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How to buy a house

12 steps to landing your dream home

Profile picture of Jessica Render
by Jessica Render ConsumerAffairs Research Team
man and woman hugging in new home

Many of us dream of owning a beautiful and elegant home we can call our own. Are you planning to spend some time this year on the hunt for a new home? Whether you’re purchasing a house to live in yourself or want to retain it as an income property, homebuying is a huge decision and can feel pretty overwhelming. If you want to know where you should start as a first-time homebuyer in 2021, it’s important to know the process takes some time. A real estate transaction often requires some knowledge of complicated legal and financial matters — so if you’re looking to buy a house this year, here are some tips.

1. Decide if it’s the right time to buy a house

Are you wondering whether it’s the right time to buy a house? Keep in mind that various economic indicators, such as housing prices and property taxes, as well as the state of the local housing market, are important factors in your decision.

For example, let's consider the latest mortgage rates. Despite a recent uptick, interest rates for most fixed-loan products are at historic lows.

Also, note that every year the U.S. real estate market is different. Although the economy contracts and expands, the housing market reacts, creating buyer’s and seller’s markets. If you want to buy a house in 2021, you should understand what the housing market is doing now.

However, remember that the decision will boil down to your particular financial situation and financial health, including your credit score. It also depends on your life goals and your readiness to become a homeowner.

2. Determine how much house you can afford

It’s vital to have a comprehensive understanding of your current income, expenditures and assets before you buy a home. This will help you determine how much you can afford and establish your new home budget.

While online calculators don’t necessarily consider all your monthly expenses, they are an excellent tool for understanding your overall financial situation, including your monthly income and monthly debt. You can use our affordability calculator to determine how much you can afford.

After figuring out what you can easily afford, you can begin looking online for houses and start narrowing down which home features are essential to you. Understanding what you can comfortably afford in the area or neighborhood you’re interested in will help keep you focused on what you really want in a house rather than what might be nice to have.

You should review your investments, credit card and banking statements thoroughly for accuracy. This is important because it will help you calculate your debt-to-income (DTI) ratio accurately. It’s also essential to evaluate your income and see if you can increase it over the next term. Lenders, including banks, calculate your DTI ratio by dividing your monthly debts by your gross or pretax income.

You can calculate your DTI ratio by simply adding up your total recurring monthly obligations (like mortgage, student loan, child support, auto loan and credit card payments) and dividing them by your pretax monthly income. While most lenders in the U.S. look for a ratio of about 36% or less, there are a few exceptions. Also, lenders usually offer the most attractive mortgage terms and rates to borrowers with credit scores of at least 740.

3. Save for a down payment and other costs

How much do you need to save for a single-family home? According to experts, homebuyers should try to have a down payment of 20% ready when looking for a new house. Although there are several mortgage options in the market that allow for a considerably lower down payment, these options usually require private mortgage insurance (PMI) or a similar payment.

Note that PMI is important in that it helps protect lenders and banks if you default on your mortgage. Also, the lower your credit score and down payment, the more you will need to pay for PMI. This is a large portion of your monthly housing budget.

However, keep in mind that conventional loans (and VA loans, if you’ve served in the U.S. military and are eligible) might allow you to put down less than 20% while avoiding PMIs.

Here’s a list of other costs you should consider:

4. Compare mortgage options and homebuying programs

There are several homebuying programs and mortgage options that can help you buy a new home. For example, the USDA home loan allows you to purchase a home with 100 percent financing and no money down. VA home loans are ideal for military homebuyers in the U.S. and require no down payment or minimum credit score.

FHA home loans are fitting for homebuyers with higher levels of debt or lower credit scores. An FHA home loan is a government-backed mortgage insured by the Federal Housing Administration. These loans are easier to qualify for compared to most other programs.

You should also know the difference between fixed-rate and adjustable-rate mortgages. Keep in mind that a fixed-rate mortgage has an interest rate that won’t change the moment it’s locked in. This means you’ll pay the same amount of money over the course of the loan.

In contrast, an adjustable-rate mortgage (also known as ARM) is a mortgage that often starts at a low rate but then can change each year.

5. Get preapproved for a mortgage

Sellers are more willing to negotiate with buyers who prove that they can secure home financing.

A mortgage preapproval means a loan officer has looked closely at your finances, such as your income, assets, debt and credit history, and determined the amount of money you can borrow, what your interest rate will be and how much you might pay each month.

When being approved by your mortgage lender, it’s crucial to be aware of the differences between a quick standard preapproval for a home loan and an underwritten preapproval. For example, the fast preapproval typically encompasses a credit report review and loan officer, and it can be done in less than a few hours.

On the other hand, the underwritten preapproval often takes at least a day or two and includes a loan officer review, credit report review and an underwriter review, as well as a compliance or fraud review. Preapproval letters are usually valid for about 60 to 90 days. Note that lenders and banks put an expiration date on the letters, as your finances and credit profile could change in that time. When your letter expires, you’ll need to complete a new mortgage application and then submit updated paperwork in order to get another one.

If you’re thinking about buying a new home and suspect that you may face some difficulties getting a mortgage, you should go through the preapproval process. This will help you identify any credit issues, potentially giving you time to rectify and address them.

You should ideally seek preapproval just before a serious home search. This will put you in a stronger position to enhance your overall credit profile. Also, you will have more time to save money for closing costs and a down payment.

If you’re preapproved, your bank or lender will give you a preapproval letter on their official letterhead. This official document shows you’re a serious homebuyer by verifying that you have the financial means or resources to make good on an offer to buy the home.

Keep in mind that preapproval letters usually include the purchase price, interest rate, loan program, loan amount, expiration date, down payment amount and property address.

6. Find a real estate agent

If you get a real estate agent, know that it’s standard practice for the seller to pay the fees for the homebuyer’s agent and their own listing agent (though these fees could be added into the purchase price). While there’s nothing wrong with researching real estate and attending open houses on your own, an experienced and savvy real estate agent can help out when the search gets serious, especially if you’re buying a home for the first time.

One of the most crucial decisions you’ll make when you’re ready to purchase a home is choosing the right real estate agent. This is because an experienced and talented agent will help you navigate the complicated buying process with minimal stress. On the other hand, a not-so-good real estate agent may make this process harder on you (and your wallet) than it has to be.

Your real estate agent should have good communication skills — successfully purchasing a house requires effective communication between a homebuyer and agent. You should also look for solid references. Note that one of the most effective ways to make sure you choose a reliable and experienced real estate agent is soliciting recommendations from individuals you know who’ve bought houses in the area.

A real estate agent can also provide you with valuable and timely information on market conditions and pull up comparable sales data in order to help you determine if a specific house is worth the asking price. They will also help you prepare your offer and counteroffers.

Make sure to speak with a number of real estate agents and get recommendations from your friends and colleagues or trusted online sources before you make your choice. Ideally, you want an agent who will act as your guide through the whole homebuying process while keeping your best interests at heart. Also, they should be expert negotiators; this will help you secure the best deal possible.

7. Go house hunting

Though the process of house hunting can be exciting, it often feels overwhelming, especially for first-time buyers. Here are a few tips to make sure you’re prepared when the best opportunity jumps at you.

If you have children, the quality of the nearby school districts is probably on your mind. Even if you don’t have children, though, a home near excellent schools is likely to sell for more in the future.

Visiting some open houses will help align the online research results with reality — it’s no secret that photographs and virtual tours can’t quite replace seeing a house in person. For instance, if you attend multiple open houses in the same neighborhood, you might notice that the trees lining the streets are actually blocking the homes from sunlight. Open houses also let you better assess the flow of the property’s layout, check out the basement, open all doors and listen for creaks on the stairs.

Keep in mind, though, that every housing market is quite different. If you come across a ridiculous listing price for your dream home as you search, don’t let that one number discourage you too much — keep at it to find a house that fits your budget.

8. Make an offer

Making an offer on a home can be tricky for first-time homebuyers. Even if you’ve purchased a home before, the process could depend on the local property market. However, here’s how the process usually works: First, you make a written offer. The seller will accept, make a counteroffer or decline. If accepted, you’ll proceed in buying the home. If the seller counters, you can either accept or make a new written offer — and return to step two. If the seller refuses, you can make a new offer or start looking elsewhere. Often, a real estate agent will handle this process.

Note that you can also attach certain conditions to your offer — these could include a preference for the closing date, a formal request for specific appliances and furnishings or a legal clause stating the home purchase is contingent on the sale of your current home.

Remember that including a money order or check with your offer helps prove you’re serious about the offer. This is known as earnest money. Also, the amount you have to deposit usually depends on local customs — it may be anywhere from 1% to 3% of the total purchase price, or it could be a fixed amount (maybe $3,000 to $5,000).

9. Get a home inspection

Remember not to sign any contract without a contingency clause stating that the house should pass inspection. This assures you that there are no hidden functional or structural problems with the house you want to buy. Keep in mind that the homebuyer typically pays for the inspection. A real estate agent can suggest reputable inspectors.

A standard home inspection involves a professional and certified inspector who will go in, under and on top of the house to look for anything that may be of concern, like structural and mechanical issues. The inspector should also look for any safety issues.

A home inspection report could reveal minor problems like plumbing or electrical issues but can also alert you to more serious issues like a cracked foundation or mold. It’s up to you to determine whether these problems are serious enough to back out of the property deal, to request that the issues be fixed before closing or to agree to the home sale “as is” and cover the repair costs on your own.

10. Get homeowners insurance

If you financed your home with a mortgage, it’s likely your lender will require a standard homeowners insurance policy. They may also require supplemental coverage, such as earthquake or flood insurance, especially if your home is vulnerable to specific risks. This is why you have to provide documentation showing you’ve bought an appropriate amount of coverage at closing.

Most lenders and banks require homeowners to purchase sufficient insurance to cover the remaining amount or balance of their mortgage. Also, remember that different lenders tend to have different requirements based on location, type of home, building codes, etc.

11. Close on your new home

Congratulations — you’ve drafted the purchase agreements and completed the inspections. Once any contingencies have been met and home financing is in place, all you have to do is sign some paperwork, including closing documents, and receive the keys to your new home.

If you’re working with a real estate agent, they will help you in mapping out the last details, like where and when you should sign all the relevant papers in order to make your ownership official. Make sure you have a certified check before the final day for your down payment and closing costs. Otherwise, you can use a wire transfer for payment.

The closing date is usually set during the negotiation phase, and it’s often several weeks after you formally accept the offer. You can complete the closing process in person. However, in more than a dozen U.S. states it can be completed online via a secure electronic signature.

If you have an attorney, they’ll be by your side at closing in order to read and explain all the relevant documents before you sign. Also, if you cannot attend an in-person closing for any reason, you may assign the power of attorney to another person.

When you buy a house, the deed is a legal document that transfers the title from one person to another. A warranty deed is used to guarantee the process goes smoothly.

This is a big commitment, so you’ll likely experience a mixture of anticipation, nervousness and a little boredom as you sit for an hour or more signing documents. However, this part of the process shouldn’t be difficult — and soon you’ll have a new home that’s all yours.

12. Consider a home warranty

What if, a month after moving into your new home, your dishwasher abruptly quits, you switch on the air conditioning and it doesn’t work or your furnace goes out in the middle of winter? The best thing about getting a home warranty is that it can help alleviate, to some extent, the financial burden many new homeowners in the U.S. face when a major home system or appliance goes out.

We can define a home warranty as a contract that covers breakdowns of your home’s major systems and appliances, e.g., refrigerators, that have failed because of regular wear and tear. The warranty is valid for a specified period — usually one year or more.

You may want to consider buying a home warranty if you’re purchasing a previously owned home. Make sure it’s from a reputable company, particularly if the home inspection reveals that many of the home’s systems and appliances are older.

Also, keep in mind that home warranties are an attractive and enticing option for people living in old homes with outdated electrical wiring, plumbing and HVAC systems.

It’s important to make sure you understand all the terms and conditions of your home warranty contract, such as how long the warranty coverage lasts as well as what it will and won’t cover. The benefit of purchasing a home warranty is that you don’t need to worry about any major unexpected expenses for all covered home systems and appliances.

Bottom line

Whether you’re a real estate investor or are simply looking to put a new roof over your head, purchasing a home in 2021 is a mixed bag. Although you may pay a little more for a home this year, you may also benefit from a considerably lower interest rate on your mortgage.

By following the 12 steps here, you can take some of the hassle and stress out of the homebuying process. Keep in mind that it starts with saving for the down payment. Remember your priorities when it comes to a home’s features and location, and make sure to assess your finances and financial goals to see if buying a home is right for you.

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Profile picture of Jessica Render
by Jessica Render ConsumerAffairs Research Team

As a member of the ConsumerAffairs research team, Jessica Render is dedicated to providing well-researched, valuable content designed to help consumers make informed purchase decisions they can feel confident making. She holds a degree in journalism from Oral Roberts University.