How To Buy A House In 13 Steps
Most home sales involve the following 13 steps. Let’s take a closer look at what each step involves and what you’ll do along the way.
Step 1: See If You Meet The Requirements To Buy A House
Buying a house is a major commitment. Before you shop for properties and compare mortgage options, you’ll need to make sure you’re ready to be a homeowner.
The first step is determining what are the requirements to buy a house. Below, we’ll dive into the factors lenders and homeowners alike should consider.
Income And Employment Status
Your lender won’t only want to see how much money you make. They’ll also want to see a work history (usually about 2 years) to make sure your income source is stable and reliable.
Assemble the right documentation to show steady employment. If you’re on payroll, you’ll likely need to provide only recent pay stubs and W-2s. If you’re self-employed or receiving passive income like social security or pensions, you’ll need to submit your tax returns and other documents.
Debt-To-Income Ratio
Debt-to-income ratio (DTI) is another factor mortgage lenders assess when considering your loan application. Your DTI helps your lender see how much of your monthly income goes to debt payments so they can evaluate the amount of mortgage debt you can take on.
DTI is calculated by dividing your total monthly debt by your gross monthly income, then multiplying this number by 100 to get a percentage. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month and your gross monthly income is $6,000, your DTI is $2,000/$6,000, which is multiplied by 100 to get 33%. Your lender will use the debts shown on your credit report to calculate your DTI.
It’s smart to review your DTI before applying for a loan. You’ll need a DTI of 43% or less to qualify for most mortgage options. However, this number varies based on lender, loan type and other factors.
Credit Score
Your credit score plays a significant role in what loans and interest rates you qualify for. It gives lenders insight into your history of paying your debts on time. Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to apply for a mortgage. A higher credit score (and lower DTI) means better loan options with lower interest rates.
Your credit score is based on the following information:
- Your payment history
- The amount of money you owe
- The length of your credit history
- Types of credit you’ve used
- Your pursuit of new credit
Down Payment
Buying a home with no money down is possible, but most homeowners need to have some cash on hand for a down payment.
The amount you’ll need for a down payment depends on your loan type and how much you borrow. If a down payment is required, you can buy a home with as little as 3% down (although putting down more has benefits).
Closing Costs
You’ll also need to pay closing costs before moving into your new home. Closing costs are fees that go to your lender and other third parties in exchange for creating your loan.
The specific amount you’ll pay in closing costs will depend on where you live and your loan type. It’s a good idea to prepare to pay 3% – 6% of your loan amount in closing costs. In some situations, part or all of the closing costs can be rolled into your mortgage or paid by the seller as part of agreed-upon seller concessions.
Willingness To Live In One Place
A mortgage can be a 30-year-long commitment. Although you don’t need to live in your home for the whole mortgage term, it’s still a big decision. When you own a home, it’s more difficult to move. Unless you’re buying a second home or investment property, you’ll likely need to sell your current home first, and this can take time.
Decide whether you want to live in the same area for at least a few years. Consider your career goals and family obligations. These factors will play a major role in the type of home you buy and the location you choose for your primary residence.
Timing
Deciding whether it’s a good time to buy a house depends on a variety of personal factors (such as financial readiness and lifestyle preferences) and market conditions (such as economic health and current mortgage rates).
Ultimately, the right time to buy a home depends on your unique situation. A loan officer can help you decide if the timing is right for you.
Providing a down payment greater than the minimum required does come with certain advantages. Typically, it means you’ll have more mortgage options. It also usually means you’ll have a smaller monthly payment and a lower interest rate. Plus, if you put at least 20% down on a conventional loan, you won’t need to pay for private mortgage insurance (PMI).
Many states offer down payment assistance programs to qualified buyers, so research whether any assistance is available to make your home purchase more affordable.
Closing Costs
You’ll also need to save money to cover closing costs – the fees you pay to get the loan. Several factors determine how much you’ll pay in closing costs, but it’s best to prepare for 3% – 6% of the loan amount. This means if you’re borrowing $200,000 for your purchase, you might pay $6,000 – $12,000 in closing costs.
The specific closing costs will depend on your loan type, your lender and where you live. Most homeowners will pay for items like appraisal fees and title insurance. If you take out a government-backed loan, you’ll typically need to pay an insurance premium or funding fee upfront.
Before you close on your loan, your lender will give you a document called a Closing Disclosure, which specifies the closing costs you’ll be responsible for and how much you’ll need to pay. Look over your Closing Disclosure carefully to know what to expect and catch any errors.
Step 4: Decide What Type Of Mortgage Is Right For You
Before you can apply for a mortgage, you’ll need to decide on the best type of loan for you and which one you’ll qualify for. Let’s take a look at some common loan types:
- Conventional loan: Conventional loans are popular mortgages not backed by the federal government. Most conventional loans are conforming loans, meaning they conform to the limits put in place by the Federal Housing Finance Agency (FHFA).
- FHA loan: Backed by the Federal Housing Administration, FHA loans are less risky for lenders because the government insures them if borrowers stop making payments. As a result, credit score requirements are less strict for FHA loans than for conventional loans.
- VA loans: These mortgage loans are insured by the U.S. Department of Veterans Affairs and available to qualifying service members, veterans and qualifying surviving spouses. The most popular benefit of VA loans is that no down payment is required. Rocket Mortgage offers VA loans with a minimum credit score of 580.
- USDA loans: A USDA loan, another type of government-backed loan, helps people buy homes in rural areas. You can get a USDA loan with 0% down, but your home must be in a USDA-eligible rural area and you must meet income eligibility rules.
Step 5: Get Preapproved For A Mortgage
When you’re ready to start house hunting or if you’ve found a home you want to buy, it’s time to get preapproved for a mortgage. After you apply, your lender will evaluate your credit, assets and income and give you a preapproval letter stating how much you’re approved for. Based on your preapproval letter, your real estate agent can help you find homes within your budget.
Rocket Mortgage offers a Verified Approval1 so you can make an offer confidently because you’ll know how much home you can afford. We verify your credit, income and assets with documentation you provide, such as W-2s, pay stubs and account statements. This can help strengthen your standing in a competitive bidding war with other buyers who don’t have an approval.
Step 6: Find The Right Real Estate Agent For You
Multiple people are involved when getting a mortgage and buying a house. As your representative in the home purchase transaction, your real estate agent will look out for your best interests by finding homes that meet your criteria. These local market experts also get you showings, help you write offers and negotiate on your behalf.
As a buyer, you can usually work with a real estate agent for free. In most cases, the seller will pay the buyer’s real estate agent’s commission. The buyer’s agent commission is usually 3% of the purchase price.
Can You Buy A House Without An Agent?
It’s possible to buy a house without a real estate agent. But this isn’t recommended, especially for first-time buyers. Working with an agent can help you navigate the real estate market, submit a legally sound offer and avoid overpaying for your property.
How Do You Find A Real Estate Agent?
Begin by asking family members and friends for recommendations to find a good real estate agent. Direct referrals are often the best way to get unbiased information on agents in your area.
Consider working with a Rocket Homes℠ Verified Partner Agent. Rocket Homes agents have proven track records of success and are at the top of their field, so you know you’ll get expert information.
Step 7: Begin House Hunting
Your real estate agent will help you hunt for houses within your budget. It’s a good idea to make a list of your top priorities, some of which might depend on the type of house you’re looking for and whether you’re in search of a starter home or a forever home.
What To Look For When House Hunting
Here are some factors to consider when shopping for a house:
- Price
- Square footage
- Home condition and possible need for repairs
- Access to public transportation
- Number of bedrooms
- Backyard/swimming pool
- Local entertainment options
- Local school district ranking
- Property value trends
- Property/real estate taxes
Rank your priorities from most to least important and show your agent this list. Your agent will then show you homes that fit your criteria. Searching for the perfect home may take time, so don’t get discouraged if your hunt takes longer than you expected.
Make sure you see plenty of homes before deciding which property is right for you. As with much of the home buying process, you can go online to do a great deal of house hunting. Once you find a property that fits your needs and budget, it’s time to make an offer.
Step 8: Make An Offer On A House
When you decide to make an offer on a home, you must submit an offer letter. Your agent will almost always write the offer letter on your behalf, but you can write it yourself if you choose. Your offer letter will include details about you (like your name and current address) and the price you’re willing to pay for the home. It may also include your earnest money deposit.
What Is An Earnest Money Deposit?
Most offers also contain an earnest money deposit, typically 1% – 3% of the purchase price, which shows the seller you’re serious about purchasing. Your real estate agent can tell you what’s common in your market. Your earnest money deposit goes toward your down payment and closing costs if you buy the home. If you agree to the home sale and later cancel, you’ll typically lose your deposit.
Once your offer letter is finalized, your agent will contact the seller or the seller’s agent to submit the offer. Your letter will include a deadline for the seller to respond to your offer.
What Happens After You Submit An Offer?
From here, the seller can respond in one of three ways:
- Accept the offer: If the seller accepts the offer, you can move on to the next step.
- Reject the offer: If the seller rejects your offer, you can choose to submit another offer or move on to another home.
- Send back a counteroffer: The seller’s counteroffer may include a change in the purchase price or to the terms of the sale. You can accept the counteroffer, reject it or make another counteroffer.
Negotiations may continue for some time after you submit your offer. Let your real estate agent help you manage negotiations – and don’t be afraid to walk away if you can’t reach an agreement. Once you and the seller agree to an offer, it’s time to get ready for the inspection and appraisal.
Step 9: Get A Home Inspection
Lenders usually don’t require a home inspection to get a loan, but you should still get an inspection before buying a property.
During a home inspection, an inspector will go through the home and look for specific problems. They’ll test electrical systems, make sure the roofing is safe, ensure appliances are working and more. After the inspection, the inspector will give you a list of problems they found in the home.
What Do You Do With Your Inspection Report?
When you receive your inspection results, review each item line by line and look for major issues. If a home has a serious health hazard (like lead paint or mold), ask the seller to correct the problem before you close. If you can’t reach an agreement, you may want to move on and consider other properties. Read over your inspection results with your agent and ask whether they noticed any major red flags.
Remember that you’ll be liable for any major repairs after your sale closes. A clogged toilet or a sink isn’t a major issue. However, if your home inspection reveals an expensive problem (like cracks in the foundation or poorly installed windows), you may want to reconsider the purchase.
How Does An Inspection Contingency Work?
It’s common for home buyers to include a home inspection contingency in their purchase offer. A contingency gives buyers the option to back out of a purchase (or negotiate repairs) without losing their earnest money deposit if the home inspection reveals major issues.
Step 10: Get A Home Appraisal
A home appraisal is a review that gives the current value of the property you want to buy. You will typically need an appraisal before buying a home with a mortgage loan.
Lenders require appraisals because they can’t lend out more money than a home is worth. If the appraised value comes back lower than your offer, you might have to consider different options such as increasing your down payment or re-negotiating your offer. Talk to your real estate agent to determine if you should contest the appraisal results. Your agent will have additional comparable homes for your consideration when appealing the value from the appraisal.
How Does An Appraisal Contingency Work?
Home buyers should also include an appraisal contingency in their offer. Appraisal contingencies are often drawn up to allow buyers to back out of a purchase (or negotiate a lower price) without losing their earnest money deposit if the home appraises for less than the offer amount. As with inspection contingencies, appraisal contingencies vary, so make sure you understand the nature of your agreement.
Step 11: Ask For Repairs Or Credits
After viewing your appraisal and inspection results, you might want to ask your seller to address some issues that were found. You can do this in one of three ways:
- Ask for a discounted purchase
- Request the seller give you credits to cover some of your closing costs.
- Ask that the seller have the problems fixed before you close.
Your real estate agent will submit your requests to the seller’s agent. If you’re buying a house that’s for sale by owner (FSBO), your agent will negotiate with the seller directly. The seller might accept your request or reject it. If your seller rejects your request, it’s up to you to decide how to proceed. If you have an inspection contingency in your offer letter, you can walk away from the sale and keep your earnest money deposit.
Step 12: Do A Final Walk-through
You should do a final walk-through of your new home before you close, even if you’re 100% committed to the property. This time allows you to check and make sure the seller has everything as it should be.
Walk through the home and make sure the seller hasn’t left any belongings. Check your repair areas if you requested them and keep an eye out for pests. You may also want to double-check your home’s systems one final time to make sure everything is in working order. If everything looks good, you can confidently move toward closing.
Step 13: Close On Your New Home
Three business days before closing, your lender is required to provide you with your Closing Disclosure, which tells you what you need to pay at closing and summarizes your loan details. Read through your Closing Disclosure and make sure the numbers don’t vary too much from your Loan Estimate, which you should’ve received no more than 3 business days after your initial application.
Once you’ve reviewed your Closing Disclosure, it’s time to attend your closing meeting. Bring your ID, a copy of your Closing Disclosure and proof of funds for your closing costs.
You’ll sign a settlement statement listing all costs related to the home sale. This is when you pay your down payment and closing costs. You’ll also sign the mortgage note, which states that you promise to repay the loan. Finally, you’ll sign the mortgage or deed of trust to secure the mortgage note. After the closing finishes, you’re officially a homeowner.
