Buying a home is a major life step. If you’re ready to embark on this journey, congratulations!
While the homebuying process can be a major challenge if the future homeowners are unprepared, there fortunately are several easy ways to make the process a lot smoother.
What's in this article?
Let’s dig into how to buy a home in 15 easy steps, from making sure you’re ready to officially closing on your home.
Is now a good time to buy a house?
The decision and timing of when to buy a home is personal, and based on a borrower’s finances and overall goals.
Mortgage rates are known to fluctuate, and home values depend on the area you are searching.
Instead of focusing solely on these factors, the best way to prepare to buy a home is to focus on getting yourself in the best financial shape.
This includes a moderate to high credit score, low debt-to-income ratio, and substantial savings for a down payment.
Let’s take a look at how to buy a home by getting yourself as financially ready as possible.
Ready To Take Your Next Step?
Step 1: Make sure you are ready to be a homeowner
If you’re reading this, chances are you either feel ready to be a homeowner or are trying to gauge whether you are ready by seeing what’s involved.
Ask yourself why you want to buy a home, and make sure the reason aligns with your short-term and long-term goals.
Then, ask yourself the following questions:
- Does it make sense to buy a home right now, financially?
- Are you planning to stay in the same area for a while for work or family?
- Is there any chance you’d have to relocate?
- Are you ready to put down roots?
- If you’re purchasing a home with a partner, are your goals aligned?
The answers to these questions can help you to not only confirm your decision, but help you to start considering what exactly you are looking for in a home.
Step 2: Determine how much home you can afford
Future homeowners often focus solely on the home price, and forget about all the costs and fees associated with a home and a mortgage loan.
Not only do you need to set aside money for a down payment, but you’ll need to consider all other bills as well as potential maintenance costs.
Use a mortgage calculator to get a rough estimate of your loan amount or monthly payment amount, then calculate your debt-to-income (DTI) ratio, which lenders use to help determine how much of your monthly income goes to debt.
DTI is calculated by dividing all your monthly debts by your gross monthly income.
The resulting percentage can show you how much money you can spend on a mortgage, based on how much of your income goes to debt each month.
Step 3: Know your credit score
One of the most important pieces in the mortgage process is your credit score.
Your full credit report is pulled by a mortgage lender when you apply for a loan, and they use it to help determine whether you can repay your mortgage.
The higher your credit score and the better your credit history, the more likely you are to snag the best mortgage rates and terms.
You can pull your own credit report for free once a year to get an idea of how things look, and determine whether you need to take some time to boost this score before you head to a lender.
Credit scores are calculated based on the following factors:
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
The No. 1 factor, payment history, makes up 35% of your score and shows whether you make your payments on time.
Total amount owed is worth 30%, and shows how much of your credit is being used vs. what is available.
Focusing on making all payments on time is one step that can significantly improve your score over time.
Step 4: Save for a down payment and closing costs
While it is the most beneficial to make a 20% down payment on a home because it eliminates private mortgage insurance (PMI), this is far from your only option.
Down payment requirements
Many conventional loans allow down payments as low as 3%, while FHA loans allow down payments as low as 3.5%, depending on your credit score.
If you qualify for a Department of Veterans Affairs (VA) loan or United States Department of Agriculture (USDA) loan, you may be eligible for no down payment.
Based on what you are able to save, this can help you determine the type of loan that might be available to you. However, if you pay less than 20%, or get an FHA loan, you can expect to pay for mortgage insurance.
Closing costs, on the other hand, are the fees you pay to get a mortgage loan. These costs usually are about 3% to 6% of the home’s value, depending on your lender and the loan type.
You will receive a closing disclosure from your lender prior to closing, so you will know exactly what you owe and can ask any questions about the costs.
Step 5: Decide what you want in a house
Allow yourself to dream in this step, but also separate your list into the following items so you know what you are willing to let go of if the search gets tight:
- Would like to have
- Absolutely cannot have
One of the most important considerations for your home is the location, followed by the type of home and whether it is allowed to need some repairs or must be move-in ready.
Take a look at nearby schools and entertainment, and determine how important a yard with lots of green space is vs. a condo or townhouse where you don’t have to cut grass or do yard work.
Step 6: Find the mortgage type that is right for you
Once you’ve determined what you can afford, have built up your savings for a down payment, and decided what you want in a house, you’re ready to begin the exciting home search.
But first, it’s time to connect with a trusted mortgage lender to take a look at your mortgage options.
Here are the most common loan types:
- Conventional loan
- FHA loan
- VA loan
- USDA loan
Each loan has different requirements for credit scores, down payments, property types, and DTI allowances.
Conventional mortgages generally require a credit score of at least 620, down payments as low as 3%, and a DTI of at least 43%.
FHA loans require lower credit scores — sometimes as low as 500 — but down payment amounts must be higher if the credit score is lower. Many lenders allow DTIs as high as 50% for FHA loans.
VA and USDA loans
VA and USDA loans require specific eligibility, but can offer significant benefits to those who qualify, including no down payment options.
Step 7: Get preapproved for a mortgage
After you connect with a trusted lender, you will be able to apply for preapproval.
Your lender will take a look at your income, credit history, DTI, and assets during the preapproval process so they can determine your interest rate and how much you could borrow.
Preapproval is an important step in the homebuying process because it tells you how much you can afford, helps you narrow down the home search, and shows sellers and agents you are a serious buyer.
Preapproval usually is valid for anywhere from 60 to 90 days, so keep an eye on the expiration during the home search to make sure you stay up to date.
Preapproval is not approval
Keep in mind that preapproval doesn’t equal approval. You must keep your finances in perfect shape until closing day. Ask your lender how you can avoid any financial missteps to ensure you’re in the clear on closing day.
Step 8: Find a real estate agent
Your lender will usually provide you with a preapproval letter, which you then can take to a real estate agent to prove you’re a serious buyer.
This helps the agent understand the type of home you can afford so they don’t spend their time showing you homes outside of your budget.
Your real estate agent is an essential part of the homebuying process, so choose wisely. They will negotiate with the seller on your behalf, share their area knowledge and expertise with you, and help you understand the process.
Many experts agree that it’s smart to interview at least three different agents before making a decision, but you also are likely to find strong recommendations from friends and family.
Step 9: Look at homes
Your real estate agent will help you during the home search, but there’s also plenty of things you can do on your own to move the process along.
The simplest way to get the search moving is to view listings online. You can easily share these with your agent to determine which ones are worth a look.
You also should consider:
- Driving through neighborhoods to see what’s for sale
- Checking out the local amenities
- Attending open houses
- Taking pictures and making notes after each in-person viewing, so you can properly compare them as you complete the search
Remember that this step could potentially take a lot of time, but don’t get discouraged. The right home is out there.
Step 10: When you find your home, make an offer
Once you have found the right home, you can make an offer.
Your real estate agent will help you put together your offer, which usually includes your offer price, preapproval letter, and proof of down payment.
From there, the seller will either accept the offer, reject it, or provide a counteroffer. Again, your agent will help you through this process until it reaches a conclusion.
Going back to preapproval for a moment, a preapproval letter could give you a competitive edge with sellers. It shows you’re serious and are less likely to back out due to financial reasons.
Additionally, reducing the number of contingencies in your offer can put you ahead with sellers. That is, items in your offer that basically make requests of the seller such as repairs or a specific timeline to close. You’re saying that the deal is contingent on certain things.
Sellers often have their own timeline, whether that be a quick close or enough time for them to find another home. If you can be flexible, it’s worth it to consider appealing to the seller.
When the offer is accepted and you make an earnest money deposit, you then can have the home inspected.
Step 11: Have the home inspected
A home inspection is highly recommended before purchasing a home.
Buyers commonly include an inspection contingency in their purchase offer, so if an inspector finds a serious issue, they can either back out of the purchase or negotiate repairs.
Real estate agents often are able to recommend a home inspector, but you also should evaluate them yourself before choosing them.
Buyers generally are responsible for paying for an inspection. The inspector will specifically look through the home for problems, and provide you with a list of what they find.
Step 12: Have the home appraised
Home inspections are mostly performed for the buyer, while appraisals are required by the mortgage lender.
Lenders require appraisals to find out the value of the property you want to purchase. If the appraiser determines the home value is much lower than your offer, you may not be able to get your loan.
Fortunately, this doesn’t happen often. It’s just a step that ensures the lender isn’t lending you more than what the home is worth.
In the case of an appraiser coming to the worst conclusion, you may be able to contest the results if you have significant evidence showing otherwise.
Step 13: Based on inspection, negotiate price and repairs
If you find anything concerning in your inspection report, you may decide to ask the seller to consider a discounted price, credit, or to fix the issues.
Your real estate agent will submit your requests to the seller or their agent, depending on who is selling the home.
If the seller rejects your requests, you can decide to either continue moving forward or walk away.
Step 14: Once a deal is reached, do a final walk-through
Your final walkthrough is your last chance to look at the home before you close.
Make sure all the seller’s belongings are out of the home, and that any agreed-upon repairs have been completed.
Finally, double-check that everything is in working order. If all looks good, you can move ahead to close!
Step 15: Close on your home
It’s time to make things official and close on your home.
Three business days before closing, your lender is required to provide you with a closing disclosure. This document spells out all loan details and closing costs.
You can compare this document to your loan estimate, which you received after your application, and make sure nothing has changed.
Don’t be afraid to ask any questions about what’s in the document to make sure you understand everything.
Once you’re satisfied, you’ll provide some signatures, pay your down payment and closing costs, and the home is yours!
Get started with Compass Mortgage
The loan officers at Compass Mortgage understand the importance of this life-changing milestone, and we are excited to help you reach your homeownership goals.
Our relationship with our borrowers is what sets us apart from other lenders: We believe we are called to treat every person we meet with love and respect.
We will go above and beyond for you to make your homeowner dreams a reality.
If you’re wondering how to buy a home, we can help.
Reach out to our team today to get started and get into your new home.
Better yet, talk to one of our loan officers about Get Committed®, our unique program for a loan commitment which goes beyond preapproval to help you buy the home of your dreams.