Home Buying 101 - Step by Step
Buying a house is an exciting milestone, but for first-time home buyers, the process can be very overwhelming. In these uncertain times of high list prices and low rates, the decision to buy a house may feel even more intimidating than ever, but we’re here to help.
In this article, we’ll walk you through each of the critical steps involved in buying a house so you know exactly what you’re getting into and how to prepare.
Step 1: Are You Ready “On Paper?”
Buying a house is a significant commitment. Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner.
Income And Employment Status
Your lender won’t just want to see how much money you make. They’ll also want to see a work history (typically two years) to ensure your income source is stable and reliable.
Debt-To-Income Ratio
Lenders these days generally prefer to limit housing expenses (principal, interest, taxes, and homeowners insurance) to about 30% of the borrowers’ monthly gross income. However, this figure can vary widely, depending on the local real estate market.
Credit Score To Buy A House
Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how risky you are to lend money to. Most lenders require a credit score of at least 620 to be eligible for the majority of loans. A score above 720 will generally get you the very best loan terms.
Preparation For Down Payment & Closing Cost
Even with the help of a mortgage, you’ll still need liquid assets to fund the purchase of a home. The amount of money you’ll need for a down payment depends on your loan type and how much money you borrow. You can buy a home with as little as 3% down (though there are benefits to putting down more). You’ll also need to pay for closing costs before you move into your new home. The specific amount you’ll pay in closing costs will depend on where you live and your loan type. It’s a good idea to be prepared for 3% – 6% of your home’s value as an estimate of your closing costs.
Step 2: Consider Your Financing Options
First-time homebuyers have a wide variety of options to help them get into a home—both those available to any purchaser, including Federal Housing Authority (FHA)-backed mortgages and those geared primarily to novices. Many first-time homebuyer programs offer minimum down payments as low as 3% to 5% (vs. the standard 20%), and a few require no down payment at all.
Conventional Loans
Conventional loans, sometimes called conforming loans, are loans that Fannie Mae or Freddie Mac backs. The majority of mortgages in the U.S. are conventional loans. Conventional loans are always a popular option for homebuyers, and you can get one with as little as 3% down.
FHA Loans
Backed by the Federal Housing Administration, FHA loans are less risky for lenders because the government ensures them if you stop making payments. As a result, FHA loans have credit score requirements that aren’t as strict. You can get an FHA loan with a down payment as small as 3.5%.
VA Loans
VA loans are mortgage loans for veterans, active-duty members of the Armed Forces, and qualifying surviving spouses. The most popular benefit of VA loans for homebuyers is that no down payment is required. The Department of Veterans Affairs insures VA loans.
USDA Loans
Another type of government-backed loan, a USDA loan, helps people in rural and suburban areas buy homes. You can get a USDA loan with 0% down, but your home must be in a good rural area, and you must meet income eligibility rules.
Step 3: Get Mortgage Pre-Approval
To get pre-approved for a mortgage, you complete a mortgage application, authorize the lender to check your credit and provide basic information on your income and assets. If the lender pre-approves you, they’ll issue a pre-approval letter, an offer to loan you a certain amount. This pre-approval letter is typically good for 30 to 90 days.
Pre-approval shows sellers that you’re a serious buyer and can secure a home loan. This makes a seller more likely to consider your offer.
Step 4: Find A Right Real Estate Agent To Work With
A real estate agent makes the home buying process easier by setting up viewings on your behalf and providing information on houses you’re interested in. But perhaps more importantly, an agent can help you negotiate the best price on a home you want to purchase.
Real estate agents are local market experts and can advise you on how much to offer for each property. Your agent will then present the offer to the seller’s agent; the seller will either accept your offer or issue a counteroffer. You can then take or go back and forth until you either reach a deal or decide to call it quits.
As a buyer, you can usually work with a real estate agent for free. In most cases, the seller will pay the buyer’s real estate agent’s commission. The commission is usually 3% of the purchase price.
Step 5: House Hunting!
Your real estate agent will help you hunt for houses within your budget. Rank your priorities from most to least important and show this list to your agent. Your agent will then show you homes that fit your criteria. You may need to spend some time searching for the perfect home, so don’t get discouraged if your hunt takes longer than you expected.
Step 6: Make An Offer
When you find a house you want, your agent will help you submit a written offer. You may also need to put down an earnest money deposit, usually 1% to 2% of the purchase price. This deposit will go toward your down payment and closing costs if your offer is accepted and you buy the home. However, if you agree to buy the home and later cancel, you lose your deposit.
From here, the seller will either accept your offer, reject your request, or come back with a counteroffer.
Step 7: Apply For A Mortgage
Once your offer is accepted, it’s time to get your financing in order. Return to the lender that provided your pre-approval to let them know you’re ready to move ahead. You may need to provide additional documentation for the loan underwriter to verify your income, assets, and employment. This process can take 30 days or more and may involve a lot of back and forth, so respond to any requests from the lender quickly to keep your application moving.
Step 8: Get A Home Appraisal And Inspection
Home Appraisal – Appraisal Contingency
The lender may order an appraisal to confirm the value of the property. If the appraised value comes back lower than your offer, you might have trouble getting financing. Be thoughtful about your offer and consider contesting the appraisal results if you believe the appraised value is too low.
Homebuyers should also include an appraisal contingency in their offer. Appraisal contingencies are often drawn up to allow buyers to back out of purchase (or negotiate a lower price) without losing their earnest money deposit if the home appraises for less than the offer amount.
Home Inspection – Inspection Contingency
Lenders usually don’t require a home inspection to get a loan, but you should still get an inspection before buying a property. A trained inspector goes over the property specifically during the inspection, explicitly looking for problems, such as faulty wiring or plumbing, a damaged roof, lead paint or mold, structural damage, and more. The inspector will provide a report outlining all the problems found on the property.
When you receive your inspection results, go over each item line by line and look for significant issues. If a home has a severe health hazard (like lead paint or mold), ask the seller to correct the problem before you close. If you can’t reach an agreement, you may want to move on and consider other options. Read over your inspection results with your agent and ask whether they noticed any major red flags.
It’s common for homebuyers to include a home inspection contingency in their purchase offer. A contingency gives buyers the option to back out of purchase (or negotiate repairs) without losing their earnest money deposit if the home inspection reveals significant issues with the home.
Step 9: Negotiate With The Seller For Repairs Or Credits
You can ask the seller to correct some of the problems found during the inspection. Determine which items you want the seller to repair, and your real estate agent will handle the negotiations. The seller might accept your request, or they might reject it. If your seller rejects your request, it’s up to you to decide how to proceed. If you have an inspection contingency in your offer letter, you can walk away from the sale and keep your earnest money deposit.
Step 10: Close
Your lender will send you a Closing Disclosure three days before closing, which summarizes the loan details. Read over the Closing Disclosure carefully to ensure the numbers don’t vary too much from your loan estimate.
Your lender will also schedule a closing meeting. You’ll need to bring a photo ID and your closing costs — usually in the form of a cashier’s check or proof of wire transfer. At the closing meeting, you’ll sign your mortgage note, deed of trust, and a pile of other paperwork. After closing finishes, you’re officially a homeowner.
