How to Buy a House in 5 Steps
Many people consider buying a home the most significant purchase they’ll make in a lifetime. Not only is it a major financial investment, but the process of buying a house is deeply emotional as you try to envision a lasting future for years to come. There’s a lot to consider as you decide what you need to buy a house and when to buy one.
There’s no denying the truth: The process of buying a home is complex and can be overwhelming, especially for first-timers. You can simplify the process and ensure smooth sailing by taking the time to answer big questions and plan ahead.
MYMOVE’s home buying guide is here to help you through the entire process — from research to closing. Follow these five steps, and you’ll be in your dream home in no time.
Before we begin, we have to ask: Are you ready to buy a house?
Before you leap into the process, you have to answer the big question — are you ready for this? It’s important to be honest with yourself about whether you’re truly ready to embark on this process.
You should answer this question early on, as a safe homebuying timeline should start about five years in advance as you consider factors like building your credit score and saving up for your down payment.
But you might not have the luxury of a five-year timeframe. That’s OK. Whatever your timeline, make sure you begin by answering this basic question.
How to tackle the homebuying process in 5 steps
There are a variety of factors to consider when buying a home, and one of the best things you can do, especially if you’re a novice buyer, is to start preparing early.
1. Get your finances in order
You’ll get to know your books inside and out by the end of the homebuying process, so the earlier you can wrap your head around your finances, the better.
First things first, check your credit score. Your credit score (also referred to as your credit rating or FICO score) will be the deciding factor that determines the interest rate your lender offers you on your mortgage. Simply put, a higher credit score equals a lower interest rate. FICO scores range from 350 to 850, with about 720 being the median credit score in the US. The minimum credit score that many mortgage lenders will consider for a loan is about 630.
You may be unsure how much you really need in the bank to buy a home. Many people believe that the down payment is all they have to pay upfront — but that’s not true.
You’ll need to prepare for several upfront costs, like your earnest money deposit. This deposit, which is also known as a “good faith deposit,” refers to funds placed in escrow when you make an offer. It’s usually just a small percentage of your down payment that’s held by an impartial third party. It demonstrates to a seller that you’re serious about buying and will be credited toward your down payment if all goes well.
You also need to prepare for other standard costs, such as:
|Standard Cost||What is it?||How Much?|
|Home Inspection||The inspection of the property||$200 to $500.|
|A small cash payment toward the total cost of your new home||3.5% to 20%|
|Closing Costs||Miscellaneous fees required at completion of sale||2% to 5% of purchase price|
Some lenders may factor real-estate taxes and insurance costs into your monthly payments, or you may be responsible for paying these separately each month.
Calculating your debt-to-income ratio will help you determine how much you can afford to spend on your mortgage each month by comparing your monthly debt payments against your total monthly income. Be sure to include the predicted cost of your future mortgage with all other debts, such as student loans, credit card bills, car payments, and any other monthly dues.
A debt ratio of below 36% is considered ideal, but you’ll likely be OK with anything below 43%. If your ratio is higher, you may need to pay off existing debts or increase your income before buying a home.
Even if your finances check out, do a gut check to ensure this is the right time in your life to buy. Consider your current employment situation. Look at current lifestyle factors — like when your current lease expires and if you could see yourself committing to this area for the next few years.
When you check the financial items above off of your list, it’s time to move on to step two.
2. Get the ball rolling for a mortgage
Before you buy a home, you need to have an idea of your mortgage options. The best way to do that is to take the financial information you just gathered and go to mortgage lenders.
A very early step in the mortgage process is getting pre-qualified. A pre-qualification is a commitment in writing from a lender that confirms the loan type and amount that you can receive. It helps you understand your options, but it’s not an official guarantee.
You can also get a mortgage pre-approval, which provides a written commitment for a specific loan from a lender. After you complete a mortgage application, the lender will verify your income and credit history before extending a pre-approval letter specifying your qualification details. Pre-approval letters generally last for 90 to 180 days, so don’t proceed with a pre-approval unless you are serious about buying a home.
Pre-qualification and pre-approval help you understand your loan options, while also showing sellers that you mean business.
“When there are multiple offers,” explains homebuying expert Ryan Cox, a Charlotte, North Carolina-based Realtor, “A seller will most likely not entertain an offer unless a pre-qualification or pre-approval letter is attached with the offer.”
In the pre-qualification and pre-approval process, the lender will walk you through the different types of loans available. Here are common mortgage types that you’ll see:
- A fixed-rate mortgage means that you have a set mortgage rate for a loan that’s commonly 15 or 30 years.
- An adjustable-rate mortgage begins with a fixed-rate but eventually moves to a variable rate that typically changes every year.
- Conventional loans are not backed by the government. Instead, they follow guidelines set by Fannie Mae (Federal National Mortgage Association or FNMA) and Freddie Mac (Federal Loan Mortgage Corporation or FHLMC).
- Government-insured loans are supported by the government, offering perks like low down payments through FHA loans, VA loans for veterans, and USDA loans for rural homebuyers through the Department of Agriculture’s loan program.
A lender will help you determine which mortgage is best for you based on your financial situation and your goals. But know that you don’t have to finance with the lender that pre-qualifies or pre-approves you. Shop around to make sure you can leverage the best loan rates and terms possible.
3. Choose your team of pros
Find a real estate agent
The first person to add to your roster? A professional real estate agent or broker. This person will help you understand the ins-and-outs of the homebuying process.
When choosing a new realtor, the most important factor is that you feel comfortable with the person and, above all, trust them. Word of mouth is a great way to learn of agents in your area, so ask friends or family members who have recently purchased homes if they had a positive experience.
But don’t just go with the first recommendation. Interview a few potential options before making your choice. Ask each real estate agent about their experience, client load, and schedule. You’ll want to find someone who will strive to make your homebuying process seamless and will consistently communicate every step of the way.
Choose your lender
In the world of homebuying, the term “lender” refers to the party sponsoring your loan to purchase property, and creating your mortgage. While you own the property itself, it serves as collateral for the loan, which means that if you don’t make your payments and you default on your loan, the lender can foreclose on your home.
Banks are one example of a direct lender. They’re regulated by state and federal agencies, making them a reliable choice. Another type of direct lender is a nonbank lender, which works the same way as a bank, but is often smaller and may cater to buyers with lower credit scores.
Mortgage brokers can connect you (the borrower) to lenders, but they don’t finance the loan themselves. You can hire a mortgage broker to help you find the best loan quickly, and shop a number of different lenders at once.
Whether you go with a direct lender or mortgage broker, it’s a good idea to connect with a number of different lenders before making a decision. Consider what element of the mortgage is most important to you, as there are a ton of factors that make up your loan, from interest rate to your actual monthly payment.
Finally, be sure to check on a lender’s credentials using resources such as the Better Business Bureau.
3. Find your new home
With a great professional by your side, it’s time to go house hunting! When searching for a new house, you have tons of considerations to take into account — from the right neighborhood to the type of property you want.
Prior to scheduling any tours, consider your main house needs. Make a list, based on these essential dream house factors:
|Factor||What to Consider|
|Type||Single-family detached home, condominium, or townhouse|
|Size||Square footage, number of bedrooms, number of bathrooms, desired floor plan and layout, outdoor area, and storage|
|Neighborhood||Curb appeal, part of town, school district, traffic and commuting, safety, privacy|
|Resale Value||Neighborhood and house features, like carpeting, extensive landscaping, and recent upgrades|
|Homeowners Association (HOA)||Is there one? Are there rules, limitations, dues, and expenses?|
You should also consider whether you’re looking for new construction or an older property. You may find that older homes have more character, feature unique touches, and may even be listed as a historic property. An older home may also be priced low enough that you have room for a generous renovation budget, thus allowing for more modern updates.
But keep in mind that you may be dealing with older appliances, dated design, and out-of-date systems that are less energy-efficient, resulting in higher utility costs. New construction will likely mean modern appliances and contemporary design, and for some people, it’s comforting knowing no one else has ever lived there.
New construction can have negatives, too. Without any previous owners, there’s no one to tell you about any existing problems. Some homebuyers also find that new construction can be too “cookie-cutter” for their tastes.
Your real estate agent or broker can help you navigate the market to find exactly what you’re looking for in a new home.
4. Make an offer
When you’ve found your dream home, it’s time to make the big purchase. This is where your real estate professional plays a shining role, serving as both negotiator and expert resource for you throughout the entire process.
Run a CMA
To determine what’s a fair offer, your real estate agent will perform a comparative market analysis (CMA). This CMA will compare information about the property you want against comparable properties in the area. Other factors, like how long the property has been on the market and the current state of the real estate market, can also impact your offer. By comparing the features and pricing of similar properties, you and your real estate professional can decide on an appropriate starting offer.
Draft an official purchase document
Your agent will then draft an official purchase document. Some states require an attorney to prepare the contract. Even if this is not the case in your state, it’s worth considering having your own attorney review the contract, as the purchase offer document is usually complex and detailed.
In addition to your offer, this document also includes the terms, your mortgage information, and how long the offer stands, which can last anywhere from a few hours to two days. It should also cover details regarding the home inspection and what to do about its findings, as well as any other conditions you and your real estate agent have determined.
Submit your official offer to the seller
Your agent will submit the offer to the seller’s agent. At that time, you will also present the earnest money check, which will be held in an escrow account. If your initial offer isn’t accepted, you may receive a counteroffer, and that opens the gate to negotiations.
Cox, the North Carolina-based real estate agent, says his biggest piece of advice during negotiations is to try to maintain your composure.
“Do not let emotions take over the negotiation process,” he says. “The last thing you want to do is overpay for a home.”
5. Go to closing
If the seller accepts your offer, you can move onto the next stage: closing. Officially, “closing on a home” means the moment the deed is recorded, and the title passes from the seller to the buyer. However, when you hear the term closing, it generally refers to the final steps of homebuying and can take anywhere from four to six weeks. Here’s everything you can expect in the closing process.
Home inspection and appraisal
Once you and the seller reach an agreement and sign off on the final contract, it’s now time to get the home inspected and insured. You’ll also need to have an appraisal of your home, so your lender can begin processing your mortgage. This all will need to be completed before the closing date stated in your contract.
The final walk-through
A few days before the official agreed-upon closing date, it’s important to do a final walk-through of the property. This gives you the opportunity to ensure that all of your offer terms were fulfilled, especially if the seller made repairs. If things are not in accordance with the contract, your real estate agent will address those concerns with the seller’s agent. This may delay closing and will also keep your earnest deposit in escrow until the seller addresses those issues.
The exact parties involved in your closing will depend on your specific state. Often, a third party closing agent, or escrow agent, will handle all documents involved in this final step of the sale. In addition to this closing agent, you’ll want your own real estate agent there as well.
The entire process may seem overwhelming, as you could be signing twenty or more multi-page documents. No matter what, don’t feel intimidated or be afraid to ask questions. It’s important to feel completely comfortable with everything you sign.
You’ll need to bring a cashier’s check to the closing for the down payment, plus any additional closing costs. Don’t worry — your agent will notify you of this amount at least one day in advance. Also, make sure to bring proof of your new homeowner’s insurance and your photo ID.
It’s a good idea to bring all of the paperwork you’ve collected during the homebuying process to closing, just in case you need to double-check any past details.
Once everything is signed, the final tasks move to the escrow agent. The escrow agent will complete the recording process, officially registering your new mortgage and property deed with the county recorder and your lender. The escrow agent will also take your cashier’s check and will receive your loan funds from your lender. Your funds will then be released to the seller, and your house payments will go directly to your lender going forward.
At this point, the deal is closed — you’re officially a homeowner! Congratulations!
The final bonus step? To pop the bubbly!
The bottom line
Buying a home can be a complicated and lengthy process, but putting in the time, research, and care to make the purchase go smoothly is completely worth it. After all, the few months it may take to purchase your dream home is nothing compared to the decades you’ll spend enjoying it!
Frequently asked questions
How much money do I need to buy a house?
There are some main costs that you’ll need to cover to buy a new home. The total cost will depend on the home you choose, but buyers typically need to provide money to cover a down payment and closing costs, as well as the home inspection fees and any other applicable costs.
How can I afford a house in 2020?
To determine how much you need to afford a home in 2020, you should consider your monthly income, current mortgage rates, and home prices. You should also factor in the cost of property taxes, homeowners insurance, and other costs like HOA, co-op, and condo fees. Crunch the numbers using a mortgage calculator!
What do I need to buy a house?
There are some necessary documents that you’ll need to furnish in order to buy a new home. These include tax returns and W-2 forms for the prior two years, paycheck stubs for the last few months, one year’s proof of mortgage or rent payments, a detailed listing of all your assets, and another listing that includes all of your debts.
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