What to expect from the path to homeownership
Buying a home is one of the most complex transactions the average American makes.
Going from house-hunting to closing the deal can take months and involves many moving parts. It’s essential to avoid mistakes along the way that can cost you money and time and add more stress to the process.
We broke down the homebuying process into a 12-step homebuying checklist. By following this list, you can take the process piece by piece, making the path to homeownership much clearer.
1. Find out how much house you can afford
Remember that your loan payment isn’t your only home expense. You’ll pay closing costs and deal with recurring expenses, including homeowners insurance, property taxes and repairs. Lenders often qualify you for a larger mortgage than you can comfortably afford, so don’t feel like you have to take out the full amount.
A good rule of thumb is to set a mortgage limit that’s no more than two to three times your household income.
According to the Federal Deposit Insurance Corporation, a good rule of thumb is to get a mortgage that’s no more than two to three times your household income.
For example, say you and your spouse earn a combined $90,000 annually. You’d want to set your mortgage budget between $180,000 ($90,000 x 2) and $270,000 ($90,000 x 3). Ultimately, your other living expenses will help you determine the amount that’s right for you.
2. Save for a down payment
A down payment is a lump sum of money you pay upfront toward the property. You immediately gain that amount of equity in your home. For instance, if you put down $20,000 on a $100,000 home, you start with 20% equity in the property.
The larger your down payment, the lower your monthly mortgage payment is. Also, if you put down less than 20% on your home and you get a conventional mortgage, you will have to pay private mortgage insurance until you reach 20% equity in the property.
Here are minimum down payment amounts for various types of mortgage loans:
- Conventional mortgages: Vary by lender, but at least 3%
- FHA Loans: 3.5%
- USDA Loans: 0%
- VA Loans: 0%
3. Find a mortgage
Finding a mortgage before home-hunting is better than finding homes first. Getting pre-qualified first helps you figure out your homebuying budget so you don’t waste time looking at houses you can't afford.
There are a few different categories of mortgages you should know — that way, you’ll be able to identify which works best for you.
Depending on your financial circumstances, you might choose a conventional or government-backed loan.
- Conventional: A conventional loan is a loan backed by a private lender. These loans can be either conforming or nonconforming; conforming loans meet rules set by the Federal Housing Finance Agency and Fannie Mae and Freddie Mac, two government-sponsored enterprises that guarantee most mortgages in the U.S. Nonconforming loans, like jumbo loans, don’t follow these standards. Conventional loans generally cost less than government-backed loans.
- Government-backed: The federal government insures certain types of mortgages, including Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans. Government-insured loans are often easier to qualify for because of the guarantees to the private lenders that make them.
4. Get preapproved
Once you find a good mortgage option, you will want to get preapproved. Preapproval is the closest thing to getting your loan before you get to closing. It gives you conditional approval of your loan amount and interest rate and describes the type of loan you are approved for.
To get preapproved, you submit financial and other documentation to the lender so it can determine the loan size and terms to offer you. The lender will likely require you to provide:
- A copy of your state-issued ID
- Documents verifying your income
- A list of your assets
- Information on your debt
- Miscellaneous documents related to bankruptcies, foreclosures, rent history, etc.
The lender runs a hard inquiry to formally check your credit. If the lender preapproves you, you’ll receive a preapproval letter that’s good for 60 to 90 days.
5. Get a real estate agent
Buying a home is a complicated transaction. It can turn into a full-time job without expert help — which is where a real estate agent comes in.
Real estate agents are licensed industry professionals who help you complete real estate transactions. They help you find a home to purchase and handle other tasks, including writing up the purchase offer and acting as your representative throughout the homebuying process.
Both buyers and sellers usually have agents to represent their interests.
Most agents receive a commission based on the home’s price, meaning they only get paid if you close the deal. That incentivizes them to get things done as quickly and accurately as possible. Both buyers and sellers can get agents to represent their interests.
Many people find good agents through referrals from family and friends. If you know someone who was in a similar homebuying situation to yours, talking to them might be a good place to start.
Otherwise, you can research online for agents through organizations like the National Association of Realtors. Research each candidate to see their experience, and be sure to look at reviews or testimonials.
Ideally, you want someone with experience working with clients similar to you. You also want to make sure there’s a good personality fit — you’ll be working closely for an extended period.
6. Find the right home
Now comes the fun part — time to find a great home!
These days, many people prefer browsing through online listings to find a home. Various websites let you sort and filter by multiple criteria, including age, home type, price, location, number of bedrooms, number of bathrooms, amenities and more, which helps narrow your options.
You can also put your agent to work looking for homes by talking over what you’re looking for with them.
Many listings now offer 3D tours to help you get a feel of the property from the comfort of your couch, but an in-person tour often gives you a better idea of the house’s condition and gives you the ability to look more closely at the house.
Another benefit to walk-throughs is learning more about what the neighborhood is like. You get a real sense of how close (or far away) the home is to schools, shopping centers and other places of interest. If you come back through the neighborhood at different times of day, you’ll get a better feel of what living there is like.
Your agent will likely accompany you on the walk-through and help by keeping a close, professional eye out for any potential problems while you get a general sense of the home. You can then weigh any flaws to see how important they are to you.
7. Make an offer
If you really like a home, it’s time to make an offer to the seller.
To make a good offer, you need to know whether it’s a buyer’s or seller’s market and how hot the market is in that direction. This will help you understand how much competition you may have to purchase the home. You’ll also want to research comparable homes in the area to see what they’re selling for. Your real estate agent can help you with this.
When making an offer, you’ll include earnest money to show you’re seriously interested in buying the property. The seller usually gets the money if you back out just because you changed your mind, so this shows commitment.
Even if hiring an attorney isn’t required, it can be a great investment.”
You may also want to get a real estate lawyer at this point. Depending on your lender and location, you might be required to get one.
Even if hiring an attorney isn’t required, it can be a great investment. At this stage, they’ll help you draw up contingencies to add to the home purchase agreement. These contingencies must be met before the home can be closed on; otherwise, you can back out and keep your earnest money. An attorney can also help with any other legal issues or questions.
A word of caution: Just because your lender preapproved you for a certain amount doesn’t mean you need to use it all. Sometimes, lenders preapprove you for more than you could comfortably afford. It’s totally fine to make an offer on the home that’s less than your preapproval amount if the offer makes sense for the home.
8. Secure your mortgage
If your offer is approved, it’s time to formally apply for your mortgage.
Since you’re already preapproved, much of the work is done. You’ll need to submit a few more documents, such as the purchase agreement.
The mortgage underwriter then looks over the agreement, all your previous paperwork and the property details to ensure everything lines up with guidelines from the lender and any other relevant entities, such as the FHA, USDA or VA (if you’re taking out a government-backed loan).
If everything looks good, you’ll be on track to get your loan.
In some cases, the underwriter may grant a conditional approval. This means you’re likely to get approved, but the underwriter or someone else needs more information before finishing up. Once you provide this info and the underwriter or other relevant parties confirm it’s what they need, you should be set to receive your loan.
9. Schedule an inspection
Home inspections are usually not necessary to close on a home — but getting one is strongly recommended. Sometimes the seller knowingly or unknowingly fails to disclose problems with the home that may require repairs, and you and your real estate agent may have missed these issues during the walk-through.
Home inspectors can often uncover issues you didn’t notice and provide a report with any problems they find. If they find issues, you could have additional negotiating power. You may be able to demand the seller pay to fix the issues before you close on the home, or you can negotiate a lower price.
In some cases, a home inspection could cause you to back out completely. Your inspector may uncover excessive problems that could indicate the home will be a money pit.
Even if nothing major is uncovered, however, the few hundred dollars a home inspection costs can be worth the reassurance that you’re moving into a safe and enjoyable home.
10. Get an appraisal
Before you close on the home, the lender will request a third-party appraisal. It’s your responsibility to pay for the appraisal.
The appraisal is different from a home inspection — the appraiser isn’t looking for problems to be fixed; rather, they're estimating the value of the property.
If the home’s valuation is significantly lower than expected, you may be able to back out of the deal if you have an appraisal contingency in your purchase offer.
It’s almost time to close on your new home — but first, you may have some room to negotiate a better price. For instance, if the appraisal comes back significantly under the price you and the seller initially agreed upon, you may be able to talk the price down.
You have less negotiating power if it’s a seller’s market, which means more people are interested in buying homes than selling them.
As mentioned earlier, unrepaired problems can also grant you negotiating power. You can ask for the repairs to be made or persuade the seller to lower the price.
Market conditions also play a role. If you’re in a seller’s market — meaning there’s a lot of buyer demand and fewer homes for sale — the seller may not budge. After all, they probably have others lining up to buy.
Things are different in a buyer’s market. You can talk the price down more easily, especially if the appraisal or inspection results warrant a lower price.
12. Close on the home
One more step — time to close on the home.
First, do one final walk-through. This ensures the home is in the same condition as when you first entered the agreement.
After that, it’s time for the paperwork. You’ll need a lot of documents, but your agent — and maybe your lawyer — are there to help you figure out what to bring to the closing.
Some items you’ll need include:
- Funds to pay for closing costs
- Proof of homeowners insurance
- Deed of trust (makes the home collateral for your mortgage)
There could be more documentation required, so work with your agent and lawyer. Be sure to make copies of all important documents and keep them somewhere safe.
You’ll also need a document called a Closing Disclosure. This outlines all of your mortgage loan’s terms so you can review everything before signing. By law, buyers must receive this no later than three days before the closing date.
If everything looks right, sign all the necessary papers, and the seller will officially hand you the keys. Congratulations! You’re officially the new owner of your chosen home.
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
- Federal Deposit Insurance Corporation (FDIC), “Loans and Mortgages: How Much House Can I Afford?” Accessed Jan. 25, 2022.
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