Buying a home is a big decision. It’s also a complicated process. You can easily spend several months and have to make lots of decisions – and jump lots of hurdles – before pocketing the key to your new home. Luckily, we make understanding the process easy with our guide on how to buy a house.
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How To Buy A House
In 2018, more than 79 million homes in America were occupied by their owners, according the number-crunchers at Statista. If that many other people can do it, you can probably buy a house too. Fortunately, we’ve made a complete guide to buying a home. Read on to learn everything you need to know!
1. Rate Your Readiness
Homeownership may be the American Dream, but it’s not for every American. Before you do anything else, see how you measure up on these four benchmarks of home-buyer readiness.
Start by checking your credit score. You need a score of at least 600 to get a home loan at a reasonable interest rate without making a large down payment. If your score is lower, you may consider waiting while you try to improve your credit score.
The free annual credit report every consumer is entitled to does not include your credit score. Your credit card company may be able to give you a free credit score. You can also buy a credit report from FICO, the company that calculates most scores.
Having a steady job is a must. You need to document all the places you’ve worked for the last two years with W-2 forms or paycheck stubs.
You normally can include self-employed and part-time work if you can show you have held the part-time position or been self-employed for two years
Your debt-to-income ratio or DTI holds the key to homeownership. To figure DTI, add up your monthly debt payments. Include housing costs, credit card minimum payments, auto loan payment, student loan payments and court-ordered child support.
Now divide that total by your gross monthly income. Multiply the result by 100. This figure should be no higher than 43, meaning you spend no more than 43 percent of your gross income on debt payments. Here’s a breakdown of an example DTI calculation:
- All your monthly payments add up to $2,000.
- Your gross income is $5,000
- Dividing 2,000 by 5,000 gives 0.4
- Multiplying 0.4 by 100 gives 40
- Your DTI is 40 percent – probably good enough to get a home loan
Coming up with the down payment is often the biggest holdup to homeownership. Conventional lenders may want you to put down 20 percent of the home price. For a typical home priced at $240,000, a 20 percent down payment comes to $48,000.
Many homes are purchased with lower down payments, however. If your loan is backed by the Federal Housing Administration (FHA), for instance, you may be able to buy a house with just 3.5 percent down.
For that $240,000 home, 3.5 percent down is just $8,400. FHA and some similar low-down conventional loan programs make homebuying possible for many more people. Also, if you’re a veteran, you may be able to take advantage of the VA Home Loan Program.
This federal home buying program lets vets buy with no money down. A program from the U.S. Department of Agriculture offers the same zero-down home buying opportunity for people buying in eligible rural areas.
You don’t necessarily have to save up the whole down payment. In fact, you may able to use a gift from a family member or someone else.
You might also negotiate with the seller to pay some or all closing costs. That could free up cash for you to put down. Not even sure you’ll qualify for a home loan? Rent to own homes may be a good option to explore.
2. Calculate Your Payment
Qualifying for a loan is one thing. Being able to comfortably afford it may be another. So get a good idea of what your mortgage payment is likely to be before you get too far into the home buying process.
The quickest way to do this is by using one of the online payment calculators. The FHA has a good one here. To accurately estimate your monthly payment, be sure to include property taxes and insurance as well as mortgage insurance. Ask your agent about local property tax rates and homeowner’s insurance rates.
3. Pick A Home Loan
You have lots of choices when it comes to where you’ll borrow the money to buy your home. You also have lots of different types of mortgage to choose from. Here are some sources for home loans:
- Bank, including your bank or almost any other chartered financial institution
- Credit unions – Yes, they offer mortgages. Read our guide on how to save money using these institutions!
- Online mortgage lender such as Quicken Loans or SoFi
- In-house mortgage company like Planet Home Lending or Regions Mortgage.
- Private lender, such as a family member or friend who’ll loan you the money
Mortgages come in a wide variety of types. For instance, you can get a mortgage that calls for you to pay back the loan in different lengths of time. The most common mortgage term is for 30 years.
But 15-year mortgages are also popular. You can also get other terms. The shortest mortgages are normally for five years.
The longest can be up to 40 years. Mortgages may also differ in the way the interest rate is set. There are two main types. Fixed-rate mortgages have the same interest rate for the life of the mortgage.
Most borrowers choose fixed-rate mortgages. One advantage of a fixed-rate mortgage is that the payment for principal and interest, which is the biggest part of the payment, always stays the same.
The other main type, adjustable-rate mortgages, have an interest rate that can change. Often the rate will stay the same for the first one to five years. After that, it will be adjusted annually based on the current market rates.
With an adjustable-rate mortgage, borrowers often get a lower interest rate to begin with. Later, however, the interest portion of the payment may go up or down, depending on market conditions.
Many of these loans often include “balloon” provisions, meaning they are due at the end of the initial loan period.
Mortgages can also be divided into those that are backed by the government and those that aren’t. FHA, VA and USDA loans are all government-insured. Loans that aren’t government-insured are known as conventional loans.
Government-backed loans generally let buyers use smaller down payments. Buyers also may get lower interest rates. That can reduce the monthly payment amount.
However, government-backed programs like FHA also require borrowers to pay for mortgage insurance. That can increase the monthly payment significantly.
4. Get Pre-Approved
After you’ve given some thought to the type of mortgage you want, it’s time to get pre-approved for your loan. Pre-approval is a mortgage lender’s sign of willingness to loan you the money you need to buy a home.
Pre-approval is not the same as being approved for a loan. But you’ll need to be pre-approved before you can decide on the price range of homes you look at.
Your lender will signal approval by giving you a pre-approval letter. It will tell how much money you are likely to be able to borrow. Again, it’s not a promise to loan you that much money. It’s just an indication that you probably will be able to get the loan.
The lender will look at your credit report and your employment and income verification before giving you a pre-approval letter.
5. Choose A Real Estate Agent
After you have the pre-approval letter, go shopping for a real estate agent. Many agents won’t take you on as a client until you are pre-approved for a loan. So even if you have identified the agent you’ll use, you probably will have to wait until getting the letter to make it official.
Open Your Rolodex
Personal referrals are one of the most common ways to find a real estate agent. If someone you know has worked with a particular agent and recommends that agent, it’s a good sign.
You may also find an agent by looking at yard signs or by meeting one at an open house. No matter where you find an agent possibility, it’s best to check references and online reviews to see how past clients have felt about the agent.
Once you’ve selected, interviewed and checked references and reviews, your agent will ask you to sign an agreement that the agent will represent your interests in finding and negotiating for a house.
Sign An Agency Agreement
Note that the buyer’s agreement you’ll sign is different from a listing agreement that sellers sign with their agents. The big difference is that the seller agrees to pay the commission, typically 6 percent of the house sale price. So while your agent is working for you, he or she is being paid by the seller.
6. Find Your House
It’s finally time for the most enjoyable part, actually looking for and finding your dream home. Start by drawing up a list of features you want.
Typically, people start with big concerns such as the number of bedrooms and bathrooms. Other issues may be whether there is an enclosed garage, whether there is a pool, and the age of the home. Location is also a big concern. Buyers often want homes that are close to schools, work and shopping.
Your agent will help you find suitable homes by looking at homes for sale in the local Multiple Listing Service (MLS.) You may also find homes by driving around neighborhoods you’re interested in and looking for “For Sale By Owner” properties that aren’t in the MLS. Online listing sites like Zillow and Realtor.com can also help you locate a desirable house.
In fact, there are many other options available in the digital age. iBuyers (direct home buyers) are streamlining the home sales process, often with more flexibility than by using an agent.
Additionally, good realtors may be able to save you time and money by using a pocket listing. After you find a home (regardless of method), your agent can contact the seller or the seller’s agent for you to arrange for you to see the home.
7. Cut The Deal
Once you’ve found a home that looks like the one you want to buy, it’s time to start asking questions. You’ll want to know why the owner is selling, whether there are any major problems with the home and what is included in the sale.
The seller will provide you with a seller’s disclosure that is supposed to identify any problems with the home. The listing will also often specify what, such as appliances, is included in the sale.
Make An Offer
After you’ve gotten satisfactory answers, you may want to craft an offer. This is actually a contract. It sets out the price you are willing to pay and requires you to put up a deposit known as earnest money that you may forfeit if the seller accepts your offer and you change your mind.
Ask For Concessions
In addition to offering the price you feel comfortable with, you can add requirements such as that your purchase price will include appliances, fixtures, décor, etc.
You can make the deal contingent on the seller having certain repairs made. Sellers often respond to offers by making counter-offers. Your agent can help you with this negotiating process.
8. Order A Property Inspection
Once you and the seller have reached agreement, the seller will accept your offer. Now it’s time for you to order a home inspection and have the home’s value estimated by a professional appraiser. We highly suggest also adding a termite inspection to your agenda, as these little buggers can cause immeasurable damage.
Offers ordinarily include a set period of time, such as a week or two, during which these activities are to be completed. Until the end of that option time, you can change your mind about your offer and expect a return of your earnest money.
Once the option period expires and you’ve completed the inspection and, if necessary, negotiated for additional repairs by the seller, you have just bought yourself a house.
Tip: There are plenty of options for home inspections. Save time by using a nationally-recognized home inspection company.
9. Close On Your Home
Closing is the last step in the home buying process. This is when you and the seller will go to the office of the company that is providing you with title insurance and sign many documents. A typical closing requires signing scores of documents.
You’ll also need to bring a cashier’s check for the down payment and any closing costs not being paid by the seller. At the end of this process, when you’ve signed everything and handed over the cashier’s checks, it will be time for your loan to be funded.
This usually takes just a couple of hours or less. You may go out to lunch and then return to the title office. When your loan is funded, you’ll get the keys and copies of the loan documents and be able to move into your new house.
10. Plan For Repairs
Once you’ve received keys, you’re not quite out of the woods. Yes, you do own your home. But this means you’ll be responsible for repairs. These can be expensive, and by Murphy’s Law, will happen at the worst time possible.
We suggest putting aside an amount equal to 10%-15% of your mortgage payment strictly for repairs. For example, the cost of a new a/c is usually at least $2,000, if not more. You can’t usually finance these repairs, so you’ll want to have an “emergency fund” so you won’t endure undue stress.
Another option is to buy a home warranty contract. While different than an insurance policy, it offers peace of mind that your large repair is covered. Read our complete guide to home warranties to learn more.
In addition to making repairs, you’ll also need to do regular pest and weed control. Learn how customer service-oriented companies TruGreen and Terminix can help. After all, you should be enjoying your home, not working on it.
11. Make The Home Your Own!
After closing on your dream home, you’ll want to make it your own! Here are a few companies we recommend to save you the maximum amount of money:
- Blinds to Go – Offers a wide variety of high-quality window coverings at discount prices.
- Window World – Provides discount windows with industry-leading warranties and pricing.
- Costco– Sells a variety of home furnishings, patio furniture, and groceries. Check out the details of their membership in our complete guide.
How To Buy A Home – Conclusion
We hope you’ve learned something from our guide on how to buy a house. Make sure to check out our other complete guides to make you as prepared as possible for your home buying process!