Buying a house is an important milestone, but for first-time home buyers who don’t know what to expect, the process is often as intimidating as it is exciting. In these uncertain times of high list prices and rising rates, the decision to buy a house may feel even more overwhelming than ever, but we’re here to help.
In this article, we’ll introduce and walk you through each of the key steps to buying a house and walk you through them, so you’ll know exactly what you’re getting into and how to prepare.
Before you begin the home buying process, you want to make sure you’re actually in a position to take on all that buying a house entails. That’s why the first step is to check your credit score and review your finances.
How Your Credit Score Affects Buying A House
Securing financing isn’t always easy. Mortgage lenders will request a credit report and, based on the information found, will use your credit score and financial history to qualify you for a home loan. It’s important to be one step ahead of them and know where you stand.
Your credit and financial history will dictate whether you’re able to obtain a mortgage and at what interest rate. Buyers with higher credit scores tend to secure better mortgage rates and loan terms, so make sure you understand your credit before getting deeper into the process.
Mortgage Requirements To Buy A House
When considering requirements to buy a house, qualifying for a mortgage is one of the most crucial steps, and you may need a certain credit score to do that.
To obtain a conventional loan, you’ll need a qualifying FICO® Score of 620 or higher. For an FHA loan, lenders may approve you with a qualifying FICO® Score of 500 or better, but you need 10% down. The Department of Veterans Affairs (VA) doesn’t require a specific credit score to buy a house with a VA loan, but lenders can set their own policies.
Here are some other basic requirements borrowers will likely need to be approved for a mortgage.
If you meet only the minimum requirements, you may want to work on improving your credit score before applying for a mortgage, as this can get you access to better rates.
Before you speak with a mortgage lender, it’s helpful to calculate how much house you can afford on your own. A lender will tell you how much money you qualify for, but you want to ensure you won’t overextend yourself.
Typically, experts recommend spending no more than 31% – 36% of your gross monthly income on housing costs. These costs include:
Down Payment And Closing Costs
Understanding what you’re responsible for paying and when is crucial to a smooth home buying process, so we recommend speaking with your real estate agent or lender to determine which costs you’ll have to pay upfront.
First and foremost, you’ll need to save for your down payment. It was previously recommended to save 20% of a home’s purchase price for the down payment. Fortunately, this hefty number is no longer the standard. The minimum down payment on a conventional loan is 3% and an FHA loan is available with a down payment of 3.5%
Keep in mind that the larger the down payment, the more equity you’ll have, and the lower your monthly mortgage payments can be. By paying more upfront, you can save on interest and be less likely to pay private mortgage insurance (PMI). Be sure to weigh your options to choose the right down payment for you. A larger down payment may be great, but not if it means emptying your savings.
The other large expense you need to plan for is closing costs. These are the fees associated with processing and securing your loan. Although the exact amount you need will vary depending on your loan amount and your area’s tax requirements, you can generally expect closing costs to be about 3% – 6% of the purchase price.
There are also options for those who are looking to buy a house with no money down.
Calculating Your Home Affordability
To calculate how much home you can afford, consider using the home affordability calculator below. Once you’ve determined how much you can afford, consider the lifestyle you want to maintain and leave yourself a cushion in case of emergencies. Don’t forget about factors like retirement, college funds and family vacations as you do your budget planning.
The next step is finding a mortgage lender and getting preapproved for a mortgage loan. You can – and should – shop around different lenders to ensure you’re paired with the right one for your situation. Doing your research can make a big difference.
Getting Different Loan Estimates
There are often variations in qualification guidelines, interest rates and closing costs between lenders, which is why it’s essential to do your homework. When comparing lenders, ask each one to provide you with a Loan Estimate, which will spell out the loan terms, projected payments and closing costs for your potential mortgage. This form is provided in a universal format, making it simple for you to compare lenders.
Be sure to consider factors beyond the bottom line, too. A lender might be offering a great deal, but it may or may not be worth it if it comes with lower-quality customer service. Buying a house is a long and often complicated journey, so it’s essential to find a lender you can trust to make the process as simple and convenient as possible.
Getting Preapproved
Contrary to popular belief, getting prequalified for a loan doesn’t guarantee that you’ll be able to obtain a loan. Moreover, not all qualifications are equal. When you get prequalified in the traditional sense, lenders only estimate your finances based on the information you provide.
However, getting preapproved for a loan requires a thorough investigation of your finances that includes verifying your income, assets and credit rating.
A preapproval is helpful because it can tell you how much the lender is willing to let you borrow and estimates the costs of obtaining the loan. Being preapproved also tells the seller you’re serious about buying, which can make a difference if and when you find yourself in a bidding war.
While some home buyers might decide they want to buy on their own, having a trustworthy and reliable real estate agent can make things a lot simpler.
Your real estate agent will represent you throughout the home buying process to ensure you find the right home, ask the important questions, make an appropriate offer, have the power to negotiate and receive the necessary disclosures. Perhaps even more important is having a real estate expert in your corner can provide some invaluable peace of mind.
The way to find the right real estate agent is by asking the right questions. Some questions to ask include:
Once you select the best agent for you, they’ll look over your approval letter, discuss your budget and help you set your priorities.
Once you’ve met with your real estate agent to discuss what you’re looking for, it’s time to begin house hunting. As you browse, keep your priorities in mind. It’s highly unlikely any listing will perfectly match your dream home, so try not to be too picky until you see the houses in person.
Finding The Right House
The first step to finding the right house is knowing what you’re looking for. Make a list of your wants and needs, and rate them in order of importance.
To make your search easier, start out by looking for homes online. By checking out online listings, you can get a feel for what’s on the market and prescreen any homes within your price range, so you’ll only tour places you’re truly considering.
If you’re having trouble finding a house that feels like home, consult your real estate agent. Agents aren’t just experts on helping people find a home; they’re also experts on the local housing market. They can help you set realistic expectations and keep you motivated when you’re feeling like you’ll never find the right house.
When you find a home you want to buy, it’s time to begin the process of making an offer. Ask your real estate agent to run a comparative market analysis to determine a fair price based on recent sales of similar homes in the area. The longer a house has been on the market, the more power you may have to negotiate.
Beyond the price you plan to offer, you should speak to your real estate agent about whether it makes sense to include any contingencies in your offer. A contingency is a stipulation included in an offer that states that the buyer is free to break the contract without any repercussions if a particular condition is not met.
Although sellers sometimes balk at offers made with contingencies, some contingencies are worth making regardless of the seller’s feelings about them.
Mortgage Contingency
If your ability to afford the home is dependent on your ability to obtain a loan, you should include a mortgage contingency in your offer. This contingency will make it possible for you to back out of your offer if you can’t receive financing.
Even if you’ve been preapproved for a loan, you should still write this contingency into your offer. If you don’t, you’ll find that you’re still on the hook for your earnest money deposit regardless of whether you’ve obtained a mortgage.
Home Sale Contingency
If you’re planning to sell your home and require the funds from the sale to purchase this new one, you’ll also want to ask for a home sale contingency. This contingency will provide you with a certain period of time to secure a buyer for your own home.
If you’re unable to find a buyer during that time, the home sale contingency will enable you to rescind your offer and reclaim your earnest money deposit without any recourse. Many sellers will refuse this contingency, but it’s still worth trying in most cases.
Home Inspection Contingency
An inspection contingency is also a worthwhile addition. After you make an offer, you’ll want to get the home inspected to ensure you fully understand the home’s condition. With an inspection contingency, you’ll be able to negotiate the offer based on any needed repairs, but you can also break the agreement if the home needs more work than you can handle.
Work with your real estate agent because you’ll need to make sure that the things you don’t want to be responsible for fixing are spelled out in the contingency.
Earnest Money Deposit (EMD)
Along with your offer, you’ll be required to provide an earnest money deposit, also known as an escrow deposit. This deposit is money you pay upfront to show the seller you’re serious about the offer and make them feel more comfortable taking their home off the market.
The amount of money included in this deposit can be negotiable. However, an earnest money deposit is typically 1% – 3% of the purchase price. Speak with your agent about what’s common in your area. The money is held in an escrow account and applied to your down payment and closing costs at closing.
If you decide you won’t buy the home for any reason that is not specified in a contingency, the seller gets to keep your earnest money deposit. This is why it’s vital that you consider the conditions in which you may need to pull out of the contract before submitting an offer.
At the end of the day, including a contingency can be the difference between keeping and losing your earnest money.
You may think you’ve reached the finish line when your offer is accepted, but a few critical steps remain. From here, you’ll want to arrange for a home inspection and appraisal.
Home Inspection
The home inspection is important, as it will identify areas where major repairs or renovations require immediate attention as well as any work that needs to be completed in the future. Be sure to hire a professional, third-party home inspector to examine the home you’re preparing to buy.
If significant repairs are needed, you can request that the seller complete them before closing. If the seller declines to handle the repairs and an agreement can’t be reached, you may be able to withdraw your offer.
If you’ve included an inspection contingency in your contract, you may be able to negotiate so that either repairs are made, the cost is deducted from the purchase price, or the contract is broken and your earnest money is returned.
Home Appraisal
At this point in the process, your lender will require the home to be appraised before they agree to release any funds. A home appraisal estimates how much a home is actually worth based on comparable sales in the area, market trends, public records and a comprehensive inspection of the property.
Keep in mind that the lender will only provide funds to cover the appraised value of the house, so if the appraisal comes in below the purchasing price, you’ll have to either negotiate the price or come up with the difference, which is one of the many reasons having a mortgage contingency is in your best interest.
Also in your best interest is homeowners insurance, which works as a safety net to protect your home and finances. Although homeowners insurance isn’t legally mandated, most lenders will require you to have an insurance policy on the home before giving you a loan.
Homeowners insurance covers damage to your home and its surrounding structures as well as stolen or damaged personal property. There are varying levels of coverage, ranging from basic to comprehensive, so be sure to do some research into all available options before deciding which home insurance product is right for you.
At this point in the home buying process, you’re probably eager to be done – but don’t neglect the final walkthrough. One last walkthrough of the property can help the buyer if something needs to be fixed by the seller before purchasing the home.
Final walkthroughs typically take place a day or two before closing, allowing you to ensure all agreed-upon repairs have been completed.
The final step to buying a house is, of course, closing on your new home. When that time comes, make sure you review your Closing Disclosure, which will outline the terms, final closing costs and any outstanding charges or fees included in your loan. Your lender will send the disclosure to you at least 3 business days before closing.
During closing, the property title will pass from the seller to you. A closing agent will oversee this process, which typically takes place at a title company, management firm, escrow office or your home.
The closing agent will ensure that all necessary parties are present at closing. The agent acts as a mediator between you and the seller and confirms that all required documents are signed. Once documents have been signed, the agent will ensure that all funds are paid and properly disbursed, including closing fees and escrow payments.
During closing, you have two primary responsibilities:
After all necessary documents are signed and information is exchanged, you’re ready to move into your new home.
When looking at what is needed to buy a house, there are several steps in the process – from getting mortgage preapproval to house hunting to closing on your new home and, finally, getting ready to move in. While the process can take a lot of your time and effort, it can all be worth it to finally live in a home of your own.
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