Buying a house is an important milestone, but for first-time home buyers who don’t know what to expect, the process is often as intimidating as it is exciting. In these uncertain times of high list prices and low rates, the decision to buy a house may feel even more overwhelming than ever, but we’re here to help.
In this article, we’ll walk you through each of the key steps involved in buying a house, so you know exactly what you’re getting into and how to prepare.
What Do You Need To Buy A House?
Before you start looking for the perfect home, you should ensure you have what you need. In order to buy a house, you should have:
- A strong credit score
- Money saved for a down payment and closing costs
- Preapproval for a mortgage loan
- A qualified real estate agent
Once you’ve begun the home buying process and find a property you love, you’re also going to want to make sure you have:
- All the necessary documentation
- A clear, comprehensive understanding of what goes into purchasing a house
Home Affordability Calculator
How To Buy A House: The Home Buying Process In 10 Steps
There’s a lot of crucial transferring of information that takes place during a real estate transaction, and you will want to be certain you’re knowledgeable enough to be able to advocate for your needs each step of the way. The best way to prepare is to know exactly what to expect. Here are the steps you will need to accomplish before you can receive the keys for your new home:
- Step 1: Check Your Credit Score
- Step 2: Determine How Much You Can Afford
- Step 3: Choose A Lender and Get Preapproved For A Mortgage
- Step 4: Find A Real Estate Agent
- Step 5: Start The Home Search Process
- Step 6: Make An Offer
- Step 7: Get A Home Inspection and Home Appraisal
- Step 8: Purchase Homeowners Insurance
- Step 9: Do A Final Walkthrough
- Step 10: Close On Your New Home
Step 1: Check Your Credit Score
Before you begin the home buying process, you want to make sure you’re actually in a position to take on all that buying a house entails. That’s why the first step is to do your research, check your credit score, and review your finances.
Research Different Areas
Before you can buy a house, you need to know where you want to buy a house. Make a list of the areas you’re considering moving to and research them. It’s important to look into crime rates and public school ratings in the area, but don’t forget about the simpler things.
Where is the closest grocery store? How long would your commute to work be? Keep all these factors in mind as you’re considering different cities.
Credit Score To Buy A House
Securing financing isn’t always an easy feat. Mortgage lenders use your credit score and financial history to qualify you for a loan, so it’s important to be one step ahead of them and know where you stand.
To obtain a conventional loan, you’ll need a median FICO ® Score of 620 or higher. But if you qualify for an FHA loan, Rocket Mortgage ® only requires a minimum score of 580. The VA doesn’t require a specific credit score to buy a house with a VA loan, but lenders can set their own policies. Rocket Mortgage requires a credit score of at least 620 for these loans.
Your credit and financial history will dictate whether you’re able to obtain a mortgage and at what interest rate. Buyers with higher credit scores tend to secure better interest rates and loan terms, so make sure you understand your credit before you get deeper into the process.
Step 2: Determine How Much You Can Afford
Before you speak with a mortgage lender, it’s useful to calculate how much house you can afford on your own. A lender will tell you how much money you qualify for, but you want to make sure you won’t be overextending yourself.
Typically, experts recommend spending no more than 30% of your gross monthly income on housing costs. These costs include:
- Principal: This is the money you borrowed to purchase your home.
- Interest: This is the fee the lender charges you to borrow the funds.
- Taxes: You are required to pay property taxes to the government based on the value and location of your home.
- Insurance: Homeowner’s insurance protects your home against any damages.
- Association dues: These are fees you must pay if your home belongs to a homeowners association. If your home is not a part of a homeowners association, you won’t have to pay this fee.
To calculate how much home you can afford, consider using the Rocket Mortgage Home Affordability Calculator. Once you’ve determined how much you can afford, be sure to consider the lifestyle you want to maintain and leave yourself a cushion in case of emergencies. Don’t forget about things like retirement, college funds and family vacations in your budget planning.
Down Payment And Closing Costs
Now it’s time to start saving! Understanding what you’re responsible to pay and when is crucial to a smooth home buying process, so we recommend speaking with your real estate agent or lender to determine which costs you’ll have to pay up front.
First and foremost, you’ll need to save for your down payment. Once upon a time, it was recommended to save 20% of a home’s purchase price for the down payment, but this hefty number is no longer the standard. The minimum down payment on a conventional loan is 3% and an FHA loan is available with a down payment of 3.5%.
Keep in mind that the larger the down payment, the more equity you’ll have, and the lower your monthly mortgage payments will be. By paying more upfront, you can save on interest and be less likely to have to pay private mortgage insurance. Be sure to weigh your options to choose the right down payment for you. A larger down payment may be great, but not if it means emptying your savings.
The other large expense you need to plan for is closing costs. These are the fees associated with processing and securing your loan. Although the exact amount you need will vary depending on the loan amount and tax requirements in your area, you can generally expect closing costs to be about 3% – 6% of the purchase price.
Step 3: Choose A Lender and Get Preapproved For A Mortgage
The next step is finding a mortgage lender and getting preapproved for a mortgage loan. Many first-time home buyers don’t realize they can – and should – shop around for lenders before choosing one. Doing your research can make a big difference.
Get Different Loan Estimates
There are often variations in interest rates and closing costs between lenders, which is why it’s essential to do your homework. When comparing lenders, ask each one to provide you with a Loan Estimate, which will spell out the loan terms, project payments and closing costs for your potential mortgage. This form is provided in a universal format, making it simple for you to compare lenders.
But be sure to consider factors beyond the bottom line. A lender might be offering a great deal, but if it comes with lower quality customer service, it may or may not be worth it. Buying a house is a long and often complicated journey, so it’s important to find a lender you can trust to make the process as simple and convenient as possible.
Contrary to popular belief, getting prequalified for a loan is not a guarantee that you’ll actually be able to obtain a loan. When you get prequalified, lenders only estimate your finances based on the information you provide.
However, getting preapproved for a loan requires a thorough investigation of your finances that includes the verification of your income, assets and credit rating. When you get preapproved for a loan, you are guaranteed that you’ll be able to obtain the loan, assuming your finances don’t change between preapproval and closing on the home.
A preapproval is helpful because it tells you exactly how much the lender is willing to let you borrow and it specifies the costs of obtaining the loan. Being preapproved also tells the seller you’re serious about buying, which can make a difference if and when you find yourself in a bidding war.
Step 4: Find A Real Estate Agent
As you may have noticed, there are many steps to buying a house. Although there are some home buyers who decide they want to do it on their own, having a trusty and reliable real estate agent can make things a lot simpler.
Your real estate agent will represent you throughout the home buying process to ensure you find the right home, ask the important questions, make an appropriate offer, have the power to negotiate and receive the necessary disclosures. But perhaps even more important, having a real estate expert in your corner can provide some invaluable peace of mind.
The way to find the right real estate agent is by asking the right questions. Some questions to ask include:
- How long have you been working as a real estate agent?
- What makes you different from other agents?
- How many clients are you currently working with?
- What experience do you have finding homes in my price range?
- How knowledgeable are you about my desired area?
- Are you willing to provide me with references?
Once you select the best agent for you, they will look over your approval letter, discuss your budget and help you set your priorities.
Step 5: Start The Home Search Process
Once you’ve met with your real estate agent to discuss what you’re looking for, it’s time to begin house hunting. As you browse, keep your priorities in mind. Remember it’s highly unlikely any listing will perfectly match your dream home, so try not to be too picky until you see the houses in person.
Tour Different Areas And Houses
You’ll find that the more houses you see, the more they all start to blend together, so be organized and make sure you walk through the various things you like and dislike about each property with your real estate agent. When visiting a listing, take notes and reflect on the house itself as well as the surrounding area. Some things to consider are:
- The size, style and physical condition of the home
- The neighborhood the home is in
- What your commute would be like
- The schools in the area
Although a house in poorer condition may seem like a steal, remember that you’re the one who will be left to make repairs. Even homes with outdated appliances can be a nuisance because you’re the one who will ultimately have to pay to replace them – so be realistic as you view each house and thoughtfully consider what you’re willing to live with and what your budget can cover.
Step 6: Make An Offer
When you find a house you want to buy, it’s time to begin the process of making an offer. Ask your real estate agent to run a comparative market analysis to determine a fair price based on recent sales of similar homes in the area. The less interest there is – and the longer the house has been on the market – the more power you’ll have to negotiate.
Beyond the price you plan to offer, you should speak to your real estate agent about whether it makes sense to include any contingencies in your offer. A contingency is a stipulation included in an offer that states that if a particular condition is not met, the buyer is free to break the contract without any repercussions.
Although sellers sometimes balk at offers made with contingencies, there are some contingencies worth making regardless of the seller’s feelings about them.
If your ability to afford the home is dependent on your ability to obtain a loan, you must include a mortgage contingency in your offer. This contingency will make it possible for you to back out of your offer if, for any reason, you’re unable to receive financing.
Even if you’ve been preapproved for a loan, you should still write this contingency into your offer. If you don’t, you’ll find that you’re still on the hook for the purchasing price regardless of whether you’ve actually obtained a mortgage.
Home Sale Contingency
If you’re planning to sell your home and require the funds from the sale to purchase this new one, you’ll also want to ask for a home sale contingency. This contingency will provide you with a certain period of time to secure a buyer for your own home.
If you’re unable to find a buyer during that time, the home sale contingency will enable you to rescind your offer and reclaim your earnest money deposit without any recourse. Many sellers will refuse this contingency, but it’s still worth a try in most cases.
An inspection contingency is also a worthwhile addition. After you make an offer, you’ll want to get the home inspected to ensure you have a full understanding of the home’s condition. With an inspection contingency, you’ll be able to not only negotiate the offer based on any needed repairs, but you will also can break the agreement if the home needs more work than you can handle.
Earnest Money Deposit
Along with your offer, you will be required to provide an earnest money deposit, also known as an escrow deposit. This deposit is money that you provide upfront to show the seller you’re serious about the offer, making the seller feel more comfortable taking their home off the market.
The amount of money included in this deposit can be negotiable. However, an earnest money deposit is typically 1% – 3% of the purchase price. The money is held in an escrow account and applied to your down payment and closing costs at closing.
If you decide you won’t buy the home for any reason that is not specified in a contingency, the seller gets to keep your earnest money deposit. This is why it’s vital that you consider the conditions in which you may need to pull out of the contract before submitting an offer.
At the end of the day, including a contingency can be the difference between keeping and losing your earnest money.
Step 7: Get A Home Inspection And Home Appraisal
You may think you’ve reached the finish line when your offer is accepted, but a few critical steps remain. From here, you’ll need to arrange for a home inspection and appraisal.
The home inspection is important, as it will identify areas where major repairs or renovations require immediate attention as well as any work that needs to be completed in the future. Be sure to hire a professional, third-party home inspector to examine the home you’re preparing to buy.
If significant repairs are needed, you can request that the seller complete them before closing. If the seller declines to handle the repairs and an agreement can’t be reached, you may be able to withdraw your offer.
If you’ve included an inspection contingency in your contract, you’ll be able to guarantee that either repairs are made, the cost is deducted from the purchase price, or the contract is broken and your earnest money is returned.
At this point in the process, your lender will require the home to be appraised before they agree to release any funds. A home appraisal provides an estimate of how much a home is actually worth based on comparable sales in the area, market trends, public records and a comprehensive inspection of the property.
Keep in mind the lender will only provide funds to cover the appraised value of the house, so if the appraisal comes in below the purchasing price, you’ll have to either negotiate the price or come up with the difference, which is one of the many reasons having a mortgage contingency is in your best interest.
Step 8: Purchase Homeowners Insurance
Also in your best interest is homeowners insurance, which works as a safety net to protect your home and finances. Although homeowners insurance isn’t legally mandated, most lenders will require you to have an insurance policy on the home before giving you a loan.
Homeowners insurance covers damage to your home and its surrounding structures as well as stolen or damaged personal property. There are varying levels of coverage, ranging from basic to comprehensive, so be sure to do some research into all available options before deciding which home insurance product is right for you.
Step 9: Do A Final Walkthrough
At this point in the home buying process, you’re probably eager to be done – but don’t neglect the final walkthrough. One last walkthrough of the property can help the buyer if something needs to be fixed by the seller before purchasing the home.
Final walkthroughs typically take place a day or two before closing after the seller has moved out, allowing you to ensure all agreed upon repairs have been completed.
Step 10: Close On Your New Home
Congratulations! You’ve made it to the final step of the process. When the time comes, make sure you review your Closing Disclosure, which will outline the terms, final closing costs and any outstanding charges or fees included in your loan. Your lender will send the disclosure to you at least 3 days before closing.
During closing, the property title will pass from the seller to you. A closing agent will oversee this process, which typically takes place at a title company, management firm, escrow office or your home.
The closing agent will ensure that all necessary parties are present at closing. The agent acts as a mediator between you and the seller and confirms that all required documents are signed. Once documents have been signed, the agent will ensure that all funds – including closing fees and escrow payments – are paid and properly disbursed.
During closing, you have two major responsibilities:
- Signing legal documents: This includes the Closing Disclosure, promissory note, deed of trust and certificate of occupancy.
- Paying closing costs: This may include fees for your mortgage application, appraisal, survey and title search as well as paying your down payment.
The Bottom Line: Know The Home Buying Process Before You Buy
Being a first-time home buyer can be intimidating, but by arming yourself with the necessary knowledge and resources, it doesn’t have to be. By following the steps outlined in this article and working with a trusted real estate agent, you can focus on what really matters: enjoying your new home.
Looking for more home buying tips? Check out the Rocket Mortgage Home Buying Resource Center!