10 Steps to Buy a Home

Buying a home involves jumping through quite a few hoops before you can officially call yourself a homeowner. When it’s your first time venturing into the home-buying arena, it’s easy to get overwhelmed if you’re clueless about where to begin. Breaking the process down step-by-step makes the task a little less daunting.

1. Give yourself a financial check-up

The very first thing you need to do before you start browsing property listings is take a good look at where you’re at financially. Specifically, you should be focusing on those things that the lender’s going to consider when determining whether to approve you for a mortgage.

That includes things like your income, debt and savings. Lenders want to see that you have a steady stream of money coming in, that you’re using some of it to build up a savings cushion, and that your debt payments aren’t eating up too much of your earnings each month.

Lenders are also going to be interested in what your credit looks like. If it’s been awhile since you checked yours, you’ll need to get a copy of your reports from all three of the credit bureaus. Go over them carefully to make sure that all of your accounts are being reported correctly. If you find an error, don’t waste time in disputing it with the reporting agency.

Aside from checking your report, you should also take a peek at your credit score. Your score can give you an idea of how easy it’ll be to get approved and what kind of interest rates you’ll qualify for on a mortgage.

2. Plan your home-buying budget

Once you’ve gone over your financial details you can move on to the second step, which is determining just how much home you can afford. The easiest way to do that is to plug in your income and debt information into an online mortgage calculator, but keep in mind that this is a rough estimate at best and what a lender is willing to offer may be very different.

As a general rule of thumb, you should be spending no more than 36 percent of your income on debt each month, with no more than 28 percent of what you make going towards your housing payment. Dividing your monthly debt payments by your monthly income will give you an idea of whether you’re above or below this threshold.

3. Get your down payment together

There are two good reasons to bring a big down payment to the table when you’re buying a home. First, it shows the seller that you’re serious about buying, which can work to your advantage if you end up in a bidding war.

The other benefit has to do with the terms of your loan. The more money you put down, the less you have to finance which means you’re paying less in interest over the life of the loan. Putting a minimum of 20 percent down also allows you to side step private mortgage insurance (PMI), which can drive up your monthly payment.

If you haven’t saved anything towards a down payment, you may have to delay your home-buying plans until you can raise the cash. Trimming your budget to the bare bones, selling things you don’t need or starting a side hustle are all effective ways to generate some extra money for your down payment fund.

The IRS allows first-time buyers to pull up to $10,000 out of an Individual Retirement Account without a penalty for down payment purposes. If all else fails, you could ask a family member to gift you the money you need. Just remember that the person giving it has to acknowledge it as a gift in written form for the lender to accept it.

4. Get pre-approved for a loan

Getting pre-approved for a mortgage is a smart move for a few reasons. First, it gives you an explicit idea of how much home you can afford and what rates you’ll qualify for. Knowing what kind of mortgage you’re able to get before you start looking at properties makes it easier to weed out homes that aren’t in your price range.

Pre-approval also helps when it’s time to make an offer. If you’re interested in a property that has multiple offers, the lender might be more inclined to accept yours if you’ve already gotten the green light for a mortgage.

Finally, being pre-approved can save you valuable time. Unlike pre-qualification, pre-approval involves a credit check and confirmation of your income. As long as your financial situation doesn’t change drastically, the information provided during pre-approval can be used to speed the process along.

5. Find the right agent

Now that you’ve been pre-approved and you’ve gotten your down payment ready, you can move on to finding an agent to guide you through the rest of the process.

When you’re comparing agents, pay attention to how much experience they have in the industry, how deep their knowledge is of the buying market in your area and what their fee structure looks like. The right agent can make the home-buying process a breeze but the wrong one can turn it into a nightmare, so you want to spend some time vetting your prospects before making a final decision.

6. Shop around for your dream home

One of the most challenging parts about buying a home is finding one that you love at a price you can afford. Doing some research can help you narrow down the list so you can find the right property.

For example, if you’ve got your eye on a specific neighborhood you’d want to look at what homes have been selling for in recent months. If prices are higher compared to other areas nearby and homes aren’t staying on the market for long that tells you the neighborhood is a hotspot and you’re likely to face more competition.

If you have kids, you might want to target your search to homes that are located in a specific school district. Someone who’s older might prefer a quieter neighborhood while a younger buyer may have their sights set on a trendier spot.

The point is you need to be looking at the bigger picture beyond just what you can afford. Just because a home is a good fit for your budget doesn’t mean you’re going to love living in it, which is why it’s so important to scope out the neighborhood before you commit.

7. Make an offer and sign a contract

If you’ve found your dream home you’ll have to act quickly to keep it from getting away. At this stage, you’ll need to authorize your agent to put in an offer on the home.

When you’re working up an offer, you don’t want to automatically start off at the home’s selling price. Going a few thousand dollars lower leaves you some wiggle room for negotiation. Using the sale prices for comparable homes in the area as a guideline is a good baseline if you’re not sure what to offer.

The one thing you don’t want to do is to go in with a bid that’s too low. If your offer is well below what the seller is asking, they may get offended and refuse you flat-out. At that point, you’re going to have a harder time getting them to agree to the price you want.

Assuming your offer is accepted, you’ll need to sign a purchase contract before you can move forward with getting a loan. This contract spells out the terms under which you’ll buy the home and any conditions that can cause the contract to be cancelled. The seller will also expect you to pony up your earnest money at this stage, which is a deposit of sorts for the home.

8. Line up financing

With a contract in place, you’re now ready to apply for a mortgage. If you’ve already gotten pre-approved, this step may not be that difficult. If not, you’ll have to do some comparison shopping with different lenders to see who’s offering the best interest rates.

You’ll also have to decide what type of loan you want to apply for. Conventional loans, for example, come with fixed rates and terms lasting from 15 to 30 years. Adjustable rate mortgages feature a rate that’s fixed for a set period of time and then adjusts periodically. If you don’t have the full 20 percent to put down, you might need to look into low-down payment options, such as an FHA loan or a VA loan if you served in the military.

Once you’ve settled on a loan and a lender, you’ll need to go through the application process. Be prepared to hand over copies of your bank statements, pay stubs and tax returns after filling out the initial application. You’ll also have to give your consent for the lender to pull your credit.

9. Tie up loose ends

If your loan is approved and you’ve made it this far, there are only a few more hurdles to clear before you’re a homeowner. Two of the most important ones involve getting the home appraised and inspected.

The lender requires an appraisal to make sure the home is worth the amount of money they’re planning to lend you. The purpose of the inspection is to ensure that there are no major structural defects with the home. You’ll need to have a separate pest inspection done to check for termites.

If the appraisal comes back with a value that’s too low, you’ll need to either ask the seller to come down on the sale price or get a second appraisal. When the inspection uncovers a major problem, you’ll have to get the seller to agree on how repair costs will be handled before the sale can be finalized.

Assuming the appraisal and inspection don’t raise any issues, you’ll need to get title insurance and homeowner’s insurance next. Title insurance covers the lender in case it turns out that there are issues with the title after you’ve completed the purchase of the home. Getting this kind of coverage involves paying a one-time fee. You can purchase a separate title policy for yourself but it’ll cost you extra.

The best place to start shopping around for homeowner’s insurance is your car insurance company. Many insurers offer a discount when you take out multiple policies. If yours doesn’t or they want to charge you an arm and a leg for coverage, take some time to compare other insurers to see how the premiums add up.

10. Seal the deal

By now, you’ve been waiting weeks or even months to claim ownership of your own and there’s just one last thing you need to do—the closing. This is when you sign off on all the loan paperwork to make the home yours.

You’ll need to do a walkthrough a day or two before you head into the closing to make sure there are no lingering problems that need to be resolved. The lender will also give you a HUD-1 Settlement Statement prior to closing that lists out all the terms of the loan, including any fees you’ll need to pay at closing. If you need to dispute a charge or change any of the loan terms, you’ll have to wait until a new settlement statement can be issued before you’ll be able to close.

Besides signing the paperwork, you’ll need to pay any closing costs not covered by the seller. Closing costs typically run between 2 and 5 percent of the home’s purchase price. Lenders usually require you to pay closing costs with certified funds so make sure you’ve got a cashier’s check or money order from the bank ready.

The bottom line

As you can see, buying a home can be a pretty exhaustive exercise and you have to be ready for everything that it involves. Knowing what you’re responsible for and what the lender expects can smooth out some of the bumps along the way.