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Buying A House: The Steps To Purchasing A Home

Molly Grace11-minute read
November 12, 2021

Though it’s something that previous generations have taken for granted, the process of purchasing a home can feel a bit like an enigma to many of today’s first-time buyers. You might find yourself wondering, “Can I afford to buy a house?” and “What does the process look like?” and “Where do I even start?”

In this guide, we’ll answer those questions and more, so you can determine if you’re ready to embark on your path to homeownership.

What Do You Need To Buy A House?

Before you’ll be able to take the plunge and start searching for your dream home, you’ll need to be prepared, not just for the home buying process but also homeownership in general. Here’s what that’ll look like.

Stable Income

Having a steady source of income is a prerequisite for buying a home. If you’re using a mortgage to purchase a home, your mortgage lender will want to know that you’ll be able to keep up with your monthly mortgage payments.

Beyond a mortgage payment, you’ll also need to be able to cover other home-related expenses, including utility bills, homeowners association fees, and repair and maintenance costs.

This requirement can make mortgage approval trickier for those whose incomes fluctuate a lot from year to year, or those who have an inconsistent work history.

Low Debt-To-Income Ratio

It’s not just the amount of money you have coming in that’s important; how much you’re spending matters, too – at least when it comes to your other debt obligations.

Your debt-to-income ratio (DTI) is the portion of your monthly income that goes toward debt payments such as student loans, credit cards, auto loans or other monthly bills.

If a large portion of your monthly budget is tied up in paying off debt, it might be hard for you to qualify for a mortgage. Typically, lenders want borrowers to have a DTI of 50% or less.

A Good Credit Score

Mortgage lenders will request a credit report. To determine whether you qualify for a mortgage, lenders have to look at your credit score. The better your score, the better your interest rate is likely to be.

Most mortgage lenders and insurers have minimum score requirements for their loans. For conventional loans, the minimum score required is 620. For FHA loans, it’s typically 580, though some lenders may go lower.

Your credit score gives lenders an idea of how you’ve handled debt in the past, which can help them determine how much risk they'll take on by lending to you. Those with really good credit scores – typically, anything above 740 – may be offered better terms when they apply for loans.

With mortgages, borrowers with great scores are often offered slightly lower interest rates, which can save them money over the life of the loan.

An Emergency Fund

You don’t want to drain your savings to get into a home, only to find a few months later that you need a couple thousand dollars for, say, an emergency roof repair.

It’s always a good idea to have some money tucked away in savings for unexpected costs, but when you’re a homeowner, that extra cash is all the more vital.

Homeownership comes with a lot of different expenses, some of them routine and others that pop up out of nowhere. Having a financial safety net is critical to ensuring that you’re able to care for and remain in your home.

Readiness To Own

Becoming a homeowner is a big step. Once you take that step, it’s not easy to back out of it if you decide it isn’t for you. That’s why it’s so important to know whether you’re truly ready.

First, you’ll want to ensure you’re financially ready. As you weigh buying versus renting, you need to understand the cost of both buying a home and owning one.

When you rent, you’re just responsible for paying rent and utilities. If something breaks, your landlord is responsible for covering repair costs. When you own your home, all the responsibility falls on you.

Additionally, you should think about how long you plan to remain in the home. Moving around is a lot easier when you’re a renter. When you own your home, you’re making a big financial investment. When you want to move, you’ll need to first go through the process of selling the home.

If you sell too soon after purchasing, you could end up losing money. Most experts recommend purchasing only if you plan on staying in the home for at least 5 years.

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How To Buy A House: 8 Steps To Success

1. Determine What You Can Afford

Before you even start looking at homes or comparing mortgage rates, you’ll need to know how much house you can afford.

This isn’t just about how much a mortgage lender will approve you for. Think about how much you currently spend on housing and how your overall budget functions on that amount. Can you afford to spend more, and do your current housing costs make it hard for you to afford other living expenses?

Remember that homeownership comes with costs beyond a monthly mortgage payment. If you buy a house on the high end of what you can afford, you may find that you don’t have much money left over to deal with those costs.

A too-high mortgage payment could also mean you won’t have any money left over to spend on other things you want, such as vacations or a new car. As you evaluate how much you can afford, it’s important to consider the big picture and how all your financial goals fit into that.

Of course, how much you think you can afford is only part of the equation. If you’re using a mortgage to buy your home, you’ll need to find out how much money lenders will let you borrow.

A home affordability calculator can give you an idea of how much you’ll be able to qualify for. These calculators look at your income, your debt, how much money you’ve saved (or plan to save) for a down payment and closing costs, your credit score and current mortgage rates to give you an estimate of how much home you can afford. When you decide what you can afford, another helpful calculator is the mortgage calculator, which estimates the cost of your monthly mortgage payments.

 

2. Save For A Down Payment And Closing Costs

Depending on the type of loan you get, you’ll likely need to put some money down.

The oft-cited “standard” for a down payment on a home is 20%, but most people put down less than this. However, if you want to avoid paying mortgage insurance, you’ll typically need to make a down payment of at least 20%.

It’s possible to make a down payment as low as 3.5% on an FHA loan or 3% on a conventional loan. VA loans and USDA loans don’t require a down payment.

The larger down payment you make, the smaller the loan you’ll need to take out, which will save you money in the long run. You may also be offered better rates because you’re less of a risk as a borrower. Large down payments also boost your buying power, which can be especially helpful if you qualify for a loan that is less than what most of the homes in your area cost.

On the other hand, large down payments take longer to save for. If you’re looking to buy soon, a smaller down payment can help you get into a home faster. A smaller down payment can also help free up cash for you to put toward other financial goals, such as saving for retirement.

As you save, you’ll also need to keep closing costs in mind. When you get a mortgage, you’ll incur a lot of fees and expenses as you go through the process of approvals, appraisals and other services associated with completing the home buying process. These expenses make up your closing costs. Closing costs can run between 3 – 6% of your loan amount.

Like any other savings goal, saving for a down payment (plus closing costs) is about determining how much money you’ll need and how much you can afford to save each month. From there, you can calculate how long it’ll take you to reach your savings goal.

3. Get Preapproved For A Mortgage

Once you’ve done all the prep work – ensuring your credit is good to go, determining how much you can afford, saving for a down payment – you’re ready to officially begin the home buying process.

This process typically starts with mortgage preapproval. Why? When you get preapproved for a mortgage, a lender has looked at your financial situation and determined how much they’re willing to lend you.

This will tell you exactly how much house you can afford, which will in turn help you narrow down your home search. Buyers with preapproval letters are also much more likely to be taken seriously by sellers and their agents.

As you shop around for a mortgage, you may find that there are a variety of different options for you to choose from. Some of the most common types of mortgages include:

  • Conventional loans: A conventional loan is one that isn’t backed by a government agency. Instead, these types of loans are often guaranteed by one of the two government-sponsored enterprises, Fannie Mae and Freddie Mac. Conventional loan borrowers will need a credit score of at least 620 to qualify.
  • FHA loans: FHA loans are backed by the Federal Housing Administration. These mortgages have less stringent requirements, making it easier for first-time home buyers and those with less-than-ideal credit to purchase a home. FHA loan borrowers typically need a credit score of at least 580, though a few lenders will approve borrowers with scores as low as 500.
  • VA loans: VA loans are backed by the U.S. Department of Veterans Affairs, and are only available to active duty servicemembers, veterans or qualifying surviving spouses. In lieu of a down payment, borrowers will pay a funding fee, a small percentage of the loan amount that can either be paid upfront or rolled into the cost of the loan.
  • USDA loans: Backed by the U.S. Department of Agriculture, USDA loans are offered to home buyers in rural or suburban areas who don’t exceed income limits for their area. You’ll typically need a credit score of at least 640 to qualify for this type of loan.

In addition to determining which type of loan you’ll get, you’ll also need to decide what rate structure (fixed-rate vs. adjustable-rate) and term length makes the most sense for you.

With fixed-rate mortgages, the interest rate remains the same for the life of the loan. With adjustable-rate mortgages, your interest rate can fluctuate up or down depending on the market.

The most common loan terms for mortgages are 30-year and 15-year. A 30-year mortgage will mean lower monthly payments, but you’ll pay more in interest over the life of the loan. Though 15-year mortgages save you money on interest, you’ll have a higher monthly payment.

4. Find A Real Estate Agent

Once you’ve got your mortgage preapproval in hand, it’s time to find the right real estate agent.

A real estate agent will help you find and tour homes, negotiate with sellers and assist you in closing on your new home.

Finding the right agent is vital to a successful home buying process. You’ll want to search around and vet potential candidates before making a decision. You want someone whom you not only trust professionally, but whom you jibe with personally as well. After all, you’re going to be spending a lot of time with them, and you want to be able to trust their opinions.

5. Start Looking At Homes

The house-hunting part of this process can be a lot of fun, but it’s also a lot of work. You may find that you have to attend a lot of showings and open houses before you find a home you really like.

Work with your real estate agent to determine exactly what you want out of your home. How many bedrooms do you need? How about bathrooms? What kind of neighborhood is best for you? Do you need a big backyard? Detached home, condo or townhouse? What amenities are important to you? Do you need to be close to downtown, to the highway, to the grocery store? This will help you narrow down your search and ensure that you’re only looking at homes you’d be happy living in.

6. Make An Offer On A House

You found a house you’d like to buy – congratulations! Now, it’s time to make an offer on it. Your agent will help you with this.

The biggest piece of your offer letter will be your offer price. If you think the house is priced fairly, this may be the list price. If you think it’s overpriced, you may offer less than the list price. If it’s a hot market and you’re competing against a lot of other buyers, you might offer more to make your offer more attractive to the seller.

Offers will usually include certain contingency clauses as well. For example, the buyer may include a contingency that allows them to renegotiate or even back out of the deal if an inspection finds serious issues with the home.

You’ll typically also include an earnest money deposit as part of your offer. This money shows that you’re serious about purchasing the home, and acts as insurance for the seller in case the buyer backs out of the transaction for a reason not stipulated in the purchase agreement.

Once you’ve made an offer, the seller can either accept it, reject it or make a counteroffer. If they accept it or you come to an agreement on a counteroffer, you’ll move ahead with the process and the home will officially be “under contract.”

7. Get An Inspection, Appraisal and Make Repair Requests

If you’re using a mortgage to purchase the home, your lender will require you to get an appraisal. A home appraisal determines the fair market value of the home you’re purchasing.

Lenders won’t give you more than what a home is worth, so if the appraisal comes in lower than what you’ve agreed to pay, you may need to renegotiate, bring more of your own cash to the table to make up the difference, or walk away.

Though typically not required, it’s strongly recommended that home buyers include an inspection contingency in their offer and get a home inspection done prior to closing on the home.

Home inspectors will inspect the property and look for problems with the home and its components. They’ll try to identify needed repairs, elements that need replacing or safety issues.

If the inspection report comes back with significant issues, you can negotiate with the seller to have them complete repairs or offer a repair credit at closing. Or, if you can’t come to an agreement, you may choose to walk away.

8. Close On Your Home

You’re almost at the finish line! It’s time to become the legal owner of your new home.

Prior to closing, you’ll receive a Closing Disclosure from your lender. This document will state how much you’ll pay at closing.

You’ll also do a final walkthrough through the home to ensure that everything is as stated in your purchase agreement. The seller should be completely moved out at this point (unless otherwise stipulated in your contract) and any agreed-upon repairs should be completed.

Closing day might feel a little anticlimactic to you. It’s an exciting day, but it’s also a day filled with lots and lots of paperwork.

When you attend your closing, make sure to bring your photo ID, proof of insurance, copies of your Closing Disclosure and purchase agreement, and anything else you’re told to bring.

Confirm how you’ll be paying your down payment and closing costs. If it’s with a cashier’s check, be sure to bring that to closing. If you’re wiring the funds, be sure to set that up ahead of time to avoid delays that could throw off your closing.

Is It A Good Time To Buy A House?

At this point in time, mortgage rates are still at historic lows, but competition is driving up home prices in many areas.

With homes selling so quickly and at such high prices, it can be especially difficult for first-time home buyers to find their footing in their local markets, as they face stiff competition from repeat buyers who tend to have more buying power than first-timers.

However, that doesn’t mean that it’s impossible for first-time buyers to find a home they love in the current market conditions. It might just take a little longer, or they might have to make some compromises on what they’re looking for in a home.

Wondering when is the best time of year to buy a home? As a rule of thumb, inventory increases as the weather gets warmer, but so does competition. If you want a lot of options to choose from, summer and early fall are often your best bets. If you’re hoping to avoid bidding wars and find more reasonably priced real estate, you might start your search as the weather turns colder later in the fall.

The Bottom Line: Ready To Buy Your First Home?

Buying a house can be complicated and confusing for many buyers, but understanding what steps you should take and why each is important will make your home buying process and experience much more manageable. Feeling overwhelmed? Don’t be. Buying a home is like anything else – you just have to take it one step at a time.

Want to learn more about the home buying process? Check out all of our home buying tips on the Rocket HQ Financial Learning Center.

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Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.