As interest rates are dropping, now may be the time to buy a house. From dreaming about your future home and what neighborhood you want to call home to touring properties and finally moving in, there’s a lot of excitement about beginning the homebuying process. However, there are a lot of things to learn about how to buy a house, like current mortgage rates, your credit score, home inspections, and closing costs.
In this Redfin article, we’re here to guide you through the process step-by-step. Whether you’re looking to buy a home in Seattle or a condo in Denver, here’s how to buy a house in 15 steps.
1. Determine if you’re ready to buy a house
Before diving into the home-buying process, it’s crucial to evaluate whether you’re truly prepared to take on the responsibilities of homeownership. Here are some factors to consider.
Long-term goals
Do you plan to live in an area for at least five years? If the answer is yes, it may be a good time to buy a home. Homeownership is a long-term investment, and staying in one place allows you to build equity and stability. On the other hand, if your future is uncertain or you anticipate needing to relocate soon, it might be wiser to wait until your long-term goals are clearer.
Check your credit report
The first financial step when learning how to buy a house is checking your credit report. Your credit score is important as it influences whether you qualify for a loan, the type of loan, and what interest rate you’ll receive.
You might be wondering, what credit score is needed to buy a house? Different mortgage types (Conventional, FHA, VA, USDA, and Jumbo) have different credit score requirements, so it’s important to have a credit report completed to identify which home loans you may qualify for. You can get a credit report from one of the three main credit bureaus – Experian, Equifax, and TransUnion.
Generally speaking, a credit score of 620 is the minimum credit score for a conventional loan, although some lenders look for a score of 700 for new homebuyers. It’s important to keep in mind that the lower your credit score, the higher your interest rate is likely to be. With a higher credit score, you’ll likely qualify for a lower interest rate. If you find that your credit score is lower than you anticipated, you can research how to increase your credit score quickly so you can start house shopping.
Debt-to-income ratio (DTI)
Another major factor that a lender will consider when approving your mortgage loan is your debt-to-income ratio (DTI). DTI is calculated by dividing total monthly debts by gross monthly income. The number is then multiplied by 100 to get the final percentage.
For example, your total debt is $3,000 and your monthly income is $7,000.
$3,000/$7,000 = 0.42 x 100 = 42%
DTI helps lenders see how much of your income is spent on other debts. Lenders use the percentage to evaluate how much you can afford to pay in mortgage payments. Many mortgage lenders require a DTI of less than 35-43%; however, this can vary.
2. See how much you can afford
After you’ve assessed your goals and finances, the next step in the homebuying process is to determine your budget. The fastest way to get a sense of how much you can afford is with a home affordability calculator.
You can also find out how much you can afford with an online mortgage calculator. A mortgage calculator will estimate your mortgage payment, including the principal and interest, taxes, insurance, HOA, and PMI. As mortgage rates drop, a calculator can help you determine if now is the right time to buy.
Additionally, it’s important to account for other upfront costs such as the down payment, closing costs, and potential home maintenance or repair expenses. Consider how much money you’ll have left after covering these initial costs, as you don’t want to stretch your budget too thin. It’s important to ensure you have enough funds not only to make your monthly mortgage payments, but also to maintain an emergency fund for unexpected home repairs..
How much should you save for a down payment and closing costs?
When it comes to saving for a down payment and closing costs, the traditional advice is to aim for a 20% down payment. This amount can help you secure a better mortgage rate and avoid private mortgage insurance (PMI). However, it’s important to know that a 20% down payment isn’t a strict requirement. Many homebuyers, especially first-time buyers, put down less, with down payments often ranging from 3% to 10%.
You will also need to save money to put toward closing costs, about 2-5% of the purchase price. Closing costs typically include appraisal costs, home inspection fees, title insurance, and more. As your closing date approaches, your lender will give you a closing disclosure, which details the breakdown of these fees.
3. Decide what type of mortgage is best for you
There are many different factors that can help determine what mortgage loan is right for you and which ones you qualify for. Let’s take a look at the six types of mortgage loans:
- Conventional loan: The most common type of mortgage, these loans aren’t backed by the government. You typically need good credit, a down payment, and a stable income to qualify for a conventional mortgage, among other requirements.
- Conforming loan: Backed by the government, these loans are more commonly called Freddie Mac and Fannie Mae loans. This means the loans must adhere to the guidelines set by Freddie Mac and Fannie Mae.
- Jumbo loan: Also known as non-conforming loans, jumbo loans exceed the limits set by conforming loans. These loans are typically issued for more expensive homes and come with stricter qualification requirements.
- FHA loan: These loans are backed by the Federal Housing Authority (FHA) and primarily help low-to-moderate-income borrowers who are less likely to qualify for conventional loans. Credit score requirements are typically lower, and down payments can be as low as 3.5%.
- VA loan: Backed by the U.S. Department of Veterans Affairs, VA loans are issued to qualified veterans, active-duty service members, and qualifying spouses. VA loans don’t require a down payment, among other benefits.
- USDA loan: A government-backed loan, USDA loans promote homeownership in rural areas. These loans typically don’t require a down payment, but the home must be located in a USDA-eligible area.
4. See if you qualify for first-time homebuyer programs
As a first-time home buyer, there are plenty of programs to help you buy a home. First-time homebuyer programs fall into three categories – loans, grants, and credits.
First-time homebuyer loans can help with your down payment and closing costs. They may also be considered a second mortgage. These loans are either deferred-payment loans, where you don’t pay them back until you sell the home, or they may be forgiven after a certain amount of time you’ve lived in the home.
Grants are typically sums of money that you don’t have to pay back, which are applied to the down payment or closing costs. You often have to meet specific criteria to qualify for these grants.
Credits, also known as mortgage credit certificates, are used to reduce how much you pay in federal taxes by reducing your mortgage interest payments. There are programs on the federal, state, and local levels, so it’s best to research your options and speak to your real estate agent to learn more.
5. Get pre-approved
As you’re researching how to buy a house, you will want to get a mortgage pre-approval. Getting pre-approved initiates the mortgage process with a lender and tells you how much you can borrow. It also allows you to move faster when you’re ready to make an offer, especially if interest rates drop.
It’s important to get quotes from multiple lenders, rather than choosing the first mortgage lender you come across or even your current bank. Different lenders offer different mortgage options and rates, so research is key in finding the best rate for your homebuying goals.
6. Find a real estate agent
Choosing the right real estate agent can be the key to finding the right home and getting the best deal. When determining how to choose a real estate agent, it’s always important to do prior research and ask a variety of questions to find the best fit for your homebuying journey. You want to look for a real estate agent that understands the local market and can advocate for you during the homebuying process.
Before touring homes with an agent, you’ll most likely need to sign an agreement with your agent. This agreement will outline the agent’s commission, so you understand how much they’re paid. Depending on the agreement, you may be required to pay these fees or you can negotiate that the seller pays instead.
7. Search homes for sale and take home tours
The next step when buying a house is to start browsing homes for sale in your area. It’s important to use your wish list to inform your home search. That way, you’ll be able to narrow down your search to the specific price range, style of home, location and neighborhood, and other amenities when searching for homes on the MLS.
You’ll then want to start attending open houses and home tours. These tours can help you identify the type of home you like, the layout you want, and the features you want or don’t want in your home. When you’re touring multiple homes, it’s easy to confuse the different features or concerns you have about one house with another you’ve seen, so take notes as you’re touring.
Don’t forget to pick your agent’s brain and ask for their input. Your agent may have insight about the home or spotted an issue you didn’t initially catch.
8. Make an offer on the home
Once you’ve found the house you’re looking for it’s time to work with your real estate agent to make an offer. Discuss your offer strategy with your agent – Is the home priced fairly? What will make your offer stand out?
Your real estate agent will know what is best for the housing market conditions. They will take into consideration your budget and the asking price for comparable homes in your area when making an offer that will stand out to home sellers.
The offer letter will include details like your name, address, the price you want to pay, contingencies, and possibly, your earnest money deposit. Your agent will often include a deadline for sellers to respond to your offer.
What’s an earnest money deposit?
An earnest money deposit is usually 1-3% of the purchase price but can vary by market. It’s often submitted in an offer letter to show the seller that you’re serious about buying their home. If your offer is accepted, this money typically goes toward the down payment or closing costs. If your offer is accepted and you later back out of the purchase, you may lose the earnest money deposit.
What to expect after submitting your offer
There are three main scenarios that can happen after submitting your offer on a home.
- Your offer is accepted: If the seller accepts your offer, then you’ll move on to the next step.
- Your offer is rejected: If the seller rejects your offer, you’ll need to begin looking for other homes for sale.
- You receive a counteroffer: The seller has sent a counteroffer, which can be several things – changing the purchase price, asking to dismiss a contingency or other terms of the sale. It’s up to you and your agent if you want to negotiate, accept the offer, or reject the offer.
9. Secure your mortgage
A mortgage pre-approval isn’t the same thing as officially getting a mortgage. Once you have the purchase agreement for the home, the next step is to apply for a mortgage. At this point, you can choose to work with the lender who pre-approved your loan or choose a different lender. Choosing the same lender who pre-approved your mortgage can help speed up the process.
After choosing your mortgage lender, you’ll need to submit information about yourself. Here are some of the common forms your lender needs:
- ID and Social Security number
- Pay stubs from the past 30-60 days
- W-2 forms from at least two years
- Proof of other income sources, like gift money, alimony, etc.
- Federal and state income tax returns for the last two years, unless your state doesn’t have state income tax
- Investment accounts, such as stocks, bonds, mutual funds, and IRAs
- Recent bank statements from the last few months
- Debt information, like car loans or student debt
As soon as the mortgage application is finished, it will go into the underwriting process. An underwriter will thoroughly review your finances to determine whether you are a good candidate for the loan. You may be requested to provide additional information about your finances.
The underwriter will do a title search on the property to ensure the current owners actually own the property. They’ll also check the home appraisal (step 12) to make sure the home’s value aligns with your purchase price. The mortgage underwriting process can take anywhere from 2-45 days depending on your circumstances and the local market.
10. Get home insurance
While it may seem counterintuitive to purchase home insurance before finalizing your home purchase, many lenders require you to have home insurance before approving the loan. There are lots of options for home insurance so make sure to do your research and get multiple quotes. Depending on your location, you may also be required to purchase additional insurance policies like fire or flood insurance.
11. Have a home inspection
One of the most important steps to buying a house is a home inspection, which identifies existing structural, electrical, or plumbing issues with the home. You’ll want to hire a professional home inspector to conduct a thorough inspection of the home’s condition. They will test the operational status of all major systems – plumbing, electrical, heating, and cooling – and check the roof, the foundation, and the home’s exterior.
After the inspection is completed, you’ll receive a report detailing the results. Go through the report thoroughly and see if there are any major problems such as mold, termites, or lead paint. Consult with your agent to see if there are any red flags they may have noticed in the report.
If the inspection report indicates any major issues with the home, you can try to negotiate repairs or a lower price with the seller. Remember that once the sale closes, any major repairs are up to you to fix. So if the inspection report shows issues with the foundation or leaks in the roof, it’s best to address them with the seller now.
What is a home inspection contingency?
A home inspection contingency is submitted in your offer. It typically allows for you to negotiate repairs or back out of your offer without losing your earnest money deposit, if there are major issues identified during the home inspection.
12. Have a home appraisal
A home appraisal is the official opinion of the home’s value by a licensed appraiser. If you have a mortgage, a home appraisal is almost always required in order to approve the mortgage loan. Lenders want to ensure that they aren’t lending you more money than the home is actually worth. Even if you’re planning to buy a home in cash, an appraisal can indicate if you’re overpaying for the home’s value.
During the appraisal process, the appraiser will report on the home’s size, amenities, floor plan, additional features, and comparable homes in the area. If the home’s appraised value is lower than your current offer, you can consider negotiating the price down or increasing your down payment.
What is a home appraisal contingency?
In your offer, you and your agent can discuss including a home appraisal contingency. An appraisal contingency typically allows buyers to negotiate a lower price or withdraw their offer, without losing the earnest money deposit, if the home’s appraised value is lower than their offer. Each appraisal contingency will vary slightly, so speak with your agent to understand the details.
13. Prepare to negotiate
Depending on the details of the home inspection and home appraisal reports, you may need to negotiate with the seller. This can look like asking the seller to complete any necessary repairs before closing, negotiating the price down, or asking for a credit. On the other hand, you may also receive a counteroffer from the seller that you want to negotiate.
Your agent will help you through the negotiation process and decide what the best option is: waiving contingencies, raising your earnest money or overall price, or changing the closing date. Expect that you may go back and forth with the seller before reaching an agreement on the offer.
If it’s a buyer’s market, with more homes for sale than buyers, you may have more options for negotiating the price back down. If it’s a seller’s market, with more buyers than homes for sale, it may be more difficult to negotiate with the seller since there are likely other buyers waiting to make an offer.
Tips for negotiating on a home:
- Use the information found in the home inspection and appraisal, as you’ll have access to important details about the property.
- Consider asking for a closing credit, rather than completing repairs before closing. This usually looks like a credit for an agreed-upon amount, that is applied to closing costs.
- Prepare to make a counteroffer if you don’t agree with the sellers’ new terms.
14. Close on the home
You’ve reached the final steps to buying a house, the closing process. Your lender will provide you with the closing disclosure documents at least three days before your closing date. This document, roughly five pages, details how much you’ll need to pay at closing, monthly mortgage payments, and the loan terms. Make sure to review this document carefully.
Most likely, you and your real estate agent will conduct a final walkthrough on the property to ensure everything is in place. For example, if appliances were supposed to stay in the home, you’ll want to make sure everything is still there.
On your closing date, you’ll need to bring your ID, proof of funds for your closing costs, and the closing disclosure. Once the money has been exchanged, the title is now in your name. A title company or real estate attorney will close the transaction and you’ll typically get the keys after 5 p.m. on your close date.
15. Move in
Congratulations, you’re officially a homeowner. Depending on whether your house is turnkey ready or not, there might be some maintenance and remodeling you want to complete before moving in. You’ll also want to think about hiring movers, buying new furniture and appliances, setting up your utilities, etc. You’ll pay for these after the house is yours. However, you may want to factor them into your budget or create a separate post-move budget.
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