Understanding how to buy a house can make the home buying process easier.
When you search for “how to buy a house,” the results seem identical and decent at best. They only show you a few basic steps. I bought my first house two years ago, and I wish I knew the actual and real steps to purchase a home. Now that I have gone though the home buying process, I am happy to share these steps with you.
So, if you’re a first time home buyer, or you have bought a house before but just want a refresher, this step-by-step home buying guide will walk you through it.
This guide is pretty long. But I highly recommend that you read it top down. Buying a house is a major expense and it also takes time.
So, it should not be taken lightly.
But if you feel comfortable with one or two steps, feel free to use this overview or the table of contents to skip around.
But no matter what stage you are in your home buying journey, you should always check to see how likely you’ll be qualified for a mortgage loan.
The worst thing that can happen is to find a house that you like to then realize that you cannot secure a home loan.
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How to Buy a House: A Brief Overview
Here are the steps to buying a house.
- Step 1: planning to buy your house: here, I will list everything you need to know about planning to buy your house. That includes making a budget, saving for a down payment, checking your credit score, considering how much house you can afford and considering the upfront costs of buying a house.
- Step 2: Search for your house – Get an pre-approval mortgage letter so sellers can take you seriously. Make a list of all the neighborhoods you wouldn’t mind living in and research the market. Also, do some research about other ways you can buy a house.
- Step 3: Choose the right mortgage: There are 4 possible mortgage you might be qualified for: FHA loans, conventional loans, VA loans, USDA loans. Each has their own requirements. We will go over the details. And finally, compare and shop for the best mortgage rates.
- Step 4: Buying your home. This section includes everything from finding a property you like, making an offer, applying for a loan, closing and moving in.
How to Buy a House: A Step-by-Step Guide
Step 1: Planning to buy your house
This step while seems simple is where a lot of people got wrong (including myself, to be honest).
I was too impulsive enough to do any planning and jump right over a few steps. But planning to buy a house is as important as the other steps, and you should not skip it.
It will not only save you time and money, but you’ll be confident during your search and the home buying process.
Make a budget
The first step in the home buying planning process is to make a budget. Write down you current expenses and be as realistic as possible. Your expenses should be your food, transportation, student loans, other personal loans you’re currently paying, credit card debts. Your rent will no longer be an expense, but it will be substituted with your mortgage. Making a budget will give you an idea how much you can afford.
Check your credit score
The higher your credit score, the more likely you’ll be qualified for a mortgage and the more likely you’ll get a good mortgage rate.
In other words, a low credit score can lead to a high interest mortgage loan, or even worse, a loan rejection. Given the fact that your credit score is the number 1 item mortgage lender looks at, it pays off to know where you stand.
Credit Sesame will let you know what your credit score is for free and monitor it for you. It will also offer tips on how to raise your credit score and reduce your debt.
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Consider how much you are able to borrow
How much house you will be able to afford will depend on three things: 1) your income; 2) your living expenses (see above) – that also includes other debts and obligations such as credit card debts, student loans, child support, etc; 3) the type of loan you want (i.e., FHA loans, VA loans, Conventional loans, USDA loans – see step below for more information on loan types.)
Consider your upfront costs of buying a house
Your down payment and mortgage repayments are not the only costs you’ll need to consider when buying a house.
That’s where I messed up.
There are other upfront costs of buying a house, like inspection costs, loan application fees, moving costs, repair costs, closing costs, etc.
So consider these upfront costs when planning to buy your house so to avoid any surprises later.
Save for a down payment
The larger your down payment, the less money you’ll need to borrow. There are several ways to save money for a down payment, including cutting back on your spending and making a regular savings plan.
Typically, conventional loans requires 20% down payment. You can pay less than the 20%, but you’ll have to pay for a private mortgage insurance. The PMI is just to protect the lender in case you default on your loan.
If you’re a veteran, you may also be qualified for a VA loan, where the down payment will be $0.
If you’re a first time home buyer, you may eligible for an FHA loan where the down payment is 3.5 % of the home purchase price.
“Planning to buy your house will give you a clear idea of how much you can really afford and help you start your home search on the right foot.“
Step 2: Search for your house
Obtain a pre-approval letter so you can search with confidence
Before you start house hunting, it’s important to get pre-approved for a mortgage first. One reason is because you have an idea of how much you can borrow. Another reason this step is important is because the seller will know that you’re serious. If you don’t have one handy, the seller will likely move to the next buyer.
Getting pre-approved for a mortgage in order to buy a house can take a while. That is because you have to make sure your financial situation is in shape. For example, your income-to-debt ratio, your down payment, and your credit score must be good.
Even when these things are in order, shopping and comparing mortgage rates and fees can take several weeks.
To get the best mortgage rates, you need to compare multiple loan offers. As I said earlier, buying a home is major expense, and getting the best rates could save you a lot of money.
I can spend a lot of time talking about why it is a bad idea to only speak with one mortgage lender. (More on this below).
But when it comes to having multiple loan offers, I highly suggest LendingTree.
LendingTree is an online platform that connects you to several mortgage lenders without visiting a dozen bank branches.
LendingTree will provide you up to 5 loan offers from multiple lenders for free, so you can compare and make sure you get the best deal.
So if you’re at this step right now, go and compare current mortgage rates for free at LendingTree, and come back to this article.
Compare home loan rates from top lenders in your area.
Meet with your real estate agent
Working with a real estate agent to help you find the right house is very important. You may think you can do it all by yourself, but a real estate agent has the insider knowledge that you may not have. They may be more familiar with the area you want to live.
Plus, their service is free. They’re paid commission from the seller.
Talk to family or friends for a referral. Or you can just google “real estate agent” in your area. You may also go through Zillow or Redfin.
The real estate agent should be able to give you a personalized property report for your preferred neighborhood.
They should also give you an estimation of upfront costs of buying a house.
Research the neighborhoods where you want to buy your house
You may have an idea of where you want to live. But whether you want to live in the suburbs or in the city, make sure you write down a list of all the things. Does the area have good schools, shopping centers, public park, etc.
These things are important, especially if you’re planning of raising a family there. Also, research the area thoroughly for recent crimes, etc.
Your real estate agent can give you recent reports of properties in a particular neighborhood. The reports should tell you about recent sales in the neighborhood, average sale prices, listings, etc.
Step 3: Choose the right mortgage: decide which home loan is the right for you
When you’re buying a house, it’s important to choose a mortgage that works for you. There are different home loan types. Each one of them has different requirement.
Again, to compare loan types, visit LendingTree.
One type of loan that is popular among first time home buyers is FHA loan. It is so popular because it’s easier to get qualified for it. And the down payment is very little comparing to that of a conventional loan.
For example, FHA loans require a 580 credit score and a down payment as low as 3.5% of the home purchase price. This makes it easier to qualify for a home loan when you’re on a low income.
If your credit score is below 580, you will still be qualified but you will have to put 10% down.
To see if you’re qualified for an FHA loan, again I recommend my favorite platform, LendingTree.
A conventional loan is any loan that requires you to put 20% down payment of the home purchase price. A down payment less than 20% won’t make buying a house with a conventional impossible. However, you will have to pay a private mortgage insurance.
But the credit score for a conventional loan is usually around 650 and up.
VA loans are another great option for first-time home buyers. However, you have to be a veteran. Unlike a FHA or a conventional loan, VA loans require no down payment and no mortgage insurance. This can save you thousands of dollars per year.
Compare and shop for loans
Once you decide which type of loan you will use to buy your home, you need to shop and compare for a mortgage.
Why you should use LendingTree to shop for your mortgage:
- Get approved in just 2 minutes
- Over 1500+ lenders in one platform
- Multiple mortgage offers – to make sure you choose the best mortgage rate.
- Checking is free
Step 4: Buying Your House
Make an offer
Once you have found your property, then the next step is to make an offer. Again, this is the time where your pre-approval letter (and we talked about this earlier) comes in handy.
Sellers are more likely to accept your offer with a pre-approval letter in hand. There will be several back and forth (or negotiations) between your agent or you and the seller.
But once accepted, you and the seller sign a contract. with confirms the selling price, settlement terms and other conditions for the sale.
Then, you will have to pay the down payment, usually between 3.5% and 20% depending on the type of loans you want (see above).
Then the next step is to actually apply for the loan. But in the meantime, you can arrange for an inspection. This is not mandatory, but it’s highly recommended to avoid bad surprises later on.
You should also hire a lawyer to go over the contract to see if there are any errors. They charge a legal fee, so make sure you’re aware of how much they charge before you commit.
Apply for a home loan
Once you have made an offer on the house, the next is to apply for the loan. You can back to the actual lender who gave you the pre-approval letter and apply with them.
If you want other options, you can always go back to LendingTree to shop and compare multiple loan offers, to find the best mortgage rates.
At this time, you should gather all important documents:
- Your identification (I.D.) – passport or driver’s license
- Bank statements
- Your income – employment verification letter, pay stubs, W2s, recent income tax returns.
- If you’re self employed: most recent personal and business tax returns, business financial statements, etc.
Sign your loan document
Once your home loan has been approved, then it’s time sign the loan documents.
Closing and move in to your home
The final step to buying a house is the closing.
Closing is when the purchase of your house is completed and the house becomes yours. The mortgage lender will arrange a closing date, time location with your lawyer. Once the closing is successfully completed, your lender will let you know and it’s time for you to pick up the keys from the seller’s real estate agent.
Learn more about how to buy a house
I hope you learn one thing or two about how to buy a house. As I mentioned earlier, buying a house is a major expense, so you should make sure you make all the right moves. If you’re still looking for more information, feel free to read through these articles below:
- 5 Signs You’re Not Ready To Buy A Home
- 10 First Time Home Buyer Mistakes To Avoid
- 3 Signs You’re Not Ready to Refinance Your Mortgage
- The Biggest Mistakes Millennials Make When Buying a Home
- 7 Signs You’re Ready To Buy A Home
- How Long Does It Take To Purchase A Home
Work with the Right Financial Advisor
You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc). So, find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.