A licensed inspector will review the home's foundation, electricity panel, fixtures, appliances, and other aspects of the home's interior and exterior. After the inspection, you will receive a detailed report of their findings, letting you know if anything is unsafe or defective in the home. You can use this report to negotiate with the seller if things need to be fixed for the sale to proceed.
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# How To Buy a House: A Step-by-Step Guide

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By

Maya Dollarhide is a financial journalist with more than 10 years of experience helping people understand challenging financial topics, such as managing student loans, buying a home, and saving for retirement.

Updated September 03, 2024

Reviewed by

Reviewed bySamantha Silberstein

Samantha (Sam) Silberstein, CFP®, CSLP®, EA, is an experienced financial consultant. She has a demonstrated history of working in both institutional and retail environments, from broker-dealers to RIAs. She is a current CFA level 3 candidate and also has her FINRA Series 7 and 63 licenses. Throughout her career, Samantha has used her expertise and various licenses and certifications to provide in-depth advice about household and business-specific financial planning, investing, credit cards, debt, student loans, taxes, retirement, and income strategies.

Fact checked by

Fact checked byVikki Velasquez

Vikki Velasquez is a researcher and writer who has managed, coordinated, and directed various community and nonprofit organizations. She has conducted in-depth research on social and economic issues and has also revised and edited educational materials for the Greater Richmond area.

Buying a home is an exciting and often nerve-wracking adventure. First-time buyers may be surprised at all the details the homebuying process entails, from finding a real estate agent to reading an inspection report. We've created this step-by-step guide to help you understand the nitty-gritty of the process and help you make smart financial decisions along the way.

### Key Takeaways

- Assess your financial readiness and credit score before buying a house.
- Determine your budget and calculate how much you can afford to spend on a house.
- Research and explore different mortgage lenders as well as financing options, such as conventional, FHA, VA, and USDA loans.
- Get pre-approved for a mortgage to strengthen your offer and streamline the buying process.
- Conduct a thorough home inspection and appraisal before finalizing your purchase.

## 1. Make Sure You Are Ready

If you (or you and your partner or spouse) want to buy your first home, start by determining if you are ready to make a long-term (and expensive) commitment to a house. Your short-term or long-term plans, such as starting a family or moving out of state, could inform that decision.

Next, look at your big financial picture. You'll want to assess your financial stability, from your annual salary to how much you have saved for a down payment, to help you figure out how much home you can afford.

Check your credit score. Lenders use this score (and other criteria) to determine your mortgage interest rate. You'll need at least 620 to be considered for a conventional mortgage, but lenders may set their minimum credit score higher. An FHA loan (more on that later) may only need a score of 580 or higher.

Lenders need to know your debt-to-income ratio (DTI) as well. Just like credit scores, debt-to-income ratio requirements may vary slightly by lenders. The Federal Housing Administration (FHA) standard is a 43% debt-to-income (DTI) ratio as a guideline for approving a mortgage. However, some lenders call for a lower DTI.

Calculate your DTI by adding all your monthly debts, from student loans to utility bills. Divide the total debt by your gross monthly income to get your debt-to-income ratio.

## 2. Set a Budget

Don't make the mistake of buying a house you cannot afford. A general rule of thumb is to use the 28/36 rule. This rule says your mortgage should not cost you more than 28% of your gross monthly earnings, while your total debt payments should equal no more than 36% of your monthly earnings. This rule isn't set in stone but can give you a good jumping-off place when setting a budget.

Researching home values (which drive prices) can provide insight into your local market.

For example, here are some example average home values as of July 31, 2024, according to Zillow:

- Westchester County, New York: $796,175
- Falls Church, Virginia (DC suburb): $745,871
- Lincoln, Nebraska (capital): $281,853
- San Diego County, California: $952,856

Unless you buy a home with all cash, you'll need a down payment, a percentage of the purchase price. Your mortgage (and what the seller will accept) will dictate the amount. Conventional loans usually call for 20% of the purchase price (if the buyer isn't paying mortgage insurance), while FHA loans only need 3.5% down payments. VA and USDA loans can be taken out without a down payment.

The good news? Most mortgages in the U.S. don't call for a full 20% down. According to recent data from the National Association of Realtors (NAR), the range for first-time buyers is between 6 to 7%, depending on the housing market in your area. If you put down less than 20% on a mortgage, your lender may require you to take out private mortgage insurance (PMI), which will be added to your monthly mortgage payment.

### Tip

There are benefits to putting down 20%, including the potential for lower interest rates, more immediate equity in the home, and not having to pay extra for mortgage insurance. Some sellers may be more motivated to sell to buyers offering a large down payment.

### Getting Ready

## 3. Find the Right Property

The trick to finding the right property is making an upfront wishlist. For example, is a single-family detached home with a big yard for a couple of kids and a dog your priority, or do you want a condo with shared common spaces? How much space do you want? The median size of a new single-family home in 2023 (most recent data available), is 2,233 square feet, according to the U.S. Census Bureau. Ask yourself how much house is enough for you, from the number of bedrooms to bathrooms.

Some properties have the potential for a convertible space (not listed in the square footage), like an attic, basement, or garage; others do not. Outdoor living space has become extremely important to buyers, according to the National Association of Realtors, and homes with decks, porches, fire pits, and swimming pools may cost more. Decide if they are worth the potentially extra price tag.

### Location, Location, Location

When buying a house, consider its proximity to essential and recreational services, like schools and playgrounds (a plus if you have or plan on having children), shopping areas, libraries, greenspaces, commuter trains or buses, and medical facilities.

Other questions to ask yourself: Do you want to buy a fixer-up and do the job yourself versus hiring a contractor, which will add additional costs? Thinking about the kind of home (and how much work you want to put into it) can help you find the right fit. And who knows, you may find your forever home or starter in the real estate market.

## 4. Shop for Financing Options

Finding the best mortgage you can afford is essential to the home-buying process. Your monthly mortgage payments (no matter which mortgage you choose) will depend on a few factors, so using an online mortgage calculator and experimenting with different inputs can help you get a general idea of your monthly mortgage payment. Here are a few main types of mortgages for you to consider:

Conventional loans are usually easy to process with lower interest rates. You need very good to excellent credit. You may be required to take on private mortgage insurance without 20% down.

Jumbo loans (non-conforming) exceed standard mortgage spending limits and are used for high-cost areas and homes with large square footage. You must have excellent credit and the ability to put down a large down payment to secure the loans.

FHA loans are backed by the Federal Housing Administration (FHA) and only need a 3.5% down payment. They have strict requirements but are easier to qualify for credit-wise than conventional loans.

Renovation loans are great for buyers who love a good fixer-upper, and you can apply for an FHA renovation loan if a conventional renovation loan is out of reach. This mortgage allows you to wrap all the costs of buying and renovating a home into one monthly payment.

VA loans are for military service members, veterans, or eligible spouses offered by the U.S. Department of Veterans Affairs. There are some requirements, but you won't have to make a down payment if you qualify.

USDA loans are designed to help low- and moderate-income families purchase a home in USDA-eligible rural areas. You don't need a down payment but must meet income and other requirements.

### Terms and rates

You can choose terms from 10-year, 15-year, 20-year, or the most commonly used, 30-year terms when you apply for a mortgage and a rate. A fixed-rate mortgage means you pay the same amount of interest and principal every month for the life of the loan. An adjustable-rate (or ARM) mortgage is tied to an index. It starts with one interest rate, which may rise over time, along with your mortgage payment.

Interest rates on mortgages vary depending on the lender, the type of mortgage, the economy, and other factors.

As of Aug. 21, 2024, average rates include 5.81% for an FHA loan, 6.39% for a 30-year fixed mortgage rate, 5.49% for a 15-year fixed mortgage rate, and 6.62% for a jumbo loan.

## 5. Get Pre-Approved

Banks, credit unions, and online lenders to obtain a pre-approval letter. A pre-approval letter states the amount of money a lender may be willing to loan you. When you find a lender you want to use for preapproval, gather your W2s, recent bank statements, proof of income, and a few months' worth of pay stubs.

The lender will need all of this information, and perhaps more, to decide how much money you can be pre-approved for. Feel free to apply for mortgage preapproval with multiple lenders, from brick-and-mortar banks and credit unions to online lenders, at the same time.

Because preapprovals are hard credit inquiries, minimize the hit by applying to all lenders within a short period, e.g., 30 to 45 days. It will only count as one hard pull on your credit. If you are serious about buying a home, have your preapproval at hand when you start talking to agents.

### Time To Buy

## 6. Find a Real Estate Agent

Working with a good real estate agent who understands the local market, will stick within your budget, and can guide you through negotiating with a seller is worth their weight in gold.

Ask your friends and colleagues for recommendations or visit a few real estate offices. When you find an agent you like (interview a few to find the best fit), you may be asked to sign a buyer's agency agreement. This states you agree to work exclusively with the agent for a set period. Most buyer's agents are paid on commission from the house sale so you won't pay anything upfront.

Your agent will be a bridge (or lifeline) between you and the seller of your dream home. You want to make sure you have the right match—personally and professionally—before you sign an agreement with one. Open communication between you and your agent is crucial, and you will want to work with someone you feel is trustworthy to advocate on your behalf.

## 7. Go House Hunting

The fun part begins when you start house hunting with your real estate agent, who can show you a variety of homes based on your wishlist. While it's fun to scroll through listings online, it is always best to walk through the house in person to look at all the nooks and crannies and feel for the outdoor space and neighborhood.

## 8. Make an Offer

You may have to act fast in a hot housing market where houses are getting multiple offers. Make sure you've done your homework. Ask for a comparative market analysis from your real estate agent to see what other homes in the area have sold for, so you don't over or underbid.

When your agent makes an offer on your behalf, don't be surprised if the sellers make a counteroffer, a common occurrence. Your agent will negotiate if you want to bid higher or add contingencies to your offer like the home passing an inspection.

When you enter a purchase contract with the seller, it's time to hand over your earnest money. This deposit will demonstrate your willingness to buy the home. Plan on paying 1% to 3% in most markets and up to 10% in competitive markets.

Your earnest money will be applied toward your down payment but may be non-refundable if you back out of the deal. Make sure to have access to your funds, which will go into an escrow account until after the closing.

## 9. Get Your Mortgage

Once you have a purchase agreement, it's time to get a mortgage. If you use the lender who preapproved you (it's not required), it may speed up the paperwork process. If you choose to go with another lender, here's what you must provide:

- Legal ID and Social Security number
- Pay stubs: 30 to 60 days' worth, depending on the lender
- W-2 tax forms: You'll likely need two years of forms
- Proof of other sources of income: Gift money, alimony, side gigs, anything that doesn't have a W-2 to support it
- Investment accounts, such as an IRA, 401(k) and stocks, bonds, and mutual funds
- Federal and state income tax returns: You'll need the last two years
- Debt details: Provide information on any long-term debt, like student loans
- Recent bank statements: Most lenders want a few months of bank statements to show you have money in the bank

### Tip

Gather all of this information and scan it (for easy transfer to your lender via email) at the beginning of your house hunt so you are ready to go as soon as you make an offer.

Next, your mortgage application must be approved by an underwriter, who will scrutinize your finances. Be prepared to offer more information as needed. Underwriters will also conduct a title search to ensure the seller legally owns the home and an appraisal to make sure the home value is worth the purchase price. This process of underwriting may take a few days or weeks.

### Complete The Purchase

## 10. Purchase Homeowners Insurance

Even though you don't own the home, often you will need to take out homeowners insurance to get the lender to finalize the loan. You should shop around for homeowner's insurance for the best rates. If you are buying a home in a flood zone, you may be required to purchase flood insurance.

## 11. Get a Home Inspection

A licensed inspector will review the home's foundation, electricity panel, fixtures, appliances, and other aspects of the home's interior and exterior. After the inspection, you will receive a detailed report of their findings, letting you know if anything is unsafe or defective in the home. You can use this report to negotiate with the seller if things need to be fixed for the sale to proceed.

Sometimes, if the house doesn't pass inspection, the lender may not agree to issue you the mortgage.

## 12. Get the Home Appraised

A home appraisal is an unbiased opinion of the home's value by a professional appraiser, and you must have an appraisal to get a mortgage. The appraiser uses a checklist to evaluate the home and create a report with detailed information about the house, including amenities, size, condition of the interior and exterior, and a floor plan.

The report will also contain information on the sale of similar properties and current market trends. An appraisal can also help when you negotiate with the seller if the home's appraisal value is lower than expected.

## 13. Negotiate With the Seller

After you have the inspection and appraisal reports in hand, your agent (on your behalf) may be able to negotiate the price depending on the results.

If you are in a buyer's market, you will likely have more room to negotiate the price down. If you are in a seller's market, you may not be able to negotiate as strongly because the seller will likely have a line of potential buyers behind you.

Tips for negotiating:

- Be kind and professional—buying (and selling) a home is often emotional, but try to keep your feelings to yourself.
- Always negotiate after an inspection and an appraisal because you will have access to details on the home you might not have known otherwise.
- Be prepared to make a counteroffer if your first offers are rejected.

## 14. Close the Deal

You are nearly a homeowner. The last step is closing on your purchase. Usually, the lender will issue you a closing disclosure document three days before you sit down for the official closing. This five-page form will show you all the details about your mortgage loan, including your project monthly payments, fees related to the closing, and the loan terms.

Make sure to read the disclosure ahead of the closing. Plan on having a final walk-through to make sure any promised repairs have happened.

A closing is held with you, your agent, the seller's agent, the seller or seller's representative, your loan officer, and your (and the seller's) real estate attorney.

Be prepared to sign many documents, so bring pens and your checkbook to pay any final fees upfront. You'll receive the keys to your new home when everything is signed.

## 15. Moving in and Beyond

Congratulations! You own a home. Before you move in, remember to set up the utilities in your name and plan any renovations (large or small) you want to do before moving day. Contact and hire movers and create a timetable for moving into your new home if needed. And revisit your budget.

Count on paying for regular home maintenance, home insurance, HOA fees if they apply, and property taxes. You may have been able to wrap some costs, like property taxes, into your mortgage, but others will be paid in addition to it, so budgeting for these monthly or annual fees is important.

## How Long Does It Take To Buy a House From Start to Finish?

There is no set timeline for purchasing a home. If the process goes smoothly, it may take four weeks to six months, or an all-cash offer could take as little as two weeks. Timelines depend on many personal factors. Your real estate agent can share a more accurate timetable for your local housing market, so don't be afraid to ask them.

## What Credit Score Do I Need To Buy a House?

Ideally, you want the highest score possible to get an interest rate. Conventional mortgage lenders want to see at least 620, and many require higher. FHA loans typically have more lenient standards, which may mean you'll qualify with a score of 580 or higher.

## What's the Difference Between a Realtor and a Real Estate Agent?

A real estate agent must have a professional license to sell, buy, or rent real estate. A realtor is a real estate agent who, besides being licensed, is a member of the National Association of Realtors.

## How Much Money Should I Have Before Buying a House?

The more money you have saved for buying a house the better position you will be when you make an offer, plus money for closing costs and fees. The amount you need will depend on the price of the house and the type of mortgage you plan on using to buy your home.

## The Bottom Line

Having a sense of the homebuying process before you start your search for your first house can help you stay calm during a potentially emotional process. It can also provide you with a sense of the details you'll need to track to make your home buying journey a success. Stay informed about local market conditions, focus on your house hunt, and keep an upbeat attitude. Buying a home can be an exciting, educational, and rewarding experience.

Zoe Hansen / Investopedia

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