Buying A House In 2020: A Step-By-Step How-To
* This is for informational purposes only and may change.
Are you ready to take on the challenge of buying a home in 2020? Make sure to read our how-to guide before you jump in.
How To Buy A House In 11 Steps
Most home sales involve the following 11 steps:
- Decide Whether You’re Ready to Buy a Home
- Calculate How Much House You Can Afford
- Save For A Down Payment And Closing Costs
- Get Preapproved For A Mortgage
- Find The Right Real Estate Agent For You
- Begin House Hunting
- Make An Offer On A House
- Get A Home Inspection And Appraisal
- Ask For Repairs Or Credits
- Do A Final Walkthrough
- Close On Your New Home
Let’s take a closer look at what each of these steps involves and what you’ll do along the way.
1. Decide Whether You’re Ready To Buy A Home
Buying a house is a major commitment. Before you begin shopping for properties or comparing mortgage options, you need to make sure you’re ready to be a homeowner. Let’s take a look at some of the factors your lender will consider when they look at your loan application.
Income And Employment Status
Your lender won’t just want to see how much money you make, they’re going to want to see a history of your income to make sure your income source is stable and reliable.
Preparing your income is all about pulling the right documentation together to show steady employment. If you’re on payroll, you’ll likely just need to provide recent pay stubs and W-2s. On the other hand, you’ll need to submit your tax returns as well as any other documents the lender requests if you’re self-employed.
Debt-to-income ratio is another financial instrument lenders use to evaluate your loan application. DTI helps your lender see how much of your monthly income is already going to debt so they can evaluate the amount of mortgage debt you can take on.
DTI is calculated by dividing your monthly debt by your gross monthly income. 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, or 33%. Your lender will use the debts shown on your credit report to calculate your DTI.
It’s smart to review your DTI before you apply for a loan. In most cases, you’ll need a DTI of 50% or less to qualify for a mortgage, although this number varies based on your lender, loan type and other factors.
Buying a home with no money down is possible but most homeowners need to have some cash for a down payment. A down payment is the first major payment you make on your loan. The amount of money you’ll need to save depends on your loan type and how much money you borrow.
Many home buyers believe that they need a 20% down payment to buy a home. This isn’t true – you can buy a home with as little as 3% down. However, if you put at least 20% down on a conventional loan, you won’t need to pay for private mortgage insurance.
PMI protects your lender if you default on your loan. You can cancel PMI when you reach 20% equity in your home or you can avoid it altogether with a 20% down payment. A larger down payment also means a lower monthly payment, so you might want to take some time to save before you buy a home.
You’ll also need to pay for closing costs before you move into your new home. Closing costs are fees that go to your lender 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 save 3% – 6% of your home’s value for closing costs.
Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how risky you are to lend money to.
Taking steps to improve your credit score and reduce your debt can pay off big as you prepare to get a mortgage. Better numbers mean better loan options with lower interest rates.
Your credit score is based on the following information:
- Payment history
- Amount of money you owe
- The length of your credit history
- Types of credit you’ve used
- Your pursuit of new credit
So what score will you need to qualify for a home loan? Most lenders require a credit score of at least 580. However, a score of 620 will allow you to qualify for more options. A score above 720 will generally get you the very best loan terms.
Willingness To Live In One Place
A mortgage can be a 30-year-long commitment. Though you don’t need to live in your home for the entirety of your mortgage term, it’s still a big decision. When you own a home, it’s more difficult to move. In many cases, you’ll need to sell your home first, which can take a long time.
Decide whether you’re ready to live in your current area for at least a few more years. Consider your career goals, family obligations and more. Each of these factors will play major roles in the type of home you buy and where you buy it.
2. Calculate How Much House You Can Afford
Once you decide you’re ready to buy a home, it’s time to set a budget. A good place to begin is by calculating your DTI ratio. Take a look at your current debts and income and consider how much money you can reasonably afford to spend each month on a mortgage.
Remember that homeownership comes with a number of hidden costs you don’t need to worry about while renting. For example, you’ll need to pay property taxes and maintain some form of homeowners insurance. Make sure you factor these expenses into your household budget when you decide how much home you can afford.
Having trouble coming up with on a number? Use our Mortgage Calculator to get a rough idea of how much money you can get for a mortgage.
3. Save For A Down Payment And Closing Costs
In most cases, you won’t be able to get a loan for 100% of the purchase price of the home. That’s why you make a down payment. A down payment is a large cash payment you make when you buy your home.
A larger down payment typically means you have more mortgage options. Putting more down usually means you’ll get a smaller monthly payment and a lower interest rate. If you’re getting a conventional loan, putting 20% of the loan value down means you can avoid paying PMI.
A 20% down payment isn’t realistic for many first-time home buyers, so there are many options for buyers who can’t pay those upfront costs. You can get a conventional loan for as little as 3% down. FHA loans have a minimum down payment of 3.5%. VA loans and USDA loans even allow eligible and qualified borrowers to put 0% down.
You’ll also need to save money to cover closing costs – the fees you pay to get the loan. There are many variables that go into determining how much you’ll pay for closing costs, but it’s usually smart to save 3% – 6% of the home value. This means that if you’re buying a home worth $200,000, you might pay $6,000 – $10,000 in closing costs.
The specific closing costs you’ll need to pay for will depend on your loan type, your lender and where you live. Almost all homeowners will pay for things 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.
Your loan type might require a specialized inspection as well. For example, you must get a pest inspection before you take out a VA loan. Most lenders will schedule this inspection on your behalf and pass the cost along to you at closing.
Before you close on your loan, your lender will give you a document called a Closing Disclosure which lists each of the closing costs you need to cover and how much you’ll need to bring to the closing table. Look over your Closing Disclosure carefully before you close to make sure there are no duplicate fees.
There are many ways to save for your home purchase, including through investments and savings accounts. If you have relatives who are willing to contribute money, you may be able to use gift money toward your down payment, but a letter confirming it’s a gift and not a loan will be required.
4. Get Preapproved For A Mortgage
When you’re ready to start house hunting, it’s time to get preapproved for a mortgage. When you apply, your lender will give you a preapproval letter that states how much you’re approved for based on your credit, assets and income. You can show your preapproval letter to your real estate agent so they can help you find homes within your budget.
To get preapproved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets and the home you want to buy. It will also involve a credit check.
There are multiple types of mortgage loans. Knowing all of your options can help you make the right decision. Here are some of the most common types of mortgage loans.
Conventional loans, sometimes called conforming loans, are loans that aren’t backed by the federal government. Conventional loans are a popular option for home buyers, and you can get one with as little as 3% down.
Backed by the Federal Housing Administration, FHA loans are less of a risk for lenders because the government insures them if you stop making payments. As a result, FHA loans have credit score requirements that aren’t as strict. You can get an FHA loan with a down payment as small as 3.5%.
VA loans are mortgage loans for active-duty members and veterans of the Armed Forces. You can get a VA loan with 0% down if you meet service standards. VA loans are insured by the Department of Veterans Affairs.
Another type of government-backed loan, a USDA loan, helps people in rural and suburban areas buy homes. You can get a USDA loan with 0% down, but your home must be in an acceptable rural area and you must meet income eligibility rules.
5. Find The Right Real Estate Agent For You
Your real estate agent is your representative in the transaction. Your agent will look out for your best interests by finding homes that meet your criteria, get you showings, help you write offers and negotiate.
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 commission is usually 3% of the purchase price.
A real estate agent represents you and helps you understand how to buy a house. Your agent will show you properties, write an offer letter on your behalf and assist in negotiations. Real estate agents are local market experts and can also advise you on how much to offer for each property.
It’s possible to buy a house without a real estate agent or REALTOR®. However, this isn’t recommended, especially for first-time buyers. Buying a home is a complicated and emotional process. Having an agent by your side can help you navigate the housing market, submit a legally sound offer and avoid overpaying for your property.
6. Begin House Hunting
Your real estate agent will help you begin looking at properties within your budget. It’s a good idea to make a list of your top priorities. Some of the things you might want to consider include:
- 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
Rank your priorities from most important to least important and show this list to your agent. Your agent will then show you homes that fit your criteria. You may need to spend some time searching for the perfect home, so don’t get discouraged if your hunt takes longer than you expected.
Only you can decide which property is right for you. Make sure you see plenty of homes before you decide which one you want to make an offer on. You should also be sure to get an inspection before you decide to buy a home.
Go through each line of your inspection report and look for major problems. 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 options. Read over your inspection results with your agent and ask whether they noticed any major red flags. We’ll talk a little more about inspections in a later section.
Once you find a property you like that fits your needs and budget, it’s time to make an offer.
7. Make An Offer On A House
When you decide to make an offer on a home, you must submit an offer letter in writing. Your offer letter includes details about yourself (like your name and current address), the price you’re willing to pay for the home and more. It will also include a deadline for the seller to respond to your offer.
Most offers also include an earnest money deposit. An earnest money deposit is a small amount of money, typically 1% – 2% of the purchase price. 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 for reasons other than inspections or finance, you typically lose your deposit.
Your agent will submit the offer.
From here, the seller can respond in one of three ways:
- Accept the offer. If the seller accepts the offer, you can move onto the next step.
- Reject the offer. If the seller rejects your offer, the ball is back in your court. You can choose to submit another offer or move onto another home.
- Give you a counteroffer. The seller can also come back with a counteroffer of their own. They may change the purchase price or the terms of the sale. You can accept the counteroffer, reject it or make another counteroffer.
Negotiations may go on for some time after you submit your offer. Let your real estate agent help you manage negotiations – 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 move on to the appraisal and inspection.
8. Get A Home Inspection And Appraisal
An appraisal is a review of your home that gives you a rough estimate of how much the property you want to buy is worth. You must get an appraisal before you buy a home with a mortgage loan.
Lenders require appraisals because they can’t lend out more money than your home is worth. If your appraised value comes back lower than your offer, you might have trouble getting financing. Be thoughtful about your offer and consider contesting the results of the appraisal if you believe the appraised value is too low.
An inspection isn’t the same thing as an appraisal. During an appraisal, a home value expert will give you a rough estimate of how much your home is worth. An inspector will go through your home and specifically look for problems. He or she will test electrical systems, make sure your roofing is safe, make sure appliances are working and much more. After the inspection closes, the inspector will give you a list of problems he or she found in the home.
Lenders usually don’t require inspections to get a loan. However, you should always get both an inspection and an appraisal before you buy a property. When you receive your inspection results, go over each item line by line and look for major issues. You may want to ask your real estate agent or inspector to go over them with you as well.
Keep in mind that you’ll be liable for any major repairs after your sale closes. A clogged toilet or a sink that won’t drain aren’t major issues. However, if your home has an expensive problem (like cracks in the home’s foundation or an electrical system that’s on the fritz) you may want to reconsider the sale.
9. Ask For Repairs Or Credits
After you view your inspection results, you might want to ask your seller to correct some of the problems you found. You can do this in one of three ways:
- Ask for a discounted purchase price in light of the results.
- Request that 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 the owner, your agent will negotiate with the seller directly. The seller might accept your request, or they might 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. Please note, in a hot market many buyers are not asking for repairs as part of their offer.
10. Do A Final Walkthrough
You should do one last walk-through alone in your new home before you close, even if you’re 100% committed to the property. This time allows you to check and make sure that the seller has made the repairs you requested and cleared out the property.
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, it’s time for you to confidently move toward closing.
11. Close On Your New Home
Your lender is required to give you a document called a Closing Disclosure 3 days before closing, which tells you exactly 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 would have received 3 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, which lists 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 closing finishes, you’re officially a homeowner!
Final Thoughts On Buying A Home
Buying a house can be a long process. First, you’ll need to make sure that you’re really ready to be a homeowner and set a budget. Next, you’ll begin shopping for properties. Having a reliable real estate agent at your side can make everything easier. Once you find a home, your agent will help you submit an offer and negotiate with the seller.
When you reach an agreement, you’ll get an appraisal and inspection. If the inspection turns up a major issue, you may want to negotiate repairs or credits with the seller. You’ll also do one more walkthrough in the house before you buy it. If everything looks OK, you can finally move to close – and enjoy your new status as a homeowner.
Do you think that you’re ready to buy a house? Contact us today to get started or learn more.