Explore your mortgage options
Buying a house is a big deal – for first-time buyers and repeat buyers alike.
Unlike shopping for groceries, clothes or even a car, buying a house isn’t something you can do in one day.
Besides being more expensive than most other purchases you’ll make, the process of buying a home can be demanding and, at times, complicated.
To help streamline your home-buying experience and simplify the process as much as possible, we’ll break down what it takes to buy a home, step by step.
1. Ask Yourself if You’re Ready To Buy a House
Buying a house is a major commitment. You need to be honest in asking yourself whether or not you’re ready to buy a home.
Are you prepared to settle down and live in the same home for the next several years? Is the timing right? Most importantly, are you financially secure enough to invest tens or hundreds of thousands of dollars in a single asset?
Not sure if you’re financially ready to buy a home? Keep reading to find out how much cash you need to save and what lenders look for when evaluating you as a borrower.
What is your level of income?
Your income level is one of the first pieces of information lenders look at. Mortgage professionals may point to the 28/36 rule, which advocates spending no more than 28% of your gross monthly income on housing.
For example, if you make $120,000 per year ($10,000 per month), then your mortgage payment – plus private mortgage insurance, aka PMI, if it applies – should be under $2,800 per month.
The other number in the 28/36 rule refers to your total debt, which shouldn’t exceed 36% of your monthly income. While keeping your debt below 36% of your income is ideal for obtaining a mortgage with the best rates, many lenders will still approve a mortgage if your debt is greater than 36% of your income.
What is your debt-to-income ratio?
Your debt-to-income (DTI) ratio is how much debt you have relative to your income. You can calculate your DTI ratio by adding up your monthly debt obligations – like your mortgage and auto loan – and dividing the total by your monthly income.
For example, if you make $10,000 per month and have $4,000 in monthly debt obligations, your DTI ratio is equal to 0.4, which is expressed as a percentage (40%).
Depending on the type of mortgage, lenders will usually look for a maximum DTI ratio of 43% – 45%. For less qualified borrowers, that might be limited to 36%, while other loan applications may be approved with a DTI ratio as high as 50%.
❓ Curious what your debt-to-income (DTI) ratio is? Enter your figures and let the magic begin!What Is DTI?
🟢 On Track – Hey money maestro! You’re right on track for your house-buying journey! Make sure you have all the information you need to make the right choice.How much can I afford?
🟢 On Track – You’re right on track for your house-buying journey!How much can I afford?
🚨 Above Recommended DTI – Some lenders have different requirements to qualify but it’s worth looking into your credit and finding out what you can afford within your budget.What Is DTI?
🚨 Too Much Debt – Seems like you’ve got a little too much debt to qualify with the income you’ve put in! Do you want to try again?
What does your credit score look like?
Your credit score is used to help lenders gauge your creditworthiness. Your creditworthiness is supposed to tell lenders how qualified you are to receive a loan – in other words, how reliable and trustworthy you are as a borrower.
The two most important factors in determining your credit score are your payment history and the amount of money you owe. If you borrow a modest amount of money relative to your income and consistently make payments on time, you’ll probably have a good credit score. If you have a lot of debt, pay your bills late or skip them altogether, your credit score will suffer.
Different loan types and lenders have various credit score requirements for mortgage approval. For example:
- Conventional loans, the most common mortgage, generally require a minimum credit score of 620.
- Government-backed mortgages, like the Federal Housing Administration (FHA) loan, only require a minimum credit score of 500 – 580.
- Some loans, like Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans, don’t have a minimum credit score requirement – though lenders might.
2. Make Sure It’s a Good Time To Buy a House
When you’re shopping for a home, timing is key. First and foremost, the timing has to be right for you personally.
You should also consider the timing of the market. Is it a buyer’s market or a seller’s market? And if you’re planning on taking out a mortgage, what are the current interest rates?
The real estate market and mortgage rates can change at any time and in either direction. Though a 1% increase in interest rates might seem insignificant, the reality is it can cost you hundreds of dollars more per month and tens of thousands of dollars in additional interest over the life of the loan.
As a first-time homebuyer, you should also look into a temporary mortgage rate buydown to help keep your interest rates low at the start of your mortgage.
3. Calculate How Much Home You Can Afford
Before you begin your search for a new home, you need to set your budget by calculating how much house you can afford.
Take a closer look at your financial situation, home prices and interest rates. Then decide how much you’re comfortable spending, both on a down payment and on your monthly payments.
Are you able to make a healthy down payment? Ideally, you’ll want to put 20% down so you can avoid PMI. If you can’t afford to do so, how much can you realistically put down without stretching your budget beyond your comfort zone?
There’s nothing inherently wrong with putting down less than 20%, but a small down payment can increase your risk of negative equity. And at the very least, you’ll end up having to pay more interest since you’re borrowing more money.
When calculating how much home you can afford, be sure to include the following fees – some of which are unavoidable:
- Property taxes
- Homeowners insurance
- Homeowners association (HOA) fees
- Maintenance costs
- Unexpected expenses
4. Start Saving for the Home Buying Process
Buying a home is a big investment – and one you’ll have to save up for. Even if your income can support the monthly mortgage payment, that doesn’t necessarily mean you can afford that home.
There’s no magic amount to save when you want to buy a home, but you should have at least 5% – 10% of the purchase price saved before you buy.
When you’re buying a home, or any type of real estate, the down payment is the upfront cash payment you make at closing. Though down payment requirements vary by the type of loan you choose, the typical down payment on a house in 2021 was 13%.
In addition to your down payment, you’ll also have to save enough cash to cover the closing costs of your home purchase. On average, closing costs are 3% – 6% of the home’s purchase price.
Let’s say you want to buy a home that costs $300,000. For your down payment, you should budget around $15,000 – $30,000 for the down payment (5% – 10%), and another $9,000 – $18,000 for closing costs (3% – 6%).
5. Learn Which Type of Mortgage Is Best for You
When financing your home purchase, there are several types of mortgages to choose from – each with its own advantages and disadvantages.
Fixed-rate mortgages are the most common type of mortgage, offering borrowers a set interest rate that remains the same throughout the life of the loan. A fixed interest rate allows you to enjoy predictable payments, along with the possibility of locking in a low interest rate for as long as you have the loan.
An adjustable-rate mortgage (ARM) has a variable interest rate, meaning the interest you pay on your mortgage can change at certain, set intervals throughout the life of the loan.
ARMs start with an attractive introductory rate that has a lower interest rate than a comparable fixed-rate mortgage. There are different introductory period lengths, such as 5, 6 or 10 years.
Once the introductory period on an ARM expires, a variable interest rate (determined by market changes) will apply, with occasional adjustments (typically annually or semi-annually).
There are different ARM structures, such as the 5/1 ARM, 10/1 ARM or 7/6 ARM. The first figure represents the introductory period in years, during which your interest rate is fixed. The second number represents months or years and denotes how frequently a lender can change the interest rate on the loan.
The FHA was established in 1934 to promote homeownership by creating affordable home loans, known as FHA loans.
FHA loans provide an affordable loan option for borrowers with lower credit scores or less cash for a down payment. Unlike conventional loans, the FHA offers mortgages for borrowers with credit scores as low as 500. For borrowers who want to make a down payment of the FHA’s 3.5% minimum, a credit score of 580 is required.
USDA loans are another type of government-insured loan and are guaranteed by the U.S. Department of Agriculture.
Qualified borrowers who want to buy a home in a rural area can take out a USDA loan with zero down payment. USDA loans help lenders make homeownership in rural areas more affordable for low- and moderate-income borrowers.
It’s important to note that borrowers can only use USDA loans to purchase property in eligible areas, and their income can’t exceed 115% of the median household income in the town where the property is located.
VA loans are government-backed mortgages available exclusively to active duty service members, veterans of the U.S. military and their surviving spouses.
There are several benefits to VA loans, like lower interest rates than other types of mortgage and no down payment or mortgage insurance requirements. VA loans also offer more flexibility, and unlike other loan types, they don’t have a minimum credit score requirement, maximum loan amount or maximum debt ratio.
6. Get Preapproved by a Mortgage Lender
If you’re planning to take out a loan, getting a mortgage preapproval from a lender is an important step in the home-buying process.
A mortgage preapproval letter is an easy way to inform sellers that you’re a serious buyer and have the financial backing you need to buy a house. Furthermore, a mortgage preapproval can help expedite closing by getting the ball rolling sooner and give you a better understanding of how much home you can afford.
7. Hire a Real Estate Agent
Legally, you don’t have to use a real estate agent to buy a home, but finding a real estate agent can make your home search a lot easier.
A real estate agent can guide you through the entire home-buying process, from identifying prospective homes and sending you comparables, to negotiating the purchase price and completing the paperwork to close on the home.
An experienced real estate agent will be familiar with the neighborhood you’re looking in, can help you find the properties that meet your goals and answer any questions you might have along the way.
As a buyer, you have little to lose by working with a real estate agent because – in most cases – they work solely for a commission, which is paid by the seller of the home you purchase.
8. Start House Hunting
House hunting can be a challenge. For many people, it can take several months to find the right property.
There’s no such thing as a perfect house. So when you begin your house hunting journey, try to stay flexible and open to ideas.
Be realistic about your budget, priorities and what you’re willing to compromise on. Your real estate agent can send you properties from the Multiple Listing Service (MLS) database that meet your criteria.
Use this house hunting checklist to stay organized and keep you on track.
9. Submit an Offer for a House
With the help of your preapproval and real estate agent, you’re ready to submit an offer on a house.
Once you find the right home, work with your real estate agent to decide how much money you want to offer. Your agent will help you write up a formal offer, which will include your earnest money deposit – the deposit that accompanies your offer to show you’re serious – any contingencies, seller concessions or other terms.
If a seller agrees to the terms of your offer and signs the agreement, you’ll have a fully executed contract. Alternatively, the seller can choose to counter your offer with new terms, which you can then agree to or reply with a counteroffer of your own.
10. Secure Financing for Your New Home
Unless you’re paying cash for your new home, the next step will be securing financing for your purchase.
After your offer is accepted, you and your lender will know exactly how much money you need to borrow to purchase the home.
Applying for a mortgage is a more involved process than getting a preapproval letter. To earn approval for a mortgage, your lender will put your application through its underwriting process.
During underwriting, lenders verify your identity, background, assets, income, debt and credit history. If your lender needs more information, they may contact you to provide additional documentation.
Every mortgage loan application is different, but generally, you can expect mortgage underwriting to take anywhere from a couple of days to a couple of weeks.
11. Schedule Inspections and Appraisals
Scheduling inspections and appraisals is a crucial part of buying a home.
Most home buyers will order a home inspection to evaluate the overall condition of a property. However, other buyers may choose to conduct additional inspections to make sure the house doesn’t have mold, termites, radon, foundation issues, lead-based paint or other potentially costly problems.
Your contract will also state how many days you have to complete these inspections. Make sure you schedule all your inspections as early as possible, so you can have time to re-negotiate if you run into any unpleasant surprises.
One of the final parts of mortgage underwriting is the home appraisal. An appraisal is conducted by a licensed professional to evaluate a property’s market value.
To approve a mortgage, lenders want to ensure they’re not lending more than what the house is worth. If the appraisal comes back below the purchase price, you’ll either have to negotiate the price down or come up with a larger down payment to cover the difference.
12. Close on Your New House
Closing on a house isn’t your average purchase. You may have to exercise patience while you wait for your home to close. Ordinarily, closing on a home takes 30 – 45 days.
It takes time to conduct inspections, run the title search, secure a mortgage, purchase title insurance and get an appraisal back. In addition, lenders must provide a closing disclosure for you to review and sign prior to issuing your mortgage. By law, your lender has to share the closing disclosure at least 3 business days before the closing date, allowing you to ask questions or back out of the deal.
Finally, you’ll have to coordinate the closing with a title company, whose staff is likely busy closing several other mortgages every day.
When the mortgage is in place and everything is ready to close, you’ll want to do a final walk-through. The final walk-through gives you a chance to inspect the property one last time before closing. It’s important to do a final walk-through to make sure any necessary repairs have been made and no new problems have arisen.
Pay your closing fees
Now that you’ve finally made it to the closing table, it’s time to pay your closing costs, sign a seemingly endless pile of paperwork and take possession of the keys to your home. Your closing costs will appear as a table with debits and credits. Debits are money you owe, which can include things like the down payment, transfer taxes, title insurance and an origination fee. Credits are money owed to you, such as a credit from the seller and the earnest money deposit you already made.
Once all the balances are settled, paperwork has been signed and funds are in the correct places, your title agent will file your deed and mortgage, and you’ll officially be the new homeowner.
Home Sweet Home
Buying a home can be an arduous journey, with a timeline spanning several months. Fortunately, the hard work is well worth the comfort, financial benefits and (of course) space to make memories with family and friends. When you’re ready to buy a home, you can start by saving, calculating how much you can afford to spend, getting a mortgage preapproval letter and finding the right real estate agent to partner with.
Take the first step toward buying a home.
Get approved. See what you qualify for. Start house hunting.
Fannie Mae. “Selling Guide.” Retrieved October 2022 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-6-Liability-Assessment/1032992131/B3-6-02-Debt-to-Income-Ratios-02-05-2020.htm#DTI.20Ratios
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United States Department of Agriculture. “Single Family Housing Guaranteed Loan Program.” Retrieved October 2022 from https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp
United States Department of Veterans Affairs. “VA Home Loans.” Retrieved October 2022 from https://www.benefits.va.gov/homeloans/
United States Department of Veterans Affairs. “VA Guaranteed Loan.” Retrieved October 2022 from https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf
Consumer Financial Protection Bureau. “What is a Closing Disclosure?” Retrieved October 2022 from https://www.consumerfinance.gov/ask-cfpb/what-is-a-closing-disclosure-en-1983/#