Buying a house is the most important purchase you’ll make in your lifetime.
Jumping into the home buying process without knowing what you’re doing can hurt you financially.
This article is focused on helping you prepare yourself to buy a home.
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How to Buy a House in 10 Steps
1. See if You Can Afford the costs of Home Ownership
There are many expenses involving owning your own home besides just the mortgage payment. Unless you have a 20% down payment you will need to carry private mortgage insurance. If your community has a homeowners association there will be an annual HOA fee due.
Besides your monthly mortgage payment and escrow account you’re responsible for any repairs. If there are plumbing issues or the heater goes out, there’s no landlord to take care of maintenance for you. These costs can add up, especially if you’re buying an older home.
Home Ownership Costs
- Mortgage and interest payment
- HOA dues
- Mortgage insurance premium
- Property tax
- Homeowners insurance
- Pest control
- Home repairs
- Cleaning services
Make sure you have enough money left over each month to go into an emergency fund in case of emergencies.
Mortgage lenders will use your debt-to-income ratio (DTI ratio) to see how much of a loan you can afford. It’s best to have a DTI ratio of 36% or lower, use our calculator to figure out your DTI ratio.
2. Check Your Credit Score
In order to qualify for a mortgage loan you need to be able to meet the credit requirements. The minimum required FICO credit score will depend on the lender you work with and the type of home loan you choose.
Minimum Credit Requirements
- FHA loans – 580 with 3.5% down – 500 with 10% down
- VA loans – 620 score
- USDA loans – 640 score
- 203k loans – 640 score
- Conventional loans – 620 score
- Jumbo loans – 700 score
You can get a copy of your credit report for free once a year at the Government site www.annualcreditreport.com.
There are several sites that provide not only your credit report but also your credit score completely free.
3. Improve Your Credit Score
Your credit score is the biggest factor in not only getting approved for a home loan, but it also dictates the interest rate you receive.
Even if you’re able to increase your score by 10-20 points it could get you a half a percentage point lower rate. While it seems small it can add up to tens of thousands of dollars over the life of the loan.
Pay down credit card balances
The amount of available credit you are using it called your credit utilization ratio and it makes up 30% of your credit score. The quickest and easiest way to improve credit scores is to quickly pay off credit card debt below 15% of the credit limits.
Pay your bills on time
When your preparing to buy a house the last thing you want to do is miss a payment. A single 30 day late payment can lower you score by as much as 50 points. Stay on top of your bills, set up automatic payments to help ensure you never miss a payment.
Do not apply for new credit
Each time you apply for a loan or line of credit the creditor will pull your credit report and scores. This is known as a hard inquiry and having too many counts against your FICO score.
4. Have Enough Money Saved Up
There are many up-front costs associated with buying a house you need to prepare for. Down payments, closing costs, discounts points, moving expenses, etc. Here are some of the main up-front costs you can expect.
When you buy a house you take out a home loan which will require a down payment. How much of a down payment you need to buy a home will depend on the type of mortgage you use and even your credit rating.
Gone are the days of needing a large 20% down payment in order to qualify for a mortgage. There are several low down payment mortgage options available to homebuyers.
Down Payment Requirements by Loan Type
- FHA loan – 3.5% with a 580 score – 10% down with a 500-579 score
- VA loan – No down payment
- USDA loan – No down payment
- 203k loan – 3.5% down
- Conventional loan – 3%-20%
- Jumbo loan – 15% – 30%
Closing costs are fees charged by lenders for issuing and funding a mortgage loan. On average closing costs come out to 2-4% of the loan amount. The largest being the loan origination fee which is usually between 1-2% of the purchase price.
Closing costs cannot be rolled into a loan. Each type of mortgage program has a maximum loan-to-value ratio, so including closing costs will take the loan amount above the minimum LTV required.
However, most mortgages allow the seller to pay between 3-6% of the buyers closing costs. In order to pay less up front money you can ask the seller to pay a portion of your closing costs. You may have to increase the purchase price to do so but it helps reduce the amount you need to bring to the closing table.
Homeowners insurance, PMI and property taxes will need to have a portion pre-paid at closing. Usually 2 months of each will be paid in cash at closing.
Up-front Mortgage Insurance
FHA loans require mortgage insurance regardless of how much money you put down. They also require an up-front MIP fee of 1.75% of the loan amount to be paid at closing.
You can’t spend your last dime when you buy a house, you need to have cash reserves in savings after you close. Lenders are looking to see at least 2 months worth of mortgage payments in savings after you close.
Mortgage lenders will have a home appraisal done on the property to know the fair market value. Banks will not lend more money than a property is worth. The borrower will pay for the home appraisal by credit card several weeks before closing. You can expect to pay between $400-$800 for a home appraisal.
Unless you plan on moving your stuff on your own, you’ll need to hire a moving company. Pricing depends on the number of rooms and amount of stuff you have. On average you can expect to pay around $1,000 for a licensed and bonded moving company.
5. Get Pre-Approved First
Before you go out and start house-hunting you want to make sure you will be approved for a mortgage if you find a house you love. Getting pre-approved is the first step in the mortgage process.
It can be done quickly, usually in an hour or two. You need to speak to a loan officer who will pull your credit and verify your income using tax returns, w2’s, pay-stubs, and bank statements.
A pre-approval letter says I am serious about buying your home and I will get approved for a home loan. Most sellers will not even accept an offer from a buyer that is not pre-approved.
6. Hire an Experienced Real Estate Agent
A real estate agent working on your behalf can save you a lot of time, money, and heartache. Having someone with experienced and expertise in the home buying process and real estate agreements is a major plus.
Some first-time home buyers believe they can save money by not hiring a realtor. However, that could not be farther from the truth. An experienced real estate agent can walk you through the process and make sure you get the best deal possible.
Buyers are not responsible to pay money to an agent. It is the seller that pays the buyers agent, they expect to pay a real estate commission so they will not give discounts if you’re not using one.
7. Go House Hunting
Now that you’re pre-approved for a mortgage and you found a real estate agent it’s time to start house hunting. You will give your agent some preferences such as the number of bedrooms, baths, square footage, etc. so you can be emailed updated MLS listings.
Schedule a time with your agent to go look at homes that you like. Once you find a home you want to buy it’s time to submit an offer. If the seller accepts then you’re in contract
8. Make an Offer
When you find the perfect home you will need to submit an offer. Knowing what to offer takes experience and that’s why you have an agent. They can look at sales prices for comparable homes in the area to get an idea of what you should offer.
The seller will do one of three things
- Accept your offer
- Reject your offer
- Send a counteroffer
Remember if you want the seller to pay for a portion or all of your closing costs you must include it in the home offer.
9. Get a Home Inspection
A home inspection is when a third-party inspects the home to make sure there are no issues or anything that may need repair. However, a home inspection is not required by a mortgage lender, we strongly advise you get one.
Even new homes may have things that need to be fixed and if you close without checking you will have to pay to repair them. On average a home inspection will cost between $300-$500.
10. Closing Day
The big day. Closing day is usually held at the title company where everything will be finalized. Your lender will provide you all of the final paperwork including the amount due.
You will need to get a cashier’s check to pay the down payment and closing costs. If you put down an earnest money deposit it will be credited to you at closing.
Once the contract is signed and the funds are transferred you are handed the keys. It is a long process and you can expect some hiccups along the way. But it’s well worth it.
Are you ready to buy a house?