goes down for you to handle later.
The home inspector will review the following aspects of the home:
Structural integrity
Plumbing
Wiring
Basement
Attic
Foundation
Paint (to rule out lead paint)
HVAC system
Ventilation
Windows and doors
Insulation
Appliances
Your lender will require an appraisal from a home appraiser at this stage to determine the fair market value of the property. In most cases, the cost of an appraiser will fall to you as the buyer for an average of $350.
The appraisal process ensures that the home is not worth less than what you've offered, and it sets the property tax value. Mortgage lenders cannot lend out more than what the house is deemed worth, so it’s a mandatory step of the home-buying process.
In the final underwriting stage, the lender will take a deeper dive into your finances to ensure you can afford the offer and related payments on the house. They may ask for bank statements and recent pay stubs, and question major deposits or withdrawals made from your account.
Here’s what not to do before buying a house: Make any major purchases or take out loans that could affect your credit between the pre-approval and financial loan approval stage. It could affect your ability to secure a loan and, ultimately, buy a house.
Even after all this work, the final walk-through is not ceremonial. During the last home walk-through, move through the house slowly with your real estate agent. Double-check that the seller made all necessary repairs and changes in your negotiations. Keep notes about anything that raises an eyebrow, including signs of pests, drafts from windows, or items left behind by the seller.
Making it to closing day is a huge accomplishment and a time to celebrate. You will receive a final closing disclosure from your lender outlining the costs due on closing day and the details of your mortgage agreement. Ensure that you understand each detail and note if it differs from the purchase agreement.
You will then need a Proof of Funds (POF) letter to demonstrate that you have the closing costs available. These may include (though vary by loan type):
Down payment
Inspection and appraisal fees
Title insurance and fees
Homeowner's insurance premium
Mortgage insurance premium
Additional lender fees
Keep in mind that closing costs vary depending on if you negotiate concessions with the seller, have closing costs included in your loan, or work with a federal problem to assist with the process. If everything looks good, you'll sign the mortgage note and state that you understand the terms of the loan and the house deed. And that's that: You're officially a homeowner!
While it's smart to save up about 25 percent of the price of a home—to cover the down payment and closing costs—many loans require between less than 3% down to qualify. In either case, you'll need between 3 and 6 percent for the closing and moving costs as well as a strong financial history for mortgage approval.
Several government-backed lending programs can help first-time home buyers purchase a home with little money down. FHA, USDA, and VA loans are options for qualifying borrowers, though many conventional mortgage lenders will lower down payment rates to as low as 3 percent.
From the underwriter to the home inspector, the team working to help you buy a house is there to make sure it is a sound financial decision and that the house is worth what you're paying for it.
A sale can fall through when a mortgage lender discovers the cost of the home plus closing costs is too high for your current financial status. Another potential issue is that an inspector or appraiser can find issues with the home that halt the sale if the offer is far higher than what it's worth.
