Homebuying Process: 9 Steps to Buy a House
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Buying a home is an exciting milestone, but the homebuying process can be confusing and overwhelming. Whether you’re buying a house for the first time or trying to find a home that meets your growing family’s needs, we’ll cover nine tips to make the process less daunting in our homebuying guide.
9 steps in the homebuying process
- Step 1: Estimate how much house you can afford
- Step 2: Get your finances ready
- Step 3: Get preapproved for a mortgage
- Step 4: Make a homebuying checklist
- Step 5: Find a real estate agent
- Step 6: Make a strong offer
- Step 7: Get a home inspection
- Step 8: Avoid mortgage mistakes before closing
- Step 9: Prepare to close
Step 1: Estimate how much house you can afford
One of the most important first steps in the homebuying process is determining what you can afford. You’ll get a good idea by using a home affordability calculator. Here’s a list of information you’ll need to gather:
- Annual income: Home affordability calculators use your income before taxes and deductions, also known as “gross income.” If your income fluctuates due to commission, self-employment or overtime, use an average over the last two years.
- Down payment. Decide how much down payment you are going to make and try to avoid mortgage insurance, a type of insurance that protects lenders if you make less than a 20% down payment. You can put as little as 3% down, but the lower your down payment, the higher your mortgage payment.
- Total up your debt. Include student loan payments, credit cards and installment loans like car payments.
- Pick your loan term. Most home affordability calculators are set to a 30-year, fixed-rate mortgage loan to give you the lowest payment and the highest qualifying home price. You can choose a shorter term like a 15-year fixed, but the higher payment means you’ll only qualify for homes in a lower price range.
- Interpret the results. Most home affordability calculators estimate how much house you can afford based on a 36% debt-to-income ratio (DTI). This figure divides your total debt, including the mortgage payment, by your gross income. Lenders can approve you for higher DTIs, but check your residual income before you push your DTI higher.
- Factor in residual income. If you use LendingTree’s home affordability calculator, you’ll see a “left over” result in the monthly budget breakdown, also known as “residual income.” This figure reflects how much money you have after your mortgage and other monthly debts are subtracted. Make sure the left over amount can cover monthly expenses such as groceries, gas, health and car insurance, utility bills and childcare (if applicable).
- Add a budget for home maintenance. If you’re a first-time homebuyer, be sure to budget for potential home repairs and maintenance. Aim to save at least 1% of the price of your home annually for repairs and maintenance.
Step 2: Get your finances ready
The next step in the homebuying process is organizing and preparing your finances, especially if you need lender financing.
Know your credit score. Your credit score is a critical factor when it comes to your interest rate. Find out what your credit score is and, if needed, work on boosting it before applying for a mortgage. The top two tips: pay everything on time, and don’t charge more than 30% on any revolving credit accounts you have. The latter move will also help lower your DTI ratio.
Document your down payment. Lenders care about where your down payment comes from. You may need to document and explain the source of the funds if they’re not sitting in your checking account.
Get your paperwork ready. To get approved for a mortgage in most cases, you’ll need to document your finances and income. Expect to show these documents, at a minimum:
- Paystubs for the last 30 days
- W-2s for the last two years
- Bank statements for the past 60 days
- Federal tax returns for the past two years (if self-employed)
Step 3: Get preapproved for a mortgage
Before you start the homebuying process and look at homes, make sure your mortgage financing is in place. Most sellers won’t even consider an offer without proof that you’re preapproved for a mortgage.
Start your mortgage shopping with a comparison website to find out what current mortgage rates are, and you’ll get calls from several lenders competing to earn your business. The best place to get a mortgage may be a mortgage broker, mortgage banker or an institutional bank. Shop around and apply for a mortgage with at least three different lenders.
After you apply for a mortgage, you’ll get Loan Estimates from each lender. This document outlines all loan details, which lets you easily compare mortgage rates, lender fees and total closing costs to ensure you get the best deal possible. Once you find a good match, provide the documents requested by your loan officer, and send a copy of the preapproval letter to your real estate agent to include with your offers.
Step 4: Make a homebuying checklist
Before looking at homes, come up with a list of what you absolutely want (and don’t want) in a potential home. This can save you time in the homebuying process and narrow down your choices. It’s important, though, to be realistic about what types of homes and amenities are available in your price range.
Here’s a checklist of things to look for in a home:
- Curb appeal. If you don’t like the look of the house when you pull up, you might not like what you see on the inside. It might also be a sign that the home needs work or isn’t in the best condition.
- Location. Consider how close the home is to your work, school, shopping, parks and neighbors. Pay attention to traffic flow and noise, too.
- Lot. Lot size can’t be changed. Is the yard big enough? Do you want less maintenance and upkeep? What direction does the home face?
- Neighborhood. Think about the neighborhood’s character, amenities and any future development nearby that might impact home values. Also, check to see if the neighborhood belongs to a homeowners association. Some HOAs can be very restrictive about what you can and can’t do to your property.
- Number of rooms. Think about future plans when considering how many bedrooms and bathrooms you need. Do you plan to have kids or will you need to care for an aging parent? Do you need a home office or other dedicated spaces?
- Layout. A home’s layout is harder to change. Do you want an open layout where you can access living spaces and the kitchen easily? Or do you prefer certain rooms to have walls or separation?
- Size and floor plan. With more square footage comes higher utility and (potentially) maintenance bills. Consider, too, safety and mobility for all household members when looking at floor plans. Is there any potential to add square footage in an unfinished basement or attic later?
- Lighting. Think about whether you like natural light or artificial light, and make sure the windows, skylights and electrical outlets are sufficient to provide it.
- Storage. Make sure you’ve got enough storage space to grow into. Pay attention to closet sizes and unfinished spaces (i.e. crawl space, basement or attic) that can double as extra storage room.
- Remodeling potential. If you’re buying an existing home, look at its potential instead of cosmetic flaws and current obstacles. You can always renovate later or use a home improvement mortgage to roll the costs of repairs and upgrades into your loan amount.
Step 5: Find a real estate agent
Real estate agents are sales professionals trained and licensed to help clients buy or sell homes. Friends and family can give you referrals. You can also search a database of real estate professionals who belong to the National Association of Realtors (NAR). They are called Realtors.
Interview real estate agents and ask them questions about their experience and background. Ask for testimonials and referrals. You may even want to check their record of homes sold over the past few years and get a gauge of their experience. Be sure you understand the terms of their representation agreement and what the agent’s services include.
Step 6: Make a strong offer
Once you find a home, there are ways to strengthen your offer on a house in highly competitive markets. Here are some ways to do that:
- All-cash offer. If you have the means, a cash offer is often appealing to a seller because the sale can be closed faster and has fewer contingencies.
- Have a preapproval letter in hand. This tells a seller that you’re serious and have the financial means to afford the home.
- Write a personal letter to the seller. It may sound old-fashioned, but writing a personal letter does work to help you stand out from a slew of offers. Sellers often have emotional attachments to their home, and a heartfelt letter describing why you love their home could give you an edge.
- Make a bigger down payment. Sellers may get nervous if you don’t have much money to put down. A larger down payment might sway a seller because it shows more financial stability.
- Offer a bigger, earnest money deposit. Consider adding a few extra thousand to your earnest money to show the seller how serious you are. The money counts toward your down payment. You can get the earnest deposit back, though, if you include a contingency in your offer.
- Include minimal contingencies. If you have the financial means and really want the home, consider waiving an inspection or financing contingency. These clauses allow you to back out of the contract if certain terms aren’t met without any financial penalties.
- Offer more than the listing price. If you have the financial wherewithal, a higher offer amount may get the seller’s attention in a bidding war. Keep in mind if you’re financing the home, the mortgage will be based on the appraised value or sales price, whichever is lower.
Step 7: Get a home inspection
Get a home inspection soon after signing the contract. If your offer has a home inspection contingency, you’ll have the option to cancel the deal if the home has major issues or needs significant work.
If there are items that need repair, you can ask the seller to make the repairs before closing, lower the sales price or provide you a credit at closing. Pay close attention to the inspection period timeline, otherwise, you could lose your earnest deposit and have a harder time canceling the transaction.
Step 8: Avoid mortgage mistakes before closing
Even after your mortgage is approved, lenders continue to verify information up until the day of your closing. Take the following actions to avoid delays in your closing, or even worse, a loan denial.
- Don’t charge any new credit or pay off existing accounts.
- Don’t open any new loans or credit card accounts.
- Don’t make large deposits for the down payment without consulting with your loan officer.
- Don’t change jobs — employment will likely be re-verified on the day of closing.
- Provide all the documents requested as quickly as possible.
- Make sure you finalize your homeowner’s insurance choice well ahead of closing.
- Provide documents to the title company as needed and decide how to hold title to your home.
Step 9: Prepare to close
You’ve reached the end of the homebuying process. Congrats! You’ll do a final walk-through of the home just before your closing date. Confirm inspection items were fixed and that the home is in move-in ready condition.
Three business days before closing, you’ll receive a Closing Disclosure form. This is the most important final document to review in the homebuying process line by line against your Loan Estimate to ensure accuracy and that closing costs and the cash needed to close are what you expected.
You’ll need certified funds to close, so be sure to verify wiring instructions with the title company in writing. Confirm how much cash you need to close, too. At closing, check every single document you sign for any errors. Finally, make sure you get all property keys, garage door openers, manuals to major appliances (if available) and any other instructions needed to access the house before leaving the closing table.