May 18, 2024

Home Inspection

Home Inspection, Primary Monitoring for Your Home

The Complete Guide to Buying a House

13 min read

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  • To buy a house, you should team up with a trustworthy real estate agent and make sure your credit is in good shape.
  • If you plan to get a mortgage, you need a loan preapproval in hand before you can start looking at houses.
  • Your mortgage lender will want an appraisal of the home, and you will need to purchase homeowner’s insurance.

Buying a house is no walk in the park.

It takes a lot of organization, careful thought and, of course, money. But if you’re serious about becoming a homeowner, you need to get prepared for the road ahead.

Below, check out the steps you’ll take to buy a house, from teaming up with a real estate agent and finding out what you can afford to closing on the deal, and everything in between.

Step 1. Assess your financial health

Evaluating credit score and debt-to-income ratio

You’ll probably need at least a 620 credit score if you want a conventional mortgage. A higher score can snag you a better rate. You can check your credit score using a free service like Credit Karma. Many credit card issuers also include your score on monthly statements or when you log into your account online.

If your score is lower, you can work on improving it or get a mortgage that allows lower scores, like an FHA loan. 

You’ll also want to know what your debt-to-income ratio is, since this will determine how much you can afford to borrow. George Chedid, a Realtor with Century 21 Barrood in Kendall Park, New Jersey, recommends your monthly debts, including your housing costs, not equal more than 40% to 45% of your gross monthly income.

Determining your budget

You can figure out how much house you can afford to buy using our free mortgage calculator.

Mortgage Calculator

$1,161
Your estimated monthly payment

  • Paying a 25% higher down payment would save you $8,916.08 on interest charges
  • Lowering the interest rate by 1% would save you $51,562.03
  • Paying an additional $500 each month would reduce the loan length by 146 months

Use the calculator to see how much a typical home in your area would cost each month based on current mortgage rates. If the monthly payment is too high for your budget, you’ll need to make a larger down payment or look for houses with lower price tags. 

Don’t forget to factor in property taxes, homeowners insurance, and private mortgage insurance (if you’re putting down less than 20% on a conventional loan). 

Saving for a down payment and closing costs

This is the part of planning for homeownership that usually takes the longest. You’ll need at least 3% down to qualify for a mortgage. Closing costs also often cost between 3% and 6% of the loan amount. With the minimum down payment on a $200,000 home, you could ultimately need between $12,000 and $18,000 to close. 

Fortunately, many first-time homebuyer lenders offer affordable loan options that come with down payment and closing cost assistance. Your state or local housing authority may also have programs to assist first-time and low-income homebuyers. If you’re having trouble saving for homeownership, make sure to explore the grant and loan options available to you.

Step 2. Understand the housing market

Researching current market trends

Familiarize yourself with the current real estate market in the place you plan to buy. What is the typical home price? Are there a lot of homes for sale or is inventory fairly limited? If there aren’t any homes in the area that fit your budget, or if there’s little inventory and a lot of competition over homes, you might want to expand your search. 

Deciding on your preferred location and type of home

The home you end up buying will likely be a compromise between the things you want and what’s available. If inventory is extemely tight, you’ll want to hone in on what features are non-negotiable and what you’re willing to forgo. 

Do you need to be close to work? Can you make do with just one bathroom instead of two? How important is it that the home has a basement, or a garage? Try to find a balance between being realistic and making sure that the home suits your needs. 

Step 3. Get preapproved for a mortgage

The importance of mortgage preapproval

In most cases, if you plan to finance your purchase, you need a mortgage preapproval in hand before you can start looking at houses — most real estate agents won’t entertain shoppers who don’t have one.

Dana Bull, a Realtor with Compass in Boston, calls it getting your “financing ducks in a row.” While you may already have an idea of what you think you can afford, you’ll need to find out how the bank sees you. A mortgage lender will assess your income, assets, and credit to determine your maximum loan amount. This will tell you what homes you actually can afford.

Choosing the right mortgage type

Your lender can help you understand the types of mortgages you qualify for, and which one might be the best fit. Here’s a quick overview of the most popular types:

  • Conforming loan: A type of conventional loan that is by far the most common mortgage
  • Jumbo loan: Another type of conventional loan for borrowers who need a larger loan amount
  • FHA loan: A type of government-backed mortgage originated by private lenders and insured by the Federal Housing Administration. They’re often a good choice for first-time buyers
  • VA loan: A mortgage backed by the US Department of Veterans Affairs that allows 0% down payments. Only available to military members and veterans who meet minimum service requirements
  • USDA loan: Backed by the US Department of Agriculture and available to low-to-middle income borrowers in rural and some suburban areas. Also requires no down payment

Step 4. Find the right real estate agent

How an agent can guide you through the buying process

A good real estate agent will be your guide and advocate throughout this process. You want to make sure prospective real estate agents have experience working with first-time buyers in the area you’re buying in. They should also be someone who listens to what you want and finds homes that are within your price range and meet your needs. 

Depending on your preferences, you may choose to find a real estate agent before getting preapproved with a lender.

Tips for successful house hunting

Though your real estate agent should be your top resource, “do your homework,” Bull says. Find out which neighborhoods you want to be in and check out a few open houses. The more you see, the more informed your decision will be when you finally pick “the one.”

Bull also suggests making it a priority to see homes the day they hit the market, or the first available showing, and always be ready to sign an offer. You may even want to keep your lender “waiting in the wings,” she says, so that you can get an updated preapproval letter quickly. Getting an updated preapproval letter means that it will show you’re approved for the amount you’re offering, rather than showing a higher amount, which could hurt your negotiating power.

Utilizing online resources

You’ll need to stay on your toes while you’re shopping. New homes come on the market every day, so it’s imperative to stay on top of listings, whether that means signing up for online alerts or checking in with your agent daily.

Many homebuyers like to browse online listing sites like Zillow and send listings they like to their agent so they can set up a viewing. This can be a great way to find a house you like. Just be sure you’re checking often so you can see homes as soon as they’re listed. 

Step 6. Make an offer

Crafting a competitive offer

Once you’ve found the home of your dreams, it’s time to make an offer. The seller may flat out reject your offer, counter your offer, or accept it. 

Bull says the most desirable offers come from cash buyers who don’t have any contingencies, because those deals can close within a week. But most people do have financing contingencies, meaning they’re required to work with the bank to secure a loan. The closing process when you get a mortgage can take between one to two months to complete.

Your agent will guide you on how to make your offer competitive. You may need to offer a larger earnest money deposit, include an escalation clause, or pay more than what the seller is asking for. 

Negotiating with sellers

If the seller counters your offer with a higher price, you may accept it or try to meet them somewhere in the middle. Your real estate agent will want to know your maximum price and will negotiate on your behalf.

Don’t get caught up in the heat of negotiation and end up paying more than you’re comfortable on a home. Decide how much you’re willing to spend ahead of time and stick to it. 

When you get an offer accepted

Once your offer is accepted, you’ll need to provide your earnest money deposit if your contract included one. This is typically equal to 1% to 3% of the purchase price, and it shows the seller that you’re committed to buying the home.

If you back out of the purchase for a reason not stipulated in the contract, the seller will likely get to keep your earnest money. 

Step 7. Apply for full mortgage approval

Choosing the best mortgage offer

You don’t have to go with the lender that offered you preapproval. Once you have a signed purchase agreement, you can apply for approval with multiple lenders to see who can offer you the best overall deal. This means looking at both the rate they’re offering and the overall costs you’ll incur with them.

When you’re purchasing a home, it’s also important to work with a lender that has good customer service and is communicative. Otherwise, it could take longer to close. 

“The rate is important, but so is the service and making sure you get to the closing table,” says Bull.

You can also compare lenders during the preapproval stage if you prefer. But by shopping around after you’re under contract, lenders will be able to give you a firmer offer that includes the ability to lock in a rate.

Completing the loan application

In addition to providing documentation showing your income and assets, you’ll give the lender information on the home you’re purchasing. Once you’re approved, you’ll receive a loan estimate. This document will outline all the details of the proposed mortgage and tell you how much cash you’ll need to bring to closing. 

Step 8. Home inspection, appraisal, and insurance

Conducting thorough inspections

Typically a purchase contract will include a home inspection contingency. An inspector will go through the home and create a report on the state of the home, including any repairs that need to be made.

If major problems turn up in the inspection, the buyer can re-negotiate with the seller to pay for repairs or lower the price. The buyer can also back out of the deal completely without losing the deposit.

Understanding the appraisal process

If you’re taking out a home loan to finance the purchase, the lender will order a home appraisal to ensure the price is an “appropriate deal,” says Bull.

During this process, a licensed appraiser will visit the home to verify the details and condition of the property. They’ll then look at comparable sales in the neighborhood to determine the property’s value.

If the appraised value is less than what you agreed to pay for it, you may need to bring more of your own cash to the transaction or negotiate with the seller. If you have an appraisal contingency in your contract, you can also back out of the deal.

Buying a homeowners insurance policy

If the property is being financed, you will need to purchase homeowner’s insurance before closing. Get quotes from multiple companies, or see if it’s cheaper to bundle your homeowners policy with your current auto insurance.

Insider’s Featured Homeowner Insurance Companies

  • Lemonade Homeowners Insurance

  • Allstate Homeowners Insurance

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Deciding whether to buy title insurance

As it prepares your loan for closing, the lender will have a title search completed on the property. This search looks at property records to ensure that there aren’t any outstanding liens on the home or issues with who legally owns it. Then, they’ll purchase a lender’s title insurance policy, which the borrower pays for as part of their closing costs.

You can also purchase an owner’s title insurance policy, since the lender’s policy won’t cover you. You aren’t required to have title insurance, but it may be worth it since title issues can be costly. 

Step 9. Closing the deal

Preparing for closing costs

As you approach your closing date, your lender will provide you with a closing disclosure. This will look just like the loan estimate document you received after getting approved for the mortgage. It will include a list of all of your finalized closing costs and how much cash you’ll need to close. Compare this document to your loan estimate to see what’s changed. 

You’ll also receive instructions from the entity that’s conducting your closing (often a title company) on how to wire your down payment and closing costs. If you receive instructions via email, verify them with that entity over the phone. Fraudsters sometimes target down payment wire transfers, sending seemingly-legitimate emails with last-minute changes to the wiring instructions. 

You may also have the option to bring a cashier’s check to closing rather than wiring the funds.

The final walkthrough

Before closing, you’ll also get a chance to view the home one more time. This is known as the final walkthrough.

The final walkthrough usually takes place a day before the closing and is a time when the buyers can physically confirm that the house is in the condition as agreed to in the contract, says Chedid.

During the final walkthrough, you’ll verify that agreed-upon repairs have been completed, the seller’s personal property has been removed, and that there isn’t any new damage to the home. 

If you’re allowing the seller to stay in the home for a certain amount of time after closing (called a rent-back agreement), you may do another final walkthrough after closing once they’ve fully moved out. In this case, your agreement will likely keep some money in escrow as a security deposit that you can keep if the seller damages the home. 

Signing the paperwork at closing

On the day of the closing (also known as the settlement) you will sign a lot of paperwork — more than 20 documents — and the final funds will be distributed, Chedid says.

It’s a process that could take up to two hours. “Once all the papers are signed, the buyer is now a homeowner,” Chedid says.

How to buy a house FAQs

You may need as little as 3% or as much as 20% of the purchase price for a down payment, depending on the type of mortgage you’re getting, your lender’s requirements, and your finances. Conforming loans and government-backed loans allow low down payments, while jumbo loans may require between 10% and 20% down. 

Minimum credit score requirements to buy a house vary by mortgage type. A score of at least 620 is required for many conventional loans. FHA loans allow scores down to 580, or 500 with a 10% down payment. 

Once you get preapproved for a mortgage, you typically have two to three months to search for a home. Then, once you have a signed purchase agreement, it can take a month or two to go from applying for mortgage approval to closing on a house. 

It can be harder to get a house if you have a low income, but things like down payment assistance programs can help. Certain mortgage types, including FHA loans and USDA loans, are geared toward borrowers with lower incomes. They come with low or no down payment requirements and affordable rates. 

When deciding where to buy a house, you should think about the area’s safety, amenities, schools, commute times, and other factors that are important to you. 

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