Buying A House: The Steps To Purchasing A Home
Sarah Li Cain11-minute read
November 12, 2021
Understanding how to buy a house doesn’t have to be complicated or overwhelming. Yes, there may be a lot of steps involved, but once you have an overview of what happens in what order, you can worry about the little steps as you need to. With the help of an experienced real estate professional, you could be moving into your dream home sooner than you think.
Here’s an in-depth overview of the steps you’ll need to take when buying a house.
How To Buy A House, Explained
The home buying process takes time and the overall experience will vary from person to person. Although each experience is different, you’ll most likely need to follow these steps from start to finish.
1. Establish A Budget
Before you even start looking at homes or comparing mortgage rates, you’ll need to know how much house you can afford.
This isn’t just about how much you’ll be approved for in terms of what a mortgage lender will offer. Rather, it’s your overall housing expense and your other monthly expenses, which can include the following:
- The mortgage payment
- Home insurance
- Utility costs
- Homeowners association dues
- Regular living expenses
- Outstanding debts
What many people fail to realize is that homeownership comes with costs beyond the monthly mortgage payment.
When considering how much you can afford, think about how much you currently spend on housing. You can use this number to determine whether you can comfortably afford to spend more or whether your current housing costs make it hard for you to afford other living expenses.
If you buy a house on the higher end of what you can reasonably afford, you may find that you won’t have much money left over to deal with costs such as home maintenance and property taxes. It could also mean you can’t meet your other financial goals, such as saving for a car or setting aside more money for retirement.
Of course, how much you can afford is only part of the equation. Mortgage lenders use their own calculations to determine how much they’re willing to lend you.
A home affordability calculator can give you an idea of how much you may be able to borrow. These calculators look at your income, debt, estimated down payment and closing costs, credit score, and current mortgage rates to give you an estimate of how much home you can afford.
Before you start looking for a home, you should have a number in mind to make the home buying process much smoother.
2. Start Saving For A Down Payment
Most lenders prefer that buyers have at least some money saved up for a down payment. For most conventional lenders, you may need to put down around 5% of the home price, though there are programs for first-time home buyers that allow you to make a down payment of 3%. Government-backed programs, such as FHA loans, can be as low as 3.5%.
Whatever type of loan you go with, it’s a smart idea to start saving as soon as you can.
3. Get Preapproved For A Mortgage
Getting a mortgage preapproval is an important step because it shows you exactly how much a lender is willing to lend you, and shows home sellers you have the means to buy a house. That's because a lender has looked at your financial situation and determined how much they’re willing to lend you, so you’re also much more likely to be taken seriously by sellers and their agents.
To get preapproved, you’ll need to submit personal and financial information such as your income, assets, debts and credit history. Keep in mind that getting preapproved doesn’t mean you’re guaranteed a mortgage — the lender won’t make their final decision until the closing process.
4. Find A Real Estate Agent
Once you’ve got your mortgage preapproval in hand, it’s time to find the right real estate agent.
Working with a real estate agent is probably the easiest way to streamline the home buying process.
They’ll help you with the following:
- Help you find and tour homes
- Put an offer on a house
- Negotiating with sellers
- Guiding buyers through the closing process
Finding the right agent is vital to a successful home buying process — it’s a smart idea to search around and vet potential candidates before making a decision. You want someone whom you not only trust professionally, but is a good fit personally as well.
After all, you’re going to be spending a lot of time with them, so you need to know you can trust their opinions.
5. Start Looking At Properties
Once you’ve got a preapproval and found a real estate agent you want to work with, you can start looking at properties. While the house hunting part of the home buying process can be a lot of fun, it’s also a lot of work.
Each home showing you go to is an opportunity to figure out what you like and what you want to avoid, meaning they can help you further narrow down the types of homes you’re interested in. You may find that you have to attend a lot of showings and open houses before you find a home you really like.
Work with your real estate agent to determine exactly what you want out of your home.
Some questions to consider include:
- How many bedrooms do you need?
- How about bathrooms?
- What kind of neighborhood is best for you?
- Do you need a big backyard?
- Do you want a detached home, condo or townhouse?
- What amenities are important to you?
This will help you narrow down your search and ensure that you’re only looking at homes you’d be happy living in. Sure, you can tell a lot about a property through photos, but seeing properties in person is ideal. That’s because you will be better able to get a feel for the space and decide if it’s the right home for your needs.
6. Make An Offer
Once you’ve found a house you love, it’s now time to make the offer — your agent can help with crafting a compelling offer and pass it onto the seller’s listing agent.
The biggest piece of your offer letter will be your offer price – you can decide to bid over, at or under the listing price. However, if it’s a seller’s market and you’re competing against a lot of other buyers, you might need to work with your agent to make your offer more attractive to the seller. Yes, it could mean offering at or above the listing price.
Another aspect to a real estate offer will also usually include certain contingency clauses. These are terms in which you or the seller can back out of the purchase contract without any consequences.
Some common contingencies include:
- Home inspection contingency: if the home inspection comes in less than favorable, home buyers can renegotiate or back out of the deal
- Financing contingency: if the home buyer can’t find a loan, then they have the right to find alternative financing or back out of the deal
- Appraisal contingency: if the home comes in at a value that’s less than the listing price, buyers can negotiate or back out of the deal
- Title contingency: If there are judgements or liens on the house, the buyer can negotiate to have them cleared or back out of the sale
To show the home seller you’re serious about buying the house, you’ll typically include an earnest money deposit as part of your offer. The money also acts as insurance for the seller in case you back out of the home sale for a reason not stipulated in the purchase agreement.
Once you’ve made an offer, the seller can either accept it, reject it or make a counteroffer. If they accept it or you come to an agreement on a counteroffer, you’ll move ahead with the process and the home will officially be under contract. If the seller rejects your offer, you’ll have to continue looking at homes.
7. Get The Home Appraised
Getting a home appraisal is a standard part of the mortgage application process where a professional real estate appraiser determines the fair market value of homes. The point of an appraisal is to help assure lenders (and you) that you’re paying a fair price for the home.
You don’t need to be present for an appraisal. In most cases the appraiser will look at similar homes in the area that have recently been sold, called comps (short for comparables). The appraisal will be completed on or before the date stipulated on your purchase contract. If you have an appraisal contingency, you can renegotiate the price or walk away if the appraisal comes in too low for you.
8. Get The Home Inspected
Getting a home inspection is one of the best things that prospective buyers can do when buying a house. A home inspection is where a professional inspector walks through the property, looks at its components and for potential problems. They’ll try to identify needed repairs, elements that need replacing, or any safety issues that are a cause for concern.
A home inspection is typically done early on in the closing process – typically within a week or so after the buyer and seller enter into the purchase agreement. The buyer is responsible for finding and paying for a home inspector – your real estate agent can make a few recommendations.
If the inspection report comes back with significant issues, you can negotiate with the seller to have them complete repairs or offer a repair credit at closing. Or, if you can’t come to an agreement, you may choose to walk away from the purchase.
9. Request Repairs Or Credits
The home inspection gives buyers the chance to further negotiate with the seller. As in, the buyer has the right to ask the seller to make repairs or give them money off the sale price (a credit) to take care of the repairs themselves.
Keep in mind that sellers are not obligated to agree to the buyer’s requests and may give a counteroffer. Again, the buyer can back out of the contract if there’s a home inspection contingency in place and neither party can come to an agreement.
10. Stay In Contact With Your Lender
Buyers need to stay in contact with their lender until they finally close on the home. That’s because you’ll want to make sure you’re providing the required documentation for the underwriting process, and to keep updated to make sure the financing is cemented on closing day. The sooner you provide any additional documentation and information through the underwriting process, the smoother your closing process will go.
11. Do One Last Walkthrough Of The Property
It’s a smart idea to do a final walkthrough of the property before going to closing, as it gives buyers a chance to inspect any repairs made or identify any damage the seller caused before getting the keys.
Buyers will typically do a walkthrough of the property with their real estate agent, who can also help point out any potential causes for concern you’ll need to bring up during closing. At this stage, it’s not about cosmetic changes — you’ll want to make sure major components work, like the plumbing, electricity and HVAC system.
12. Close On The House
You’re almost at the finish line! It’s time to become the legal owner of your new home. If you follow all the above steps, and get your final loan approval, you can close on the home.
Prior to closing, you’ll receive a Closing Disclosure from your lender, usually a few days before your scheduled closing date. This document will state how much you’ll pay at closing, including any closing costs you’re responsible for.
You’ll also do a final walkthrough of the home to ensure that everything is as stated in your purchase agreement. The seller should be completely moved out at this point (unless otherwise stipulated in your contract) and any agreed-upon repairs should be completed.
Closing day might feel a little anticlimactic to you. It’s an exciting day, but it’s also a day filled with lots and lots of paperwork.
When you attend your closing, make sure to bring your photo ID, proof of insurance, copies of your Closing Disclosure and purchase agreement, and anything else you’re told to bring.
Confirm how you’ll be paying your down payment and closing costs. If it’s with a cashier’s check, be sure to bring that to closing. If you’re wiring the funds, be sure to set that up ahead of time to avoid delays that could throw off your closing.
What Do You Need Before You Can Start The Home Buying Process?
You’ll want to be prepared as much as you can before you take the plunge and start the home buying process. Some of what you’ll need includes a stable source of income, a good credit score, and ample savings.
Having a steady source of income is a prerequisite for buying a home. If you’re using a mortgage to purchase a home, your mortgage lender will want to know that you’ll be able to keep up with your monthly mortgage payments.
Beyond a mortgage payment, you’ll also need to be able to cover other home-related expenses, including utility bills, homeowners association fees, and repair and maintenance costs.
This requirement can make mortgage approval trickier for those whose income fluctuates a lot from year to year, or those who have an inconsistent work history. Even if not, it’s still a smart idea to find ways to increase your income (and have the proof to back it up) so you can more than comfortably afford your new home.
A Low Debt-To-Income Ratio
It’s not just the amount of money you have coming in that’s important; how much you’re spending matters, too – at least when it comes to your other debt obligations. That’s why lenders look at your debt-to-income ratio (DTI) as one of many factors to determine how much of a risk you are as a borrower.
Your DTI is the portion of your monthly income that goes toward debt payments such as student loans, credit cards, auto loans or other monthly bills. If a large portion of your monthly budget is tied up in paying off debt, it might be hard for you to qualify for a mortgage.
To calculate your DTI, first add up all of your monthly debts, then divide that by your gross monthly income before taxes. For example, if you make $4,000 a month and you owe $1,600 in loan payments, your DTI is 40%.
It’s a smart idea to pay down existing debts before you apply for a mortgage as it will help lower your debt-to-income ratio and increase your chances of approval. You can also consider increasing your income as well.
A Good Credit Score
Mortgage lenders will request a copy of your credit report. To determine whether you qualify for a mortgage, lenders have to look at your credit score. The better your score, the better your chances of being approved for a lower interest rate, saving you money for the life of your loan.
Your credit score gives lenders an idea of how you’ve handled debt in the past, which can help them determine how much risk they'll take on by lending to you. Those with really good credit scores – usually anything above 740 – may be offered better terms when they apply for loans. In other words, the lower your credit score, the less options you have when it comes to shopping around for mortgages.
Most mortgage lenders and insurers have minimum score requirements for their loans. For conventional loans, the minimum score required is typically 620. For FHA loans, it’s typically 580, though some lenders may go lower.
Buyers need to have money saved for both emergencies and a down payment before they can start looking with confidence. You don’t want to drain your savings to get into a home, only to find a few months later that you need a couple thousand dollars for, say, an emergency roof repair.
It’s always a good idea to have some money tucked away in savings for unexpected costs, but when you’re a homeowner, that extra cash is all the more vital.
Homeownership comes with a lot of different expenses, some of them routine and others that pop up out of nowhere. Having a financial safety net is critical to ensuring that you’re able to care for and remain in your home.
As for how much to set aside, a good rule of thumb is around 1% to 4% of your home’s value each year. This amount can cover routine maintenance (like a HVAC tuneup) all the way to pest control. In general, the older your home, the more you may want to put away in savings, as you’ll probably need to spend more on repairs or upgrades.
The Bottom Line: Ready To Buy Your First Home?
Buying a house can be complicated and confusing for many buyers, but understanding what steps you should take and why each is important will make your home buying experience much more manageable.
Ready to take the first step? Get preapproved for a mortgage to get the best idea of what you can afford.
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