Buying a house is a pretty big step, not just financially, but also in terms of your lifestyle. And whether it’s your first time or your 10th time buying a piece of real estate, the process can be a little overwhelming. One way to remove some of the stress is to break the homebuying process into a series of simple steps.
So what are the major steps to buying a house? In this article, we’ll take you through the process one decision at a time.
10 Steps to Buying a House
1) Check your financial health.
First things first: Before you get too deep into the process of buying a house, you’ll want to make sure you are in a good place financially. There are a number of factors to consider as you try to determine whether you are really ready for homeownership:
- Income and employment status. Your lender will need some assurances not just that you have money, but that you have a recurring income that will allow you to keep up with mortgage payments. Generally, lenders will require you to provide evidence that you have been steadily employed for at least two years. When you apply for a mortgage, you’ll need to supply a W-2 and pay stubs, so you might as well start gathering those documents at the beginning of the process.
- Liquid assets. You’ll also want to ensure you have some money saved up that you can use to make a down payment, and also to cover closing costs. As a rule of thumb, you’ll usually want to have anywhere from three to 10 percent of your home’s total value in savings.
- Debt-to-income ratio. To determine your debt-to-income ratio, simply divide your monthly debts by your gross monthly income. Most lenders will require you to have a debt-to-income ratio of no more than 50 percent, but really, the lower the better.
- Check your credit score. Finally, before you get too deep into the process of buying a house, you’ll want to check your credit score. Typically, a score of 620 or higher should be fine to get a conventional loan, but better scores will mean better interest rates. A score of 720 or higher is ideal.
2) Determine your budget.
After you determine that you’re in a good place financially, the next step is figuring out exactly how much house you can afford.
To start with, look back over your debt-to-income calculations, which will show you roughly how much money you’ll have each month to put toward mortgage payments. But also keep in mind that homeownership comes with additional expenses, including utilities, property taxes, homeowners insurance, maintenance and repair costs, HOA fees, and more.
It is often helpful to draft a basic household budget, providing you with a reasonable sense of where your money goes each month and how much house you can realistically afford before you start to feel too much of a financial strain.
3) Get pre-approved for a mortgage loan.
If you’re planning on buying your home in cash, then you can skip this part. For anyone who plans on taking out a mortgage loan (and that’s obviously going to be the vast majority of homebuyers), pre-approval is one of the most important steps in buying a house.
During the pre-approval process a lender will help evaluate your overall financial health. They’ll do this by reviewing:
- Your income statements, such as 1099 or W-2 forms.
- Assets, including statements from your bank accounts and retirement statements.
- Debts, which can include student loan obligations, credit card statements, etc.
- Records of any foreclosures or bankruptcies in your history.
Basically, your lender will take a look at these and other documents to confirm that you are eligible for homeownership, and also to let you know roughly how much house you can afford. The process will end when you receive a pre-approval letter, which is the lender’s endorsement that they will loan X amount of money.
The pre-approval process is important for a few reasons. One, it gives you a more concrete sense of how much house you can afford. Two, a pre-approval letter provides potential sellers with evidence that you’re serious. And three, it can make the rest of the mortgage and closing process move much more expediently.
4) Look for a real estate agent.
Most homebuyers will want to work with a real estate agent to help them navigate the process of buying a house.
This is not necessary, and it does come with some downsides. Most notably, you’ll owe your real estate agent a commission, which is usually three percent of the final sale price.
With that said, a real estate agent can provide you with invaluable guidance and support during the negotiation process. They can help you coordinate with vendors, lenders, and more. Also note that agents are great at helping you find houses to tour, including some that you might not be able to find on your own.
5) Go house hunting!
For most people, the house hunting stage is the most exciting part of the process. Before you actually set foot in a house, though, it’s wise to make a basic list of your priorities and non-negotiables. Provide this list to your real estate agent, who can use the list to help locate some promising homes.
Some specific factors to consider include:
- Square footage
- Number of rooms
- The home’s era, style, and/or condition
- Amenities such as a pool, big backyard, etc.
- Property value trends
- School district zoning
6) Make an offer.
This is where the process of buying a house gets really exciting. Once you find a place that you really like, that fits your budget, and that ticks all of the boxes on your must-have list, you’ll want to make an offer.
A formal home offer is submitted in writing. Your written offer should include basic information about yourself (name and contact information), the price you are willing to pay for the house, and any other terms or contingencies. Your agent can help you draft the right language.
It is typical to include an earnest money deposit with your offer letter… one or two percent toward the final sale price, as a show to the seller that you’re serious about your offer.
7) Get your home inspected.
Once you put in your offer, the seller will have a certain amount of time to accept, reject, or make a counteroffer.
You may negotiate back and forth a few times, but hopefully you’ll ultimately reach a point where you and the seller have a tentative agreement. The next step is to get a home inspection. (Your lender will likely require this.)
During this step in the process, an inspector will assess all of the physical structures in the home, and provide a full report detailing their findings. Based on this information, you may choose to move ahead with your purchase; to back out; to negotiate a different price; or to ask that the seller make certain repairs.
8) Get a home appraisal.
Getting a home appraisal is another important step in the process… and crucially, it is not the same thing as getting a home inspection.
The appraisal is something your lender requires to verify that the house is worth as much as the seller says it’s worth. This is the lender’s way of protecting their investment, and of avoiding paying more than what the place really merits.
Your real estate agent will likely advise you to include an appraisal contingency in your initial offer, providing you with a simple way to back out of the deal or to adjust the terms of the deal should the house appraise for less than the asking price.
9) Get homeowners insurance.
Homeowners insurance can provide you with a financial safety net, should your new home be adversely impacted by fire, storm, or theft. More to the point, your lender will probably require you to have some level of insurance protection. You’ll want to start shopping around for good homeowners insurance policies before closing on your new place.
10) Go to the final walkthrough & closing.
The seller should be agreeable to you taking one final walk through the house before closing. This may be the day before closing, or even the morning of. This provides you with an opportunity to ensure that the seller is fully moved out, and that all agreed-upon repairs have been made.
On closing day, you’ll sign some paperwork, complete a bank transfer for the down payment and closing costs, and receive keys to your new place. Your agent will be there to walk you through these final steps to buying a home, and most of the time a representative from your mortgage company will be there, as well.
Are You Ready to Take the Steps in Buying a House?
Do you think it’s time to begin the process of buying a house? One small step you can take is to complete our quiz, which will help you determine whether you’re ready to sell your current home and to move on to the next one. Take the quiz from SOLD.com today!