Have you been saving for a down payment for a while but have no idea how the homebuying process actually works? Or perhaps you’ve been too overwhelmed to begin? You’re not alone.
Few first-time homebuyers know exactly how to buy a house, but it’s something you can learn. This guide will show you everything you need to know to prepare for the process and successfully close the deal.
4. Save your money for a down payment
5. Get pre-approved for a mortgage
1. Do your research
You’re already on the first step: doing your research. This is the time to gather information on the home-buying process, from the neighborhoods you’d like to live in, to the real cost of owning a home.
It’s also a good time to reflect on your goal for getting a house and to make a plan for how and when you intend to achieve that goal. Set your timeline so you have an idea of when you could have your funds saved up and begin shopping.
2. Budget for your house
Buying a house will cost you more than just the mortgage. You’ll need to make sure you can cover the interest on your loan, plus private mortgage insurance (for down payments under 20%), homeowners insurance, property taxes, and perhaps a homeowners association fee, all of which can add a significant amount to your monthly payment. When you’re budgeting for the home you want, be sure to take those costs into account.
Closing costs can also add up; these are the one-time fees and expenses associated with closing the deal and transferring ownership of the home from the seller to you. They include title insurance, inspection and appraisal fees, document and paperwork fees, and other costs.
Expect to pay between 2% and 5% of the purchase price of the home in closing costs. You might need to have this amount in cash, or you may be able to roll it into your mortgage — just remember that if you do, you’ll pay interest on that amount, as well.
3. Check your credit score
Your credit score is also a critical factor in determining your budget because it can affect the mortgage interest rates you’ll qualify for.
“It’s very important to check your credit scores and clean up any discrepancies before you purchase if you plan to take out a mortgage,” said Svetlana Choi, a broker with Coldwell Banker Warburg.
“Banks check your score several times during the purchase process, not only when you apply for the loan, but also before you close, so maintaining a good score is essential,” she said.
If your score isn’t yet in the “good” range — usually defined as a FICO score of 670 or higher — don’t panic. You can work on improving it, starting today, and start to see positive results in the coming months. Start with some of these moves:
- Get current on your bills
- Make more than the minimum payment toward your credit card debt
- Set your payments to autopay so you never miss a due date
- Pay off your smallest debts (but leave the account open, as the age of your accounts factor into your credit score)
- Check your credit report for errors and correct them
On-time payments make up as much as 35% of your credit score, so making all of your payments is a great way to make major strides toward better credit.
4. Save your money for a down payment
If you haven’t already, start setting aside cash for the down payment. While the rule of thumb is to put down 20%, you may qualify for a loan program that lets you put down as little as 3%, which would make it much easier to reach your goal, but would affect how much you need to borrow.
| For example: For a $300,000 house, you’d need to save $60,000 for a 20% down payment, and your mortgage would be $240,000. At a 6% interest rate and with a 30-year fixed-rate term, that would make your monthly payment (not including taxes or insurance) $1,439. If you put down 3.5% instead, your down payment would be $10,500, and you’d need to borrow $289,500. That puts your monthly payment at $1,736 (though with a down payment under 20%, you’ll likely have to factor in private mortgage insurance). |
5. Get pre-approved for a mortgage
With your cash saved up and your goals in mind, you might be ready to buy. But your first step is not to look at real estate listings — it’s to visit a loan officer. They’ll help you get pre-approved for a mortgage. A pre-approval will not only show you what price range to shop in, it will also let sellers know to take you seriously, because you’re ready and able to buy.
Getting pre-approved entails filling out an application and submitting some personal and financial information. Based on those details, plus a soft credit check, the lender will let you know how much you’re prequalified to borrow.
While you’re at it, this is a good time to check whether you qualify for loan programs through the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or Department of Agriculture (USDA) loans. These programs provide lower down payment and credit score requirements, making it easier to buy your first home and begin building wealth.
6. Hire a real estate agent
Once you’re pre-approved, hire an agent. The right real estate agent will make home shopping much easier, because they will know your market well. Heather Walton, a Realtor with Class-Harlan Real Estate in Doylestown, Pa., recommends interviewing real estate agents to find an experienced buyer’s agent.
An agent since 2001, Walton suggests hiring someone “who listens to your wishes, is knowledgeable on the marketplace, and who can guide you through all the steps of purchasing a home.”
“They likely will be your ‘first friend’ in your new community,” she said. ”So make sure you are comfortable with their skill set and trust them to steer you in the right direction.”
7. Shop for a house
Your real estate agent will help you find and tour potential homes. Let them know what you’re looking for, what neighborhoods appeal to you, and whether you want a new move-in ready home or an older home with more character.
After you visit each of the top contenders, make notes of each home’s pros and cons. This data will help you make your final decision later.
8. Make an offer
When you’ve landed on a home that checks off most of your boxes, it’s time to make an offer to the seller. Your agent will help you draw up an offer that provides a proposed price, as well as any contingencies or conditions you require. Be prepared for the seller to make a counteroffer; this is part of negotiating the sale. You can counter their counter if necessary.
If you can both agree to terms, congratulations! But the deal isn’t complete until the sale is closed, and that’s the final part of the process.
9. Finalize your mortgage
You’re almost to the finish line. The final steps are to complete the contract and make sure that everything is in order for your mortgage.
Your lender will need to make sure that your finances are stable and that the home is valued at the right price. If you were prequalified for a mortgage, this part should go a bit more smoothly. Decide on the best mortgage lender for your needs. This is also when you’ll decide on your loan specifics. Common mortgage terms are 10, 15, 20, or 30 years. Most homebuyers choose fixed-rate loans, but adjustable-rate is an option, too.
10. Get a home inspection
While you’re finalizing things, you should definitely consider getting a home inspection. A professional inspection will give you a heads-up about any concerns with the structure of the home: heating and cooling, floors, walls, windows, basement, or foundation. It’s not required, but you may be glad you had it done if it reveals any problems.
11. Appraise your home
Appraisals, on the other hand, are typically not optional. Your lender wants to make sure the home is actually worth the loan amount. During a home appraisal, a professional appraiser will evaluate your home’s condition, age, structure, and location and compare it to similar homes nearby. They use this information to create an unbiased valuation of the home.
12. Get homeowners insurance
Finally, make sure you sign up for a homeowners insurance policy. Many lenders won’t let you take out a mortgage without insuring the home first. This protects both you and the mortgage company if something happens to the home.
No matter which stage of the home-buying process you’re in, you’ve got this. Remember why you’ve set homeownership as your goal, lean on your trusted real estate agent for advice, and keep going until you’re home.