How to Buy a House

12 steps to buying a house

When buying a house, you’ll generally want to take the following steps:

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

There’s likely never a perfect time to buy a house, but there are various economic factors that can impact your decision, such as housing prices, interest rates, property taxes and the state of your local housing market.

Beyond economic indicators, you’ll also need to consider your current financial situation, including your credit score, income, and short- and long-term goals. It’s also a good idea to assess your readiness to become a homeowner and if it’s the appropriate time for you or your family.

2. Determine how much you can afford

You should review your investments, credit card and banking statements, and income to accurately calculate your debt-to-income (DTI) ratio. You can calculate your DTI ratio by dividing your monthly debts (like student loan, auto loan and credit card payments) by your gross income. Most lenders in the U.S. look for a DTI ratio of about 36% or less, some lenders may accept a higher ratio.

Also, consider using an affordability calculator. This can be an excellent tool to use to figure out how much you can afford to spend on a house. It can help you understand your overall financial situation, including your monthly income and monthly debt.

3. Save for a down payment and other costs

You’ve likely heard that you need at least a 20% down payment. While this is certainly helpful advice since it can lower your monthly mortgage payment and overall cost of the loan, it’s generally not required. However, you should put at least 20% down if you don’t want to pay private mortgage insurance (PMI) each month. PMI is an additional fee the lender tacks on to your monthly payment as a way of reducing its risk of lending to someone who didn’t put 20% down.

Besides the down payment, you’ll also need to save up for some other costs, including:

• Home inspection fees
• Home appraisal fees
• Land survey fees
• Homeowners insurance fees
• Closing costs
• Property taxes

4. Compare different types of mortgages

Mortgages are not one-size-fits-all and you may be surprised at the number of options available. It’s helpful to know the main differences between some of the more common loan types as you start shopping around and comparing lenders. It’s also a good idea to get quotes from at least a few different mortgage lenders.

Fixed vs. variable rates

There are two main interest rates with mortgages:

• Fixed-rate mortgage: This means the interest rate won’t change from the moment it’s locked in. Your principal and interest payment will be the same each month.
• Adjustable-rate mortgage (ARM): An adjustable-rate mortgage typically starts with a fixed-interest rate and then changes to a variable-interest rate for the remainder of the loan. Your future monthly mortgage payments will be unpredictable.

Types of loans

You’ll also be able to choose from a variety of loan types, including conventional loans and government-backed loans.

• Conventional loans: Conventional loans are available from private lenders, and they’re not backed by any government entity. They typically come with stricter credit requirements than government-backed loans.
• Federal Housing Administration (FHA) loans: FHA loans are designed for low- to moderate-income borrowers. You can qualify with a credit score as low as 500, and down payment requirements range from 3.5% to 10%.
• U.S. Department of Veterans Affairs (VA) loans: VA loans don’t require a down payment or minimum credit score, and you won’t need to pay PMI.
• U.S. Department of Agriculture (USDA) loans: USDA loans are available for eligible rural locations. Similar to VA loans, there’s no minimum credit score or down payment requirement.
• Jumbo loans: Jumbo loans exceed conforming loan limits set by the Federal Housing Finance Agency (FHFA). They’re typically for properties of over $1 million.

» MORE: Best mortgage lenders for first-time buyers

5. Get preapproved for a mortgage

A mortgage preapproval means a loan officer has looked at your finances, such as your income, assets, debt and credit history, and determined the amount of money you may be able to borrow, what your interest rate may be and how much you might pay each month. It is not an official loan approval, and you’ll still need to officially apply for a loan after you submit an offer on a home.

Standard vs. underwritten preapproval

A standard preapproval typically encompasses a credit report review and loan officer, and it can be done in less than a few hours. In comparison, an underwritten preapproval often takes at least a day or two and includes a loan officer, a credit report and an underwriter review, plus a compliance or fraud review. It’s typically valid for 60 to 90 days. You’ll get a preapproval letter, which is an official document showing you’re a serious homebuyer and you have the financial resources to buy a home.

» MORE: Does mortgage preapproval affect your credit score?

6. Find a real estate agent

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

Speak with a number of real estate agents and get recommendations from your friends and colleagues or trusted online sources before making 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 to help you secure the best deal possible.

7. Go house hunting

Though house hunting can be exciting, it often feels overwhelming, especially for first-time buyers. A real estate agent can help you find a house that fits your budget and goals.

Also, visiting some open houses will help align online research results with reality. After all, it’s no secret that photographs and virtual tours can’t quite replace seeing a house in person. Open houses let you better assess a property’s layout, room sizes, basement and more.

8. Make an offer on a home

When you’re ready to make an offer, you’ll want to work with your real estate agent to write one. You can attach conditions to your offer, such as a specific closing date or a legal clause stating that the home purchase is contingent on passing a home inspection or the sale of your current home.

You can also include a money order or check with your offer to prove you’re serious about the offer. This is known as earnest money. This typically varies anywhere from 1% to 3% of the total purchase price, or it could be a fixed amount, such as $3,000 or $5,000.

Once you submit your offer, the seller will then either accept it, make a counteroffer or decline.

• If the seller accepts your offer, you’ll proceed with buying the home.
• If the seller counters, you can either accept it or make a new written offer.
• If the seller refuses your offer, you can make a new offer or start looking elsewhere.

9. Get a home inspection

A standard home inspection involves a professional and certified inspector who will assess the home for any safety issues or damage. A home inspection report will reveal if there are minor or serious problems with the plumbing, electrical, roof, foundation and more. It typically won’t check for mold or pests, so you’ll need to get an add-on inspection to look for those issues.

Make sure you include a home inspection contingency clause with your offer.

After an inspection, it’s up to you to determine whether any problems are serious enough to back out of the property deal. Otherwise, you can request that the issues be fixed before closing or agree to the home sale as is and cover the repair costs on your own.

» MORE: How to negotiate after a home inspection

10. Get a home appraisal

A home appraisal is the most common method for determining the value of a home. A licensed assessor evaluates the home and offers an opinion on what the home is worth. A lender relies on this information to decide how much it will lend to you.

Home appraisals find the value of a home through comparable sales, upgrades and the overall condition of the home. Appraisals typically cost anywhere from $200 to $600, depending on the location.

11. 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. You’ll have to provide documentation showing you’ve bought an appropriate amount of coverage at closing.

» MORE: What does homeowners insurance cover?

12. Close on your new home

Once you’ve drafted the purchase agreements, completed the inspections, met contingencies and secured financing, all you have to do is sign the paperwork 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 final details. Make sure you have a certified check before the final day for your down payment and closing costs, or you can use a wire transfer for payment.

The closing date is usually set during the negotiation phase and you can complete the closing process in person. However, many states now allow closings online via a secure electronic signature. If you can’t attend an in-person closing for any reason, you may assign the power of attorney to another person.

If you have a real estate attorney, they’ll be by your side at closing in order to read and explain all the relevant documents before you sign. 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.

Common mistakes to avoid when buying a house

Some common mistakes you should avoid when buying a home include:

Not looking into first-time homebuyer programs

There are a wide range of state and local first-time homebuyer programs that are available, all of which have varying borrower requirements and loan limits. These programs may be in the form of a loan or grant, and you may be able to get assistance with your down payment or closing costs.

Not saving enough for closing costs

Closing costs are typically 2% to 6% of a home loan, which can add up to tens of thousands of dollars depending on your home’s price. If you don’t qualify for closing costs assistance from a first-time homebuyer program, make sure you factor in saving up for closing costs with saving for your down payment.

Starting with finding a home before a loan

While it’s a good idea to research the housing market in your area, you’ll generally want to get preapproved for a home loan before you start house hunting.

“In my experience as a certified mortgage advisor, one of the biggest mistakes first-time and repeat homebuyers make is finding the home first and then starting the loan process,” said Kevin Martini, a certified mortgage advisor with Martini Mortgage Group, a broker based in North Carolina.

“Regardless of the experience level of the homebuyer, the first step should always be the home loan first and then go find your home,” Martini said. “This gives a homebuyer price and cost clarity before the home search and provides certainty through mortgage approval.”

Skipping a home inspection

Generally, you shouldn’t sign a contract without a home inspection contingency clause. This states that the house should pass inspection for you to buy it. This assures you that there are no hidden functional or structural problems. The homebuyer typically pays for the inspection, though a real estate agent can recommend an inspector for you.

FAQ

Bottom line

Buying a house is a long process, but a little preparation can take some of the hassle and stress out of the homebuying process. It’s also helpful to work with lenders and real estate agents you trust. And before you put in an offer on a home, make sure you compare offers from at least a few lenders to make sure you get the best deal.