If you’ve decided you’re ready to buy a house, you’ve probably already started looking at potential homes online. Naturally, you want to see the possibilities — and dream about your new home and neighborhood. But just how do you buy that house you fell in love with online? Yahoo Finance has compiled 13 steps to help simplify your path to homeownership.
Here’s a step-by-step guide for how to buy a house.
Read more: Everything you should know as a first-time home buyer
In this article:
1. Know how much house you can afford
4. Shop lenders for the best mortgage
6. Find a buyer’s real estate agent
9. Get a home inspection and appraisal
10. Shop for homeowners insurance
11. Choose your lender and apply for the mortgage
As Step 1, you’ll want to determine how much house you can afford comfortably. If you properly gauge your financial capacity, your monthly mortgage payment will feel right from the beginning and get even easier to make over time.
Divide your gross (pre-tax) monthly salary by four. That’s a good start for a target monthly payment. But that’s not just principal and interest payments. You will also want to include property taxes and homeowners insurance in the total.
Mortgage lenders often recommend your housing costs total around 28% of your gross pay. That calculation is known as your debt-to-income ratio (DTI).
Learn more: How much house can I afford? Use the Yahoo Finance home affordability calculator.
The down payment will be the biggest chunk of cash you’ll need. That can range from 3% of the purchase price (some lenders even offer 1%-down loans) to the optimum 20%. “Optimum” because with 20% or more down, you won’t be charged private mortgage insurance. PMI is a fee that protects the lender if you default on the loan.
Other low- and no-down-payment options are available, which we’ll cover later.
You’ll also need to factor in closing costs — cash required at closing to cover the fees associated with your loan. Some common closing costs to budget for include your title search, real estate attorney, home appraisal, and loan origination fees. Your lender can give you a full breakdown of your loan costs and the cash you can expect to bring to the closing table.
Read more: How much money do I need to buy a house?
Prioritize paying off debt before buying a home. Why? Your debt-to-income (DTI) ratio — your monthly debt payments divided by your pre-tax monthly income — has a heavy impact on your borrowing costs.
The higher your DTI, the more difficulty you may have securing a home loan because lenders will think you cannot successfully take on more debt and remain current on your payments. If you can get a mortgage with a higher DTI ratio, you’ll likely be charged a higher interest rate on your loan.
Paying down debt before applying for a mortgage can help bring down your DTI ratio and increase your approval odds — and at a lower interest rate, to boot.
For example, say you make $4,000 monthly. If you have $1,000 in existing debt payments each month plus a mortgage payment that would cost $1,000, here’s how your DTI ratio would look:
$2,000 total debt payments / $4,000 total income = 0.5 or 50% DTI ratio
If you paid your existing debt down to $100 per month, it reduces your DTI ratio:
$1,100 total debt payments / $4,000 total income = 0.275 or 27.5% DTI ratio
Dig deeper: What is your debt-to-income ratio, and why does it matter?
Knowing your credit score is a must. Many financial services providers offer FICO scores for free, and the numbers will vary a bit from each. Knowing generally where you fall on the bad-to-excellent scale will suffice. The higher your score, the better your bargaining power for a lower interest rate and fewer fees.
If you’re going for a conventional loan — what you may think of as a “regular mortgage” — you’ll typically need a credit score of 620 or higher. For first-time buyer programs like FHA loans, you’ll need a credit score of at least 580 to qualify for the lowest 3.5% down payment. Your credit score for FHA loans can be as low as 500, but you’ll need to increase your down payment to 10%.
Dig deeper: The credit score needed to buy a house
Lenders want to see that you’ve got some money left over after making the down payment and covering the closing costs. It doesn’t have to be a huge amount, but showing that you have a bit of a cash cushion during the purchase and once in the home is a good thing.
Now it’s time to actively save for a house. That lump sum down payment has to be in a savings account or somewhere readily accessible. From the minimum 1% of the purchase price to the preferred 20% down, or anywhere in between, it’s got to be money ready to be in motion.
Read more: How to save for a house in 7 easy steps
Over the last 10-plus years, more than 60% of home buyers said they shopped more than one lender, according to Fannie Mae research. Gone are the days when buyers just went with a real estate agent’s “preferred lender,” no questions asked. Comparison shopping mortgage lenders for the best rate and most favorable fees is a thing.
When comparing lenders, it’s important to look beyond the advertised annual percentage rate (APR) for your preferred loan. You’ll want to compare key criteria that impact your total loan experience.
-
Origination fee. Look for lenders with low to no origination fees to help keep costs down.
-
Total closing costs. Comparing Loan Estimates from all lenders will help uncover costs beyond your monthly mortgage payment so you can find the lender with the lowest interest rate and total loan costs.
-
Lender reviews. A simple web search can unearth how other borrowers felt about their experience with a lender. Look for those with glowing reviews and top-notch customer service.
Dig deeper: The best mortgage lenders right now
Getting a written mortgage preapproval in hand is another step rarely taken for granted these days. That’s because real estate agents and home sellers want to be sure you’re a serious shopper.
Yahoo Finance tip: The provider who gives you the preapproval letter doesn’t have to be your final lender choice. You’ll want to take one more pass at getting a better loan offer once you have a buy-sell agreement in hand.
Learn more: How to get a mortgage preapproval
Now you’re set to shop for that perfect house. Almost. You need the right real estate agent on your side — and that’s not the seller’s agent shown on the “for sale” sign or the “listing agent” named in the home’s online profile. Talk to two or three buyer’s agents and find a strong negotiator and advocate.
Read more: What is a real estate agent, and what do they do?
The fun part: looking at houses. Sure, you skipped down to this house-hunting step a bit early, right? Not to worry, because now that you’ve completed steps 1 through 6, it’s time for a serious search for the perfect home.
Attend some open houses and scour the local market for neighborhoods and amenities that best suit you. Find a couple of contenders: one to make an offer on and some backup options if your favorite falls through.
Read more: Here’s what to look for when buying a house
Your buyer’s agent will handle the details of making an official offer and negotiating counteroffers.
When you make an offer on a house, you’ll likely have to put up some earnest money with your written offer. That can be from several hundred to a couple thousand dollars. But don’t worry, this isn’t a new chunk of cash. It’s a small slice from your down payment and will be applied to the total money down later.
Lenders will also want to see a cash cushion available for maintenance, repairs, furniture, and other related expenses, such as moving costs.
Dig deeper: How to make an offer on a house
Then comes a home inspection and home appraisal. Both protect you from unknown problems and valuation issues, but they’re very difference processes.
A home inspection looks for structural integrity issues in a home, such as a leaky roof, mold, plumbing, and electrical problems.
A home appraisal is an estimate of the home’s fair market value compared to similar properties in the area. The appraisal assures the lender that the property is worth enough to warrant a loan approval — and alerts you to the possibility of overpaying for a property that may be worth less than you thought.
Read more:
It’s time to shop again, this time for insurance. Your lender will require it, and of course, you need it. It’s another round of comparison shopping between multiple providers. Bundle and save? You’ve got to put every sales pitch to a numbers test.
Learn more: What is homeowners insurance?
With an offer in hand, you can get real-deal loan offers. Each lender vying for your business will give you a written offer. If you have each lender provide a zero-discount-points offer, you can compare apples to apples and then decide if you want to buy points to lower your interest rate.
Before closing, you’ll do one more walk-through with your agent to ensure everything is as promised. Repairs, if any, are completed; things like that.
Read more: What to expect at a final walk-through before closing
You’ll face a pile of paperwork, so be patient.
And there are closing costs. Figure those will amount to another 3%-4% of the home’s selling price.
Ask questions and understand what you’re signing. If there are any last-minute surprises, you can still walk away. But don’t worry, that’s not likely to happen. You’ll probably have an, “Am I really doing this?” feeling, but it will soon transform into delight and excitement when you get the keys.
Congratulations. You bought a house.
Dig deeper: Closing on a house — What to expect and how to prepare
When buying a house, the first thing to do is get your finances in order. Figure out how much house you can comfortably afford (both in terms of the home price and the monthly payments), see if you have enough money, and check your credit score and debt-to-income levels.
The first steps in purchasing a house are knowing how much you can afford and getting your finances in order, including saving for a down payment. Then, you can start shopping for a Realtor and mortgage lender, get preapproved by a few lenders, and find a house you like. If you make an offer and it is accepted, you’ll schedule an inspection and appraisal while choosing homeowners insurance. Finally, you’ll officially apply for a mortgage with the lender of your choice, do a final walk-through of the house, and — finally — close on the home and receive your keys.
Having $5,000 may be enough to buy a house, but you’ll likely need a bit more cash on hand. Closing costs typically cost between 3% and 6% of your mortgage balance, so it might be enough to cover closing costs if you borrow as little as $100,000. If you get a 0% down mortgage, like a VA or USDA loan, you could buy a house with little to no money down.
This article was edited by Laura Grace Tarpley.