Buying a home can be INTENSE.
If you bought a home in the past, you probably feel more confident in your home buying chops than if you’re new to the home buying market. But the more prepared you are for each step, the better you’ll feel. Knowing the basic steps of buying a house gives you power and peace of mind.
Whether you’re a newbie home buyer or you’re buying a second home and need a refresh, now’s a good time to read this guide and get the facts you need.
What Should You Consider Before You Buy a Home?
Before you dive into the depths of house hunting, there are some key considerations you’ll need to take into account. Here are four important points to mull over – from digging into your finances to evaluating mortgage interest rates and current real estate market conditions.
1. Make sure you’re ready to buy a house
Q: What is the first thing you should do when you’re thinking about buying a house?
A: Make sure you’re ready.
Okay, but how do you know you’re ready to buy a house?
Owning a house is a BIG commitment. Whether now is the best time to buy a home or not depends on where you’re at in life – and not just from a money perspective. You also need to consider your lifestyle and career.
Are you sure about where you want to live for, potentially, the next 15 – 30 years? Are you planning on starting or growing your family? Are you working at a job that requires you to stay local, or are you a remote worker who can live anywhere?
If you end up needing to move to another state for work, family or fun, it’s a lot easier (and maybe a lot cheaper) to get out of a lease than it is to sell a house.
And what about that money angle? Let’s take your lifestyle into account. If you enjoy extravagant trips abroad every year, you may not want to take on the financial responsibility of a house.
You’ll need to crunch numbers to figure out how much money you’ll need to buy a house you can afford. Add up closing costs, mortgage insurance, homeowners insurance, taxes and maintenance. If you buy a house that’s more expensive than you can comfortably afford, you might end up house poor. (We’ll cover more about the costs of buying and owning a home in a bit.)
2. Assess your money situation (honestly)
Your finances don’t have to be perfect to buy a house.
An A in one area might make up for a C in another. Maybe your credit score isn’t hot, but your savings are ginormous.
If you’re all-in on buying a house now, your real estate agent and lender will work hard to find you a home and a loan that fits your circumstances. If they are going to get it right, you must be transparent about your finances.
Your current budget = Your homeownership stress test
Owning your first house could blow up your budget if you’re not careful. And stressing out about paying your bills every month is no way to live – even if you’re stressing out in a nice house.
Common homeownership costs in addition to your monthly mortgage payment include:
- Lawn care
- Pest control
- Homeowners association fees
Owning a home doesn’t automatically mean instant bougie life – especially if it’s your first one.
Would you need to remove anything from your monthly budget to pay for owning a house? A lot of finance experts would suggest cutting out the coffee runs and takeout. Well … think long and hard about what makes you happy. Try to think of ways to save money without making your life miserable.
Saving a lot = Boss move
First-time home buyers are sometimes surprised by the upfront costs included in a home purchase. Not you, though. You’ll know ahead of time how much you’ll need in your savings account.
Here are some costs you’ll need to pay out of pocket before and after getting a mortgage:
- Due diligence fee and earnest money
- Down payment
- Home inspection fee
- Closing costs
- Moving costs
Each of these costs will be relative to the price or size of the house. For example, average closing costs are typically 3% – 6% of the mortgage amount.
The due diligence fee, earnest money and closing costs are negotiable. If you negotiate it, your closing costs could even be covered by the seller.
Ask your real estate agent ahead of time for an estimate of all these costs. If you don’t have enough money saved, consider asking someone for gift money or taking more time to save money.
Be aware that while you’re delaying your purchase to save more money, interest rates and home prices could rise. It’s a good idea to evaluate the housing market, including rising home prices, before starting the home buying process. The Federal Reserve recently raised mortgage rates, and they could go up again. Buying a house now could make more sense than waiting.
3. Pick a price before you pick a house
Knowing what you can spend on a house is part “what you think you can spend” and part “what the lender thinks you can spend.”
To avoid getting your heart set on a house that ends up being more than you can comfortably afford, you’ll want to know how much house you can afford before you even start searching.
If the amount you land on isn’t going to get you what you want in the location you’re looking in, consider looking somewhere else. There are a lot of under-the-radar places that offer a great balance of lower home costs and higher quality of life.
Don’t guess-timate your monthly mortgage amount. Up your game 🎮 using the MoneyTips mortgage purchase calculator.
4. Set your house goals: decide what you want
Now that you know what you can afford, it’s time to make your house-hunting wish list.
First, are you planning on buying a “forever home” or a starter home that you’ll eventually sell to upgrade to something nicer?
With that in mind, create your list of must-haves. If it’s a competitive seller’s market with a low inventory of homes, consider making it a short list. Be realistic. Even in a buyer’s market with slow home sales and lots of housing inventory, no one house will have everything you want.
Next, list your nice-to-haves, or bonuses. For example, maybe you’d love a midcentury home with an open floor plan, but all the houses you’ve seen would need a wall knocked out for that.
Thinking through what you need and what you want can help you and your real estate agent find a home you’ll want to live in – even if it doesn’t check every box on your list.
The Deets on the Home Buying Process
Buying a home usually involves these ten steps:
1. Find a real estate agent (aka your new bestie)
Good real estate agents are more than trusty sidekicks. They’re total brainiacs who know the ins and outs of everything you’ll encounter during your home search, including:
- Finding listings (quickly!) that have what you’re looking for
- Pointing out things you wouldn’t have noticed in houses
- Assessing any potential repairs the house might need
- Helping you decide what to offer for the house
- Telling you when it’s best to negotiate or walk away
Look for a real estate agent or REALTOR® who is honest and happy to answer all your questions – even the ones you didn’t think of.
2. Find the right mortgage for your dream home
Unless you can buy a home with cash, you’ll need a mortgage loan. But what kind of mortgage? And how do you know which mortgage is right for you?
Most mortgages can be broken down into two main types: conventional loans and government-backed loans. We’ll walk you through each of these types of loans and some of the general qualifications.
When people think of mortgages, they often think of conventional loans (conventional mortgages). Conventional loans are available at most mortgage lenders, like banks, credit unions or online lenders.
Most conventional loans are conforming loans, which are mortgages that conform to the standards set by Fannie Mae and Freddie Mac.
Some conventional loans are nonconforming. These mortgages do not follow the guidelines set by Fannie Mae and Freddie Mac. Government-backed loans (which we will discuss soon) are nonconforming.
Conventional loan requirements will vary by lender and borrower. In general, you’ll need to meet the following requirements to qualify for a conventional mortgage:
- A minimum credit score of 620
- A down payment that is at least 20% of the home’s sale price. In some cases, you can put down as little as 3%, but you’ll pay private mortgage insurance (PMI)
- A maximum debt-to-income (DTI) ratio of 36%
- 2 years’ worth of steady income
Unlike conventional loans, Federal Housing Administration (FHA) loans are loans backed by the federal government. FHA loans are geared toward first-time home buyers who don’t qualify for conventional conforming loans.
If your credit score isn’t up to snuff, your DTI is a bit high or you are a lower-income borrower, an FHA loan could be the mortgage for you. While lenders can offer some flexibility with their requirements, the following is what you’ll typically need to qualify for an FHA loan:
- A minimum credit score of 580 if you make a down payment of at least 3.5%. If you have a credit score of 500 – 579, you can put down at least 10%.
- A DTI no higher than 43%
- Mortgage insurance premiums (MIPs)
- 2 years’ worth of steady income
Department of Veterans Affairs (VA) loans are also government-backed mortgages. They’re great for members of the armed services because their interest rates are lower than conventional mortgage interest rates, you can get a loan with no down payment and their qualifications are flexible. To qualify, you’ll need to meet one of these requirements:
- You were in active service for at least 181 days in peacetime or 90 days in wartime.
- You served at least 6 years with the National Guard or Reserves or meet Title 32 rules of 90 days of service.
- You are a surviving spouse of a member of the armed services.
You’ll typically need to meet some additional qualifications:
- While there is no minimum credit score for VA loans, most lenders require a credit score of at least 580.
- You will need proof that you’re creditworthy. When you’re deemed creditworthy, you’re seen as a good risk and likely to pay back your loan.
U.S. Department of Agriculture (USDA) loans are government-backed loans for homes purchased in rural areas. And what’s considered rural is rather broad. The home doesn’t have to be a cabin on a lonely mountaintop. It just can’t be part of a large urban area.
Here are the typical requirements to qualify for a USDA loan, though they are up to a lender’s discretion:
- A credit score of at least 640
- A DTI of 41% or less
- An income that doesn’t exceed 115% of the median household income in your area
Mortgage rate options
You can further customize your loan by deciding to make it a:
- Fixed-rate mortgage: Your mortgage rate and your monthly payment stay the same over the life of the loan.
- Adjustable-rate mortgage (ARM): Your mortgage rate is fixed for an initial period of time (typically several years). At the end of the introductory period, your rate will increase or decrease depending on market fluctuations. Your monthly mortgage payment will change with any changes in rates.
3. Time to go shopping for lenders
Smart buyers compare lenders.
Finding the right one can help you get a more affordable mortgage and your offer accepted. The right lender will offer fair and competitive rates and fees for your mortgage. The right lender will feel like a super-fast partner in the home purchase process – not an obstruction.
4. Research specialized programs for first-time buyers
Being a first-time home buyer has its advantages.
First-time home buyers have an assortment of resources available to help them purchase their first home (they even exist for buyers who aren’t new borrowers). These programs may include state-sponsored first-time home buyer clubs, tax incentives or loans (whether you’re a first-timer or not).
You may even qualify for a mortgage program or special terms for specific areas or communities. Ask your lender about special mortgage programs that you may be eligible for.
5. Get preapproved for a mortgage
Finding your perfect home is a marathon, not a race. You must do your due diligence before you put down an offer. And that means getting preapproved for a mortgage.
Getting a mortgage preapproval letter can help you make a winning offer on a house. When you’re preapproved, it signals to the seller that you didn’t come to the open house just for the cookies. You came to buy a house – and you are not playing!
Bonus: Getting preapproved lets you know the maximum purchase price you can offer a seller (hint: it’s the amount the lender preapproved you for – or less).
Transparency is important to us — get the .
How long does it take to get preapproved for a mortgage?
Preapproval only takes a day or two (sometimes less) and is usually good for 30 – 45 days.
6. Let the house hunting begin
At long last, you’re ready to look at houses! This is the fun part!
Make sure you’ve got your list of must-haves and nice-to-haves at the ready as you explore the home’s location and curb appeal and evaluate its price.
Remember your budget and rely on your real estate agent for advice. Play it safe and look at homes within your price range. It’s all too easy to fall in love with a home you can’t afford.
7. Make a smart offer on a house: Good choices
It’s got a front porch, a fireplace and an AstroTurf lawn you’ll never need to mow? Aww, snap!
But wait! Don’t offer the seller your entire preapproval just yet. Let your agent help you figure out the best offer to make. You want the house – but not if it means paying more than it’s worth. A diplomatic agent (the best kind) will give you a suggested price or price range, then you can decide if you want to make that offer or add a few more zeroes.
You may even decide to offer less than your agent’s recommended offer.
The real, nerve-wracking fun starts as you wait to hear if the seller accepts your offer.
We would suggest setting up a ringtone just for your agent. If you’re anything like us, you usually don’t pick up calls without a text first – but maybe make an exception in this case!
It’s time to negotiate the offer
Before the seller officially accepts your offer, they may throw a counteroffer back at you.
There’s usually room for negotiation. Your real estate agent can help you figure out what to offer and negotiate on your behalf. They might even be able to get the seller to throw you a bone on:
- The home’s sale price
- Repairs before the sale
- Credits for potential maintenance
- A home warranty
- Covering your closing costs
8. Get the home inspection and hope it looks good
Your offer was accepted. Nice! You’re officially “under contract.”
You likely want a certain level of peace of mind that you’re living in a safe, healthy home.
The home inspection should let you know if there’s any sketchy stuff happening – like a leaky roof, a moldy basement, a colony of squirrels in the walls – you know, the usual.
You can use the inspection report to negotiate (for instance: a rotted window frame) or back out of your offer (for instance: “Resident Evil” lives behind the basement walls).
Negotiate repairs after the inspection
So the inspection turned up some issues. Now what?
Talk to your real estate agent about what you may reasonably negotiate with the seller after the inspection and how. Remember, in a seller’s market, you may have lots of competition for the house, so you’ll have to temper your expectations about what to ask for. In general, if there are health or safety concerns, concessions can be requested, including a reduction in the home sale price, the completion of any repairs before closing or even help with closing costs.
Don’t forget the final walkthrough
During the final walkthrough, you and your real estate agent will visit each and every room in the home. Here’s when you check that requested repairs were made, and there aren’t any new surprises, like a puddle in the living room.
9. Time to get your mortgage loan
No more preapproval – it’s time to get the real approval.
You work with the same lender that preapproved you (most buyers do), or you can shop around for the best mortgage rate and terms you can find.
Just move as quickly as you can to get the approval process started ASAP.
What your lender will ask for:
- An application
- Proof of income
- Proof that you are who you say you are
Time for the appraisal
Lenders require and arrange a house appraisal as a part of the home buying process. The appraiser will use all sorts of appraisal ninja skills to estimate how much the house is worth.
Most appraisals come back in the amount you offered for the house. If yours doesn’t and comes in higher than expected, you’ll be responsible for paying the difference between your offer and the appraised value of the home by the closing date. If you can’t come up with the money in time, you probably won’t be able to buy the house. If you find yourself in this spot, you can request another appraisal.
How the underwriting process works
Underwriting can last a month or two after your offer is accepted.
This is when your lender thoroughly inspects your finances and credit history. They’ll review everything you submitted to make sure nothing looks wonky. At the end of the underwriting process, your lender will determine if you’re ready for a home loan.
By the way, don’t be surprised if they call you a few times during this process to ask you for details or explanations about anything. That’s normal. Surprises can occasionally pop up.
And please don’t make the mistakes some borrowers make between preapproval and approval, like running up your credit card or buying a car before you’re officially approved for the loan.
10. Closing the deal and what to expect
The last step to buying a house is closing on it. At closing, the sale is finalized, and the house (and the land it’s on) is transferred to your name.
A few days before closing, expect to get a Closing Disclosure from the lender that spells out the details of your loan and the closing costs you’ll pay at closing. If anything looks wrong, let your agent know.
On closing day, you’ll sit down with someone from an attorney’s or title agency’s office. (Your real estate agent will probably help you pick the attorney or title agency.)
They’ll go through all the paperwork to make sure you’ve met the lender’s and seller’s requirements.
You’ll sign the purchase paperwork, hand over your down payment and closing costs, show the proof of funds from your lender – and then you get the keys.
Keep up the savings for emergencies
Make sure you keep up (or start) your emergency savings fund for unforeseen events like a strong wind taking down a portion of your fence or replacing your furnace.
You’ve Closed: Celebrate Your New Home!
After you get the documentation showing that you’re the new homeowner – and before the rush of moving in – run to your car, find the right station and have a dance party in your car.
Don’t be ashamed to rock (or Milly Rock) out while people stare. Hey, you own a home!
FYI: Technically, your lender owns the house until you’ve repaid the loan, but we’ll leave that for another MoneyTips Guide.
Fannie Mae. “ELIGIBILITY MATRIX.” Retrieved July 2022 from https://singlefamily.fanniemae.com/media/20786/display
Fannie Mae. “Selling Guide – B3-6-02, Debt-to-Income Ratios (02/05/2020).” Retrieved July 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
Federal Deposit Insurance Corporation. “203(b) Mortgage Insurance Program.” Retrieved July 2022 from https://www.fdic.gov/consumers/community/mortgagelending/guide/part-1-docs/203b-mortgage-insurance-program.pdf
U.S. Department of Veterans Affairs. “Eligibility Requirements For VA Home Loan Programs.” Retrieved June 2022 from https://www.va.gov/housing-assistance/home-loans/eligibility/
U.S. Census Bureau. “Defining Rural at the U.S. Census Bureau.” Retrieved July 2022 from https://www.census.gov/content/dam/Census/library/publications/2016/acs/acsgeo-1.pdf
U. S. Department of Agriculture. “Single Family Housing Income Eligibility.” Retrieved July 2022 from https://eligibility.sc.egov.usda.gov/eligibility/incomeEligibilityAction.do?pageAction=state