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Buying a house is one of the most exciting and yet overwhelming times in your life. Not only must you find the perfect home, but you need financing unless you’re paying cash.
You’ll find hundreds of lenders out there with different programs you can qualify for, but no two lenders are created equal.
Knowing what to look for in a mortgage, how to find the right house, and what numbers to look at to make sure one of the largest investments you make in your life is worth it.
How to Buy a House (Step-by-Step)
In this guide, I outline every step you should take to buy a house. Remember, buying a house is more than a purchase. It’s an investment.
Many people use the equity in their homes to supplement their retirement income or leave a legacy for their loved ones.
This isn’t a decision to make lightly. Know the steps to buy a home, how to tell if you’re ready, and what you should consider in this important decision.
#1. Decide if You Are Ready to Buy a Home
Wanting to buy a house and being ready are two different things. Before you jump into homeownership, ask yourself:
- Am I ready to set down roots? When you buy a house, you make a commitment. You can’t move yearly like you can if you rent. Make sure you’re ready to plant roots in the community you’re looking to buy a house.
- Do I have money for a down payment? You’ll need between 3% – 10% down to buy a house, depending on your credit and the loan program you qualify for.
- Do I have money saved for emergencies? When you own a home, you’re responsible for all aspects of it, including the major repairs. Having at least 3 to 6 months of expenses saved will help you in an emergency.
- Is my job secure? If you aren’t secure in your career yet, you may want to wait. Mortgage payments last for up to 30 years. If you default, you run the risk of losing your home. Don’t buy a home until you’re settled in your career.
- Do I have good credit? Your credit score determines if you’ll qualify for financing, and if you are, it determines your rate and terms. The higher your credit score is, the better terms you’ll get. Aim for a 680-credit score or higher. There are loan programs for lower credit scores, but you’ll get better terms with a better score.
#2. Budget Accordingly: How Much House Can You Afford?
Deciding how much house you can afford comes down to how much of your income you want to commit or can commit to your mortgage.
A good rule of thumb is for your mortgage payment to be 28% or less of your gross monthly income (income before taxes).
Here’s how that works. If you bring home $6,000 a month, your mortgage shouldn’t exceed $1,680. This includes the principal, interest, monthly real estate taxes, homeowner’s insurance, HOA dues, and mortgage insurance.
If your mortgage payment takes up much more than 28% of your gross monthly income, it’s hard to afford anything else.
We call this house poor, and it’s not a good situation. You’ll find yourself sacrificing in most other areas of your life.
This could lead to buyer’s remorse or, worse yet, the inability to make your housing payments on time.
It’s not a good idea to get in over your head. Know how much you can afford and be realistic about it. You can always ‘upgrade’ later, but always only buy what you can afford.
#3. Organize Your Finances
Organizing your finances is the number one way to ensure you’re approved for a mortgage. Before you apply (at least 6 to 12 months before), do the following.
Check your credit
Look for any derogatory information, including:
- Late payments
- Credit balances over 30% of your credit line
- Any incorrect information such as fraudulent information or human error
If you have any of these issues, correct them as quickly as you can. Bring your late payments current, pay your debts down, and satisfy any collections. If there is incorrect or fraudulent information on your credit report, dispute it with the credit bureaus.
Pay our Debt Off
The less debt you have when you apply for a mortgage, the higher your chances of approval. If you have high credit card balances, pay them down or off if you can.
Any other debts you can pay off is good too. The less debt you have, the lower your debt-to-income ratio and the higher your chances of approval.
Save for a Down Payment
You’ll need money for a down payment, and the more you have, the better. At a minimum, you’ll need 3% for a conventional loan (first-time buyers), 3.5% for an FHA loan, or 5% for conventional financing if you’ve owned a home before.
These minimums are just that, minimums. You should put down as much as you can, though. The higher your down payment is the lower your payment will be, and the more equity you’ll have in the home.
Lenders don’t require reserves on hand, but it’s always a good idea. Reserves are liquid assets you have available to cover your mortgage should you lose your job or be unable to work. It’s also a good idea to have money set aside for house emergencies.
You are responsible for all repairs and renovations when things go wrong. The last thing you want is a several thousand-dollar emergency to land in your lap, and you have no way to pay it.
Assess your Employment Situation
Think about your career or job. Are you happy where you are or are you still searching for the right career?
If you think you may change jobs or your job isn’t steady now, wait to buy a house. A mortgage is a large commitment, and one most people can’t handle when they aren’t working or don’t have a steady job.
#4. Save Money for a Down Payment & Closing Costs
We talked about the down payment above, but it’s worth mentioning again, along with the closing costs.
First, save money for a down payment – at least 3 – 3.5% of the sales price. Next, save for the closing costs. On average, lenders charge 3% – 5% of the loan amount or $3,000 – $5,000 for every $100,000 you borrow.
Your closing costs are in addition to your down payment. For example, if you bought a $200,000 home with conventional financing, you’d need $6,000 for the down payment and $10,000 (maximum) for closing costs.
#5. Research All Options. Find the Perfect House.
While you’re in the planning stages, research all options for a home. Start with the type of home, including:
- Condos: Condos are a unit within a building. You live among many other families and own the common areas together. You own the interior components of your unit, but not the exterior. You aren’t responsible for exterior maintenance, but interior maintenance is your responsibility. Condos have homeowner’s association dues and HOA rules. Make sure you know all the rules before committing to a unit and a condo loan.
- Townhomes: Townhomes are like condos, but rather than many units in one building, multiple houses are attached. Like condos, you are only responsible for interior maintenance and repairs. You don’t own the exterior of the building, and you own a part of the common areas with all other residents. Townhomes also have HOA dues and rules, so make sure you’re aware of all of the rules before buying.
- Single-family Home: A single-family home is a standalone home. You own the land and the building. You can do what you want with the home within city or county guidelines. You are also responsible for all interior and exterior maintenance and repairs. Even single-family homes may have HOA dues and rules, though. Find out if the subdivision has an HOA, what the dues are and what they cover. Also, find out specifically what you can and can’t do with the home. For example, they may restrict the type of fence you can have, the type of roof, or even the color of your home’s siding.
- Multi-family Home: A multi-family home has multiple units, each with its own kitchen, living area, and bedrooms. You share the structure of the building but nothing else. When you buy a multi-family home, you own all the units within it. If you live in one unit and rent out the others, you can consider it an owner-occupied property and use almost any financing on it, including government financing (FHA, VA, or USDA loans).
#6. Choose the Right Mortgage
Just as important as finding the right home is choosing the right mortgage. It plays an important role in your investment. You want a mortgage that you can afford but that has attractive terms.
Look not only at the interest rate but the overall cost of the loan. Each lender must send you a Loan Estimate within 3 days of applying for the loan.
On the Loan Estimate, you’ll see the principal and interest payment, escrow payment, total closing costs, cash needed to close, and a breakdown of all closing costs itemized for you.
Choose the loan with the terms you can handle. Do you want a fixed-rate or adjustable-rate? Fixed rates stay the same for the life of the loan.
Adjustable rates adjust annually after an introductory period of 3 – 10 years.
Do you want a 30-year term, or would you prefer a 15-year term? Your payment will be higher, but you’ll pay thousands of dollars less in interest since you’ll pay the loan off in half of the time.
You have many loan options, but here are the most common.
VA loans are for veterans of the military or currently serving members. Surviving spouses of those who lost their lives in the service are also eligible.
VA loans have the most competitive rates, low closing costs, and they don’t require a down payment. The best VA mortgage lenders don’t charge mortgage insurance, either.
You’ll pay an upfront funding fee of 2.3% the first time you use the program, but it may increase with subsequent uses.
Borrowers need a 620-credit score and to prove they have enough disposable income for the average daily cost of living for the area given their family size.
USDA loans are for low to moderate-income families who don’t qualify for any other financing. You must buy a house in a ‘rural’ area, but the USDA’s definition of rural is different than most.
You can live right outside of urban areas and be considered rural. Check out the USDA map to see which areas are eligible near you.
USDA loans don’t require a down payment. You need a 640-credit score and a debt-to-income ratio not higher than 41% to qualify.
You also must not make more than 115% of the median income for the area to qualify. USDA loans charge mortgage insurance for the life of the loan, but only at 0.35% of the loan amount.
FHA loans are another government-backed loan. They are the go-to loan for borrowers who don’t qualify for conventional financing.
To qualify, you need just a 580-credit score, 3.5% down payment, and a maximum 43% debt-to-income ratio.
FHA loans charge mortgage insurance for the life of the loan at a rate of 0.85% of the loan amount.
Conventional loans are the most common loans but are reserved for ‘good credit’ borrowers. You’ll need at least a 660-credit score and DTI of less than 43%. Conventional lenders don’t have government backing, so they have stricter requirements.
To qualify, you’ll need a 3% down payment if you’ve never owned a home or a 5% down if you’ve owned a home before.
If you put down less than 20%, you’ll pay Private Mortgage Insurance, but only until you owe less than 80% of the home’s value.
#7. Get Preapproved for a Mortgage
Once you choose your mortgage program (or even if you haven’t), get preapproved for a mortgage. This is the most important step in the whole process.
Educating yourself before you get to this point and preparing your finances and credit will yield the best results. When you look for lenders, you’ll know what loan program you want and what terms you can afford.
If you aren’t sure, you can work with a loan officer or even a mortgage broker to determine the best program for you.
Either way, get preapproved. To do this, you will provide the lender with your qualifying factors. They will evaluate the information and decide if you fit the loan criteria. To qualify, you must provide:
- Paystubs for the last 30 days
- W-2s for the last 2 years
- Tax returns for the last 2 years if you’re self-employed
- The last 2 months of bank statements
- Proof of employment
Mortgage Lenders use this information to determine if you personally qualify for a specific loan program. If you do, they’ll write a pre-approval letter stating the loan amount you can borrow, the sales price you can afford based on your down payment, and the terms of the loan. The letter will also state the conditions you must satisfy to get final approval.
#8. Partner with a Real Estate Agent
With your pre-approval letter in hand, find a reputable real estate agent in the area. Your pre-approval letter will help you see more homes and make offers on them.
Most real estate agents won’t work with buyers who don’t have a pre-approval letter, so that step is important.
It’s a good idea to work with a real estate agent versus finding a home yourself. First, buyers don’t pay for the agent – the seller pays the fee.
Second, you’ll have access to more homes. Real estate agents have their ears to the ground and know when new homes hit the market, which is especially important in today’s fast-paced market.
A real estate agent also does all the work for you. They will narrow down your choices based on the criteria you want. The agent will also do all negotiating and paperwork once you find a home you want to buy.
#9. Go House Hunting
Now the fun part – house hunting! This is when you and your agent go out and see houses. Depending on your area, you may see most of the houses online first.
Many agents can even provide Zoom home tours or video tours so you can get a good feel for which houses you want to see in person.
Make sure when you look at homes that you look at the neighborhood and community too. When you buy a house, you buy into an area.
Make sure it has all the amenities you need/want, and it’s a community you can see yourself getting involved in.
#10. Make an Offer on a House
When you find ‘the house,’ make a contingent offer. This is the most nerve-wracking yet exciting part and is why I recommend using a real estate agent.
Your agent will suggest a price, and you can decide from there. Don’t assume you have to bid the asking price – you don’t.
How much did recently sold homes sell for? Let your agent find out the comparable prices in the area. Use that as a guide as you figure out how much to offer.
Remember, many sellers will negotiate. Some may even turn your offer down entirely. Sellers look at the entire offer – not just the sales price.
They look at when you can close on the house, what you want to be left in the house, and what contingencies you’re asking for.
Real Estate Contingencies are ‘ways out’ of the contract. Common contingencies buyers include are:
- Appraisal contingency – If the home doesn’t appraise for at least as much as you offered to buy it for, you can back out of the contract.
- Home sale contingency – If you own a home and need to sell it to have funds for the new home, you can back out of the sale if your home doesn’t sell in time.
- Home Inspection contingency – If the inspector finds major issues with the home, you can back out of the contract.
#11. Compare Home Loan Lenders
Once your offer is accepted, it’s time to choose your mortgage lender. If you received several pre-approval letters, compare your options.
Which loan offers the best deal, and which lender do you like the most? Remember, you’ll be working with the lender for the next 15 – 30 years. Make sure you work with a reputable lender you can trust.
>> More: Best Online Mortgage Lender
#12. Apply for a Mortgage
Once you choose a lender, you’ll formally apply for the loan. If you’ve been preapproved, you submit your sales contract and any outstanding conditions. The lender will evaluate the information you provide as well as order the appraisal and title work.
#13. Get a Home Inspection
While you wait for the mortgage processing, it’s a good idea to order a home inspection. This isn’t’ for mortgage approval. This is for your own peace of mind.
An inspection can set you back $300 – $500, but you’ll receive a detailed report of the home’s condition. You’ll know if the home is safe, sound, and stable.
An inspector can tell you what things may go wrong soon and what is wrong with the home now.
If you have an inspection contingency on the contract, you can back out of the sale if there are too many issues with the home.
The inspection also gives you grounds to re-negotiate with the seller or even ask them to make certain repairs.
#14. Get a Home Appraisal
The lender will order a home appraisal. This is the most important piece of the process for the lender.
The appraisal tells lenders if there is enough collateral in the home compared to the price you agreed to pay.
If the appraisal comes back lower than the sales price, you have a few options if you have an appraisal contingency on the contract:
- Back out of the sale
- Re-negotiate the sales price
- Pay the difference between the sales price and appraised value in cash (not recommended)
The appraisal tells you if you’re making a good investment. Would you pay more for something than it’s worth? That’s the point of the appraisal.
If the appraised value is lower than the sales price, consider asking the seller to lower it or walking away from the sale.
#15. Get Home Insurance
All lenders require home insurance. If you don’t have it, they will force place it on you at a cost much higher than most companies charge.
Most lenders require you to have a 1-year paid-in-full policy by the closing. Shop around to find the best rates with the most extensive coverage.
#16. Take Note of Repairs: Ask for Credits or Negotiate Costs
Pay close attention to the inspector’s report, and don’t be afraid to ask the seller to make repairs. If they don’t make the repairs, ask for a credit for the cost so you can fix the issue, assuming it doesn’t prevent you from securing financing.
#17. Schedule a Final Walkthrough
Once you get through mortgage processing and the property is cleared, too, you’ll do one final walkthrough.
This usually takes place a day or two before the closing. This is your chance to make sure the home is in the same condition it was when you signed the contract.
You can also check up on any repairs or other issues the seller promised to handle. If something isn’t right, your agent can handle the discussions with the seller.
#18. Close On Your New (Dream) Home
Your final step is to close on your new home! This is when you’ll sign a mortgage deed that gets recorded with the county. You’ll sign a lot of papers – usually 125 – 200.
You’ll also sign many disclosures and documents certifying that you understand the loan terms, what’s expected of you, and what could happen if you don’t make your payments.
How Can a Beginner Buy a House?
First-time homebuyers have many advantages. It can seem overwhelming to save for a down payment and closing costs, plus figure out which mortgage is right, but there is plenty of help.
Many first-time buyers use FHA financing because of its simple guidelines, but you are free to use any financing option that you can afford.
The key is to have at least a 3% down payment, enough money for closing costs, and to ensure your credit and finances are in good shape.
I recommend preparing yourself to apply for a mortgage at least 12 months before you apply. This gives you time to fix your credit, save enough money, and ensure your employment, assets, and income are all in good shape.
Simple Home Buying Tips and Tricks
Save early for a down payment
Don’t wait until the last minute to save for a down payment. Remember, you’ll need $3,000 – $3,500 for every $100,000 you borrow plus 2% – 5% for closing costs.
This won’t happen overnight. Save early and often, investing your money or at least putting it in a high yield savings account to help your money grow.
Don’t forget about moving costs
Many first-time buyers don’t realize how much it costs to move. This is separate from your mortgage costs. You’ll need to pay movers, turn utilities on, set up cable and internet, and furnish your home.
Freeze your credit
Once you apply for pre-approval for a mortgage, don’t change your credit. This means don’t rack up credit card debt, open new credit accounts, pay bills late, or make any other changes.
Lenders approved you based on your credit score at the time. Make sure you don’t change that score, or it changes as little as possible in between pre-approval and the closing.
Don’t change jobs
Once you get preapproved, don’t change jobs (if you can help it). Changing jobs could cause lenders to start all over.
Some even require you to be on the job for 3 – 6 months before they’ll consider it. If you lose your job involuntarily, be honest with the lender about what happened and together decide what’s next.
Don’t go house poor
Don’t assume you have to go big or go home. Just because a lender preapproves you for a certain loan amount doesn’t mean you have to borrow the entire amount.
Only borrow what you’re comfortable with, based on the payment and overall costs. It’s okay to borrow less than they say you can afford. No one wants to get in over their head in housing debt.
Is It Hard to Buy a House?
It’s not hard to buy a house. There are many loan programs out there today for people in all financial situations. It’s detailed and time-consuming, but not hard.
As long as you have average credit, some money saved, and can show financial responsibility and consistency, you should be in good shape to secure a mortgage.
Bottom Line: How to Buy a House
Buying a house should be fun and exciting! Educate yourself as much as possible before starting the process.
You’ll feel more confident, be able to make smarter decisions, and will enjoy your investment and hopefully make a profit, versus regretting it and selling it for a loss.