• The steps to buying a house can be divided into three distinct phases, starting with financial preparation,  the home search, and ending with due diligence and closing.
  • Establishing a financial plan early helps buyers understand how much house they can afford, which is useful when deciding which neighborhoods and homes to consider.  
  • Leveraging the expertise of industry professionals such as real estate agents, lenders, title representatives, escrow officers, home inspectors, and appraisers can help you make informed decisions along the way.

Many buyers think the first step toward buying a house is to research real estate listings online. While that’s certainly an exciting part of the process, several tasks should be completed even before you start looking at homes.[1]

Homebuying begins with financial preparation, which lays the crucial groundwork for a successful purchase. By setting a budget, understanding mortgage loan options, and getting pre-approved for a home loan, you can shop for a home with financial confidence. 

Phase One: Financial Preparation

The first step in buying any home is to make sure you are financially ready and able to secure the financing needed to complete the purchase.

Determine Your Budget

How much can you afford to spend on monthly mortgage payments? 

To find out, start with your take-home pay amount. Then subtract the following:

  • Fixed expenses: expenses that don’t typically change from one month to the next, such as car payments and student loan payments.
  • Variable expenses: expenses that fluctuate each month, such as credit card bills, utilities, gas, groceries, personal care, and entertainment. Since these amounts change monthly, you may want to calculate a monthly average. You could also use the highest amount you’ve spent within a single month to provide a more conservative estimate.
  • Monthly savings: the amount you want to continue saving every month, perhaps for retirement or general investing.

The result is the amount you potentially have to spend on your mortgage. 

Generally, your mortgage payment should typically not exceed 28% of your gross (pre-tax) monthly income, and your total debt should not exceed 36%. However, more flexible loan programs may be available.  

If you need help with this step, you can use an online homebuyer financial planner.

Review Your Credit Score

Your credit score is one of the most important factors in determining both if you qualify for a home loan and what your mortgage interest rate will be.[2]

Consumers are entitled to a free credit report each year from each of the three credit bureaus annually. You can order your reports from sites like AnnualCreditReport.com.[3]

Many lenders prefer to see credit scores of at least 600. However, some lenders can offer home loans to people with lower scores. The best interest rates are typically reserved for those with scores of 780 or higher.

Calculate the Down Payment and Closing Costs 

The down payment is the amount of the purchase price that must be paid upfront. 

While there are 0% down payment mortgage programs, these are generally limited to VA loans (reserved for military service members, veterans, and their spouses) and USDA loans (specialized loans reserved for low-to-moderate-income buyers in rural areas). 

For other types of mortgage loans, applicants with strong credit may qualify for down payments as low as 3-5%. However, those who can put down 20% or more could benefit from lower monthly payments and better interest rates.[4]

Closing costs are those expenses incurred when transferring a property from the seller to the buyer, including loan origination fees, transfer taxes, and pre-paid property taxes. These costs are separate from your down payment but must also be paid upfront.

Closing costs typically range from 2-5% of the purchase price.[4]

If you have concerns about the down payment or closing costs, ask your mortgage loan officer (MLO) about options such as down payment assistance programs or rolling closing costs into the mortgage loan. 

You may also use an online down payment calculator and closing cost calculator to help estimate these expenses.

Understand Mortgage Options

There are several types of mortgage loans available to today’s buyers, including:

  • Conventional loans, which work well for many buyers with good credit.
  • FHA loans, which work well for many first-time buyers and those with lower credit scores.
  • USDA loans, which are specifically for rural buyers with low-to-moderate income.
  • VA loans, which are specifically for military members, veterans, and their spouses.
  • Jumbo loans, which are for homes that are more expensive.

In addition to choosing the loan type, you may also choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). Fixed-rate loans offer more stability because the rate does not change during the life of the loan. ARMs offer a lower upfront rate, but the rate automatically shifts with the market rate after the designated introductory period.

The loan type and interest rate structure chosen will affect your monthly payment amounts, down payment requirements, and the total cost of borrowing money for the home purchase. It is important that you fully understand the terms and conditions of any mortgage loan as you will be responsible for meeting the financial obligations of the loan. 

Get Pre-Approved for a Home Loan

Being pre-approved for a mortgage can greatly simplify the process of buying a home. This means having a lender review your finances to determine how much you are qualified to borrow and at what rate. Not only can pre-approval help inform your home search, but it can also strengthen your offer by assuring the seller that you already qualify for the financing needed to complete the purchase. This can prove a strong advantage in a market where available homes are in limited supply. 

Submit a pre-approval application online today to prepare for Phase Two, the home search. 

Phase Two: The Home Search Process

Once your finances are in order, it’s time to house hunt.

Find a Real Estate Agent

A real estate agent can prove an invaluable resource in your home-buying journey. Agents know the market, so they can help you find suitable properties and negotiate fair terms on the deal. Plus, established agents have extensive networks of industry professionals, such as qualified inspectors, appraisers, and title researchers, when needed.

If you don’t have an agent in mind, ask your MLO for a referral.

Begin the House Hunt

Now it’s time to explore available homes. Here are a few quick tips to help with your search:

  • Photos can be deceiving. Professional listing photos can make homes feel larger and brighter than they are. And hastily snapped smartphone photos can make a home feel smaller and darker than it really is. Don’t get overly invested in the photos you see online.  
  • Distinguish needs from wants. Finding everything you want in a single home could be difficult. Focus on what you need and consider your wants as a bonus. 
  • Prioritize location. Most of a home’s features can be changed, but the location is fixed. So make sure the location works for you.
  • Look past cosmetic issues. Poor staging, heavy clutter, outdated fixtures, and unexpected paint colors can make a home feel less appealing. But these are easy fixes. Don’t let these issues detract from a home that has “good bones.” 

Make an Offer

When you find a home that meets all your needs (and a few of those wants), it’s time to make an offer. It is worth noting that the listing price is not necessarily indicative of the fair market value. Your agent can review recent sales of similar homes to help you determine a fair offer price. They can also advise you on whether it makes sense to request concessions from the seller. For example, in a slow market, the seller may be willing to cover some of your closing costs to help seal the deal. 

The seller can either accept your offer as-is, reject the offer, or provide a counteroffer in which they propose some changes to your original offer.

Once you and the seller agree on the terms, the house is now considered to be officially under contract. 

Phase Three: Financing, Due Diligence, and Closing

It takes time to move from signing a contract to closing the purchase. That’s because several tasks must be completed before ownership can be transferred. This time is often referred to as the contract period, due diligence period, or escrow period, typically taking 20-45 days.

Financing

As soon as the offer is accepted, you should complete your mortgage loan application. Underwriting a home loan takes a few weeks, so it’s important to start working with your lender quickly and reply promptly to any requests for information. 

A Mortgage Application Checklist can help with organization as you apply for a home loan. 

Due Diligence

Due diligence is the process of evaluating the property to make sure you want to go through with the purchase. This process includes:

  • Having the home inspected to confirm its physical condition
  • Having the home appraised to confirm its current value
  • Reviewing disclosures made by the seller
  • Researching the chain of title to make sure the seller has the legal right to sell
  • Having the property surveyed to confirm the geographic boundaries

Additional Transfer Preparation

Once the property has passed the due diligence process, you should prepare to become the new owner by:

  • Purchasing homeowner’s insurance to help financially protect the property
  • Setting up utilities such as electricity, water, gas, and cable or internet for your move-in date
  • Scheduling movers

Close on Your New Home

All that’s left to do is wire funds as instructed, collect your keys, and enjoy your new home!

The Bottom Line

There are many steps to buying a house, and each one is important to the success of your purchase. If you are feeling overwhelmed by the process, contact a Mortgage Loan Officer (MLO) to discuss home financing options and get answers to your questions.