How to Buy a House: A 9-Step Guide to Your Biggest Purchase Ever
Housing prices are on the rise with no signs of slowing down.
Since 2011, single-family home prices have climbed 42%. That means a house that cost $200,000 eight years ago would now cost $284,000.
With rising home prices and inflation, growing student loan debt and stagnant wages, the dream of homeownership is becoming more challenging for each generation.
But it’s not impossible.
How to Buy a House: 9 Steps for First-Time Buyers
While the road to buying a house has become more riddled with potholes and speed bumps, it’s still one you can navigate with the right savings plan, a decent credit score and a little professional guidance.
Think you’re ready to embark on your homebuying quest? Here’s how to buy a house in nine simple steps.
1. Whip Your Credit Score Into Shape
A strong credit score is crucial to securing a low interest rate on your mortgage.
Over 30 years, the most common length of a mortgage, paying just 1 percentage point more in interest could cost you big time. For example, if you bought a house with a $200,000 fixed-rate 30-year mortgage at 5% interest, you’d pay an extra $40,000 in interest over 30 years than you would have at 4%.
At a minimum, your credit score should be 620. Some mortgage lenders may approve you for a loan if your score is under 620, but prepare for astronomical interest rates and larger down payment requirements. An above-average credit score falls within the 680 to 740 range. Anything above 740 will secure you the best interest rates available.
If you have poor credit, don’t rush to buy a house just yet. You can improve your credit score over time by paying off debts (especially credit cards), lowering your credit utilization and diversifying your credit portfolio responsibly.
Paying off debt is especially important because lenders look at your debt-to-income ratio, which is your monthly debt obligations (including your estimated future mortgage payment) divided by your pretax monthly income. Lenders look for a debt-to-income ratio of 43% or lower.
2. Save for a Down Payment
Saving for a down payment while also paying off debts is challenging, but if you want to be a homebuyer, you’ll need to do both.
The age-old wisdom is that you need to save 20% for a down payment. But with the median home sale price at $232,700 as of February 2019, that would make the average 20% down payment $46,540. And in 2019, most first-time homebuyers do not have that kind of cash lying around.
In recent years, it has become more common to put as little as 10%, 5% or even 3.5% down. FHA loans, which are popular among first-time buyers (this millennial included), require only 3.5% down when your credit score is above 580.
VA loans, reserved for members of the military, veterans and some surviving spouses, require no money down but typically require a funding fee of 2.15%, which can be financed into the loan.
There are benefits to putting 20% down, however. When you put 20% down, you usually avoid having to carry private mortgage insurance, or PMI.
I currently have the luxury of paying more than $200 a month for PMI, and it is the most useless expense in my entire budget. My lender would, of course, disagree because PMI protects them in the event that I stop making my payments.
VA loans do not require PMI even if you put 0% down.
A larger down payment can also make your offer more attractive in a competitive market.
3. Figure Out Your Price Range
How much house you can afford and how much you should actually spend on a house may be two vastly different numbers.
The golden rule: Never set your sights on a house that you could afford — but that will cause you to make other sacrifices you’re not jazzed about, like cutting vacations or ruling out education.
Similarly, if you or your significant other (if you’re buying with a partner) both work, but one of you is considering a career change that could result in less income or becoming a stay-at-home parent, you should not budget using your current combined income.
Be conservative. Your home shouldn’t cost more than three to five times your annual income, but if any part of you that suspects your income may decrease in the next 10 years, stay closer to three times your income than five.
Housing expenses — including your mortgage payment, homeowners insurance and property taxes — generally should not exceed 30% of your monthly income.
4. Get Preapproved for a Mortgage
Before shopping for houses, you should shop for a lender. You can compare mortgage rates online and interview prospective lenders to find the best deal.
Ask friends, family and your real estate agent (if you already have one) for recommendations and try your own financial institution, but ultimately, go with the lender that will offer you the best interest rate on your home loan.
Then ask that lender for a preapproval letter. This is different from being prequalified. Lenders can typically prequalify you with just a few data points that they don’t verify to give you a ballpark range of the loan amount and interest rate they might offer.
But a preapproval letter is an official document that says the lender is committed to giving you a loan, assuming nothing changes in your finances. Getting preapproval takes more work, because the lender will send all of your financial documents (W-2s, pay stubs, tax returns, etc.) to an underwriter for verification.
A lender may preapprove you for a higher amount than you’ve budgeted for. Remember: Just because they are willing to give you that much does not mean you have to spend that much.
5. Hire a Real Estate Agent
The beauty of the homebuying process is that the seller will typically pay your real estate agent fees, so hiring an agent doesn’t cost you a thing, though some sellers may lower the price slightly if you purchase without an agent.
Ask family members and friends for recommendations, and always hire a buyer’s agent. These homebuying tips include several recommendations for hiring a good real estate agent who will find you the best deal on your dream home.
6. Shop for Your Dream Home
This is the most exciting step. Now you can actually set foot inside of homes and envision your life inside them. Visit open houses and go on private tours with your real estate agent, but also research houses on your own on sites like Zillow and Trulia.
But don’t be distracted by fresh paint and that hot tub in the backyard. When you’re house hunting, have a sharp eye for what really matters. If possible, bring along friends or family who know what to look for in a new house.
Cosmetic things like ugly carpet and questionable wallpaper can be changed relatively cheaply. The structural components are what you should be most concerned with. Some things to look for when you tour a home:
- How’s the plumbing? Can you get hot water fast? What’s the water pressure like? Do you notice any leaks or signs of water damage? Does the basement show signs of flooding?
- Is the foundation solid? Or are there issues that might require costly repairs?
- How old are the appliances? Will they need to be replaced soon?
- What about the exterior? When was the roof last done? Is the siding in good shape? Are the windows going to drive up your energy bill?
- What’s the neighborhood like? Do you feel safe where this house is? Is there a lot of noisy traffic? Is it conveniently located near restaurants, shopping, hospitals and parks? If you have or want children, are there good schools nearby?
7. Make an Offer They Can’t Refuse
Once you have found a house that fits your needs and is within your budget, you and your real estate agent will submit an offer. Be prepared to negotiate the purchase price, especially if you envision needing to do some remodeling.
Your real estate agent likely has a number of tricks up their sleeves to make your offer more appealing — but then, so does everybody else’s agent.
The seller may make a counteroffer. You can counteroffer right back until you land on a contract that you both find pleasing.
You might have to put up “earnest” money as a show of good faith to the seller that you are serious about moving forward with the sale. You’ll get this money back if the sale falls through because of issues with the appraisal or home inspection. If you purchase the home, the money is applied to the price of the home.
At this point, the house will go into escrow while you secure financing, get the house appraised and coordinate a home inspection ahead of closing.
8. Get a Home Appraisal and Home Inspection
Your lender will typically coordinate the home appraisal to determine what the house is worth. If the house is valued at less than what you offered to buy it, the contract will likely need to be revised, because it is not a good investment for the lender.
It is your responsibility to coordinate the home inspection, which, though not always legally required, is something you should absolutely do. A home inspector will investigate the property, checking for structural issues, HVAC issues and issues with the roof and major appliances. The average home inspection costs between $300 and $400.
You might need to hire specialized inspectors to test for pests, radon, mold and asbestos and to inspect pools, chimneys and sewers. These inspections can be more expensive.
9. Close on Your New Home
A few days before you officially close, you should do a final walk-through of the house to ensure everything is as you expected. Check that all agreed-upon repairs were made, and if the contract specified that certain appliances would be left behind, like the washer and dryer, verify that those are still present.
On closing day, drink lots of water and maybe do some hand and forearm stretches because there’s going to be a lot of paperwork to sign.
This will also be the day you write a massive check for the down payment and any closing costs that you’ve agreed to cover. It can be painful to watch that paper rectangle slip away from your fingers, but it’ll all be worth it when you are christening your new home with a glass (or whole bottle) of Champagne.
When closing, you need to bring your checkbook, any required identification (driver’s license or passport, for example) and maybe even a thank-you card for your real estate agent.
All told, the process of buying a house takes, on average, 40 to 45 days from application to closing. But considering that there are a lot of steps before making an offer, so be prepared for months of hard work.
4 Mistakes to Avoid When Buying a House
Following the above step-by-step guide will keep you on the right path when buying your first house, but it’s still possible to make mistakes. The following common mistakes are easy to avoid.
1. Not Having a Real Estate Agent
Real estate agents can get you into homes you might not otherwise find, help you negotiate and spot unfavorable terms in contracts. Plus they probably won’t cost you a dime as the buyer.
2. Forgetting the ‘Extras’ When You Calculate Your Housing Budget
When you’re making your budget, it can be easy to see the cost of a house online and assume you would pay the website’s estimated monthly payments.
However, those estimates assume your credit report is immaculate and you are putting 20% down. If you’re calculating expenses on your own, don’t forget that you will pay more than just the cost of the house. Plus there’s homeowners insurance, PMI, property taxes and, of course, interest.
3. Skipping the Inspection
If you forgo an inspection and issues surface shortly after your purchase, you are out of luck. You’ll be paying out of pocket, and the seller is not liable.
4. Buying Outside Your Price Range
Even if you’re approved to borrow X amount, you should not buy a house for that amount if you don’t feel comfortable spending that much.
Remember: You are likely signing a 30-year commitment. Make it a number you’re comfortable with.
Timothy Moore is a market research editor and freelance writer covering topics on personal finance, careers, education, travel, pet care and the automotive industry. His work has been featured on Debt.com, Ladders, Glassdoor and The News Wheel.