How to Buy a House: All the Steps You Need to Know
The process of buying a home can quickly become overwhelming, especially for first-timers who are new to it all. To help you navigate the process, we put together this step-by-step guide of what to expect.
One important thing to note: The exact homebuying process can vary by state. The process can even be different from one real estate transaction to another depending on the deal. These steps give you a general idea of each homebuying stage.
How to buy a home in 10 steps
Step 1: Evaluate your finances
The first step is to know where your credit score and debt-to-income (DTI) ratio stand. We’ll go into detail about what your DTI is next. First, let’s talk about credit scores.
Lenders take a look at your creditworthiness to decide whether to lend to you and at what interest rate. Minimum credit requirements can vary by lender and mortgage product. We’ll talk about some specific loan products in the next step.
There are many places where you can check your credit score and reports ahead of your home purchase. Everyone is entitled to a free credit report once a year. Some banks, credit card companies and credit unions offer free FICO scores as well. American Express, Bank of America, Citibank and Wells Fargo are examples of financial institutions that give out free credit scores with certain products. You can also get your credit score for free at LendingTree.
Does it matter what type of credit score you monitor? There are two main credit-scoring methods — the FICO score and the VantageScore. Lenders generally use the FICO score over the VantageScore. But either score can help you review an overall trend. If your VantageScore is going up, there’s a good chance your FICO score is following suit. A score of 700 or above on the VantageScore model is considered “good,” while a score of 670 or better on the FICO model puts you in the “good” range. Learn more about the differences between the two scoring models here.
Calculate your DTI
The next financial preparation step is calculating your DTI. The DTI ratio is a simple formula that lenders use to determine how much of a mortgage payment you can afford. Lenders want to make sure you’re not going to be drowning in monthly debt payments when you take on a mortgage.
The DTI ratio compares your monthly gross income with your debt. There are two types of DTI ratios — the front-end DTI and back-end DTI.
- Front-end DTI: This ratio compares your projected housing payment with your debt. You calculate this ratio by dividing the housing payment (principal, interest, taxes and insurance) by your monthly gross income.
- Back-end DTI: This ratio takes into account all your monthly debt payments (i.e., housing payment, student loan payments, minimum credit card payments) versus your monthly gross income. To calculate this, you divide your total monthly debt payments by your gross income.
Generally, lenders look for a maximum of 28 to 35 percent for front-end DTI, and 43 percent for back-end DTI, although requirements vary by lender and loan product.
Determining how much home you can afford
Besides checking your credit and calculating your DTI ratios, coming up with a home budget is a step that shouldn’t be missed. You don’t want to fall in love with a home only to find out it exceeds your price range.
To get an idea of how much you can spend on a home given your income and expenses, check out the LendingTree Home Affordability Calculator.
Step 2: Consider your mortgage products
After reviewing your finances, start researching the various types of mortgages available. Here’s a rundown of a few popular mortgage programs:
FHA loan: Federal Housing Administration loans are government-backed loans that allow qualifying borrowers to put down as little as 3.5 percent on a home. You need a credit score of at least 580 to qualify for the 3.5 percent down payment. If you have a credit score of less than 580, you may still be able to qualify but would be required to put down 10 percent.
VA loan: Department of Veterans Affairs loans are government-backed loans that may offer as much as 100 percent financing to eligible veterans and surviving spouses. There’s no set-in-stone minimum credit score for the VA loan, but the lender will look at your credit history to measure creditworthiness.
USDA loan: U.S. Department of Agriculture loans are government-backed loans for homebuyers who live in select suburban and rural areas. The USDA loan requires good or decent credit.
Conventional loan: Conventional loans are loans that are not government-backed but conform to loan limits set forth by Fannie Mae and Freddie Mac, government-supported enterprises that buy conforming loans from lenders. Lenders generally look for a score of 620 or above for conventional loans.
Don’t have the customary 20 percent to put down? Don’t give up on your dreams of homeownership. As you can see above, there are several mortgage products that open doors to homebuyers who don’t have a full down payment sitting in a savings account.
Besides the government-backed options, conventional loans may let you put down less than 20 percent with private mortgage insurance.
Step 3: Save for the down payment, closing costs and other fees
Besides the down payment, there are closing costs to consider. Closing costs are costs necessary to settle a real estate transaction. In total, these costs generally run from 2 to 4 percent of the purchase price. Closing costs may include:
- Appraisal fees
- Attorney’s fees
- Credit report fees
- Origination fees
- Property transfer and recordation taxes
- Title insurance, which protects you and the lender against property claims
Discount points are another optional expense you may pay at closing. Discount points are percentage points you purchase from the lender to lower your interest rate.
Planning early is the key to saving up large amounts. Coming up with $10,000 to cover a down payment and closing costs may seem like a tall task. But break that sum down over 24 months and you only need to squirrel away about $96 a week. Open a new savings account called “my house fund,” then start to transfer money into it regularly. Money added each week and month can grow before your eyes.
Step 4: Get preapproved for a mortgage
You may be excited to start searching through home listings after checking your credit, calculating your DTI and coming up with a savings plan. Not so fast. It’s a good idea to get preapproved for a mortgage before hitting the open house circuit.
Here’s why you should get preapproved first:
- Sellers tend to take you a bit more seriously. Shopping with a preapproval in hand can set you apart from buyers who aren’t preapproved. It shows you’ve started the financing process, and you’re not just touring on a Saturday afternoon for fun.
- It gives you a clear picture of what you can afford. A preapproval letter from a lender tells you how much it’s willing to lend based on a preliminary review. No need to guess your price range when you have a preapproval.
- Working with a lender early gives you a chance to make adjustments. If you’re unable to qualify for the loan product and interest rate you want on the first go, you have time to shop around with multiple lenders. A lender may even be able to work with you and suggest financial moves you can make to improve your home loan terms.
Preapproval versus pre-qualification. The words pre-qualification and preapproval may be used interchangeably, but there is usually a slight difference. A pre-qualification is typically something you can get without a full credit review. You give the lender an estimate of your income, credit and debt, and it gives you an estimate of how much you can afford.
A preapproval, on the other hand, is when the lender typically does a deeper dive to determine how much it’s willing to lend to you. The process can be different from lender to lender. The lender may pull credit reports and ask for supporting documents, including:
- Residential history
- Asset statements (bank statements and retirement fund statements)
- A list of your other assets, including property
- Debt statements
- Pay stubs, W-2s or I-9s
Keep in mind: A preapproval letter gives you a loan amount, but it is still conditional. You can take either a pre-qualification or a preapproval letter with you when shopping, but a preapproval letter generally makes a stronger statement.
Tips for choosing a lender
When it’s time to choose lenders to get preapproved, you have many options both online and offline. Offline, you can ask your family and friends for recommendations or check review sites such as Yelp or Angie’s List. Online, the LendingTree mortgage tool can help you compare multiple mortgage products with a few clicks.
Don’t worry about accumulating many hard inquiries while mortgage shopping. Multiple hard pulls for a home loan within a 30-day rate-shopping period generally count as one inquiry. Plus, the long-term benefit of applying with multiple lenders to land the best deal on rates and fees can outweigh the repercussions of losing a few credit score points temporarily from hard inquiries.
Step 5: Find a real estate agent and real estate attorney, and start house hunting
Now to the fun part — the home search. Thanks to online listing websites such as Realtor.com, Zillow and Trulia, you can technically spearhead your own home search. But an agent could kick your search into high gear with their expertise and knowledge of listings not widely marketed.
A real estate agent helps you look for a home, puts in your offer, helps you negotiate and answers questions along the way. Your agent is another service provider you can find from recommendations, or you can comb through review sites and line up a few to interview. Industry databases, such as the one on Realtor.com, are another place where you can find a licensed professional. Be sure to check credentials. You may be able to verify credentials through a state license search.
Another person you may want to add to your team is an attorney. An attorney is required by some states and not required by others. An attorney is your representative who looks over the deal and may accompany you to closing. If you hire an attorney, you can expect for it to cost at least a few hundred dollars.
Step 6: Make an offer
When you find a home you love, it’s time to put in an offer. What’s included in the offer may vary. An offer typically includes your purchase price, the date of your preapproval, earnest money and a list of any conditions that need to be met for you to buy, such as securing financing.
Earnest money is money that may be given to the seller to show you’re serious and not just putting out random offers for different houses. Earnest money typically is put toward the purchase price if the offer is accepted. Be aware that the seller may counteroffer. A bidding war may even ensue if there are many interested buyers.
Step 7: Get a home inspection
The next stage of the process is the home inspection. You choose the home inspector, and it’s an expense on which you shouldn’t skimp. The home inspector is going to point out problems before you buy. Depending on the terms of the agreement, you can back out of the deal or negotiate repairs if issues are discovered.
Referrals can come in handy as well. You may also be able to find an inspector through a home inspection professional association website. Be careful about conflicts of interest. You want someone who doesn’t have any ties to the deal to ensure they’re giving you an unbiased opinion.
Step 8: The underwriting process
The underwriting process is when the lender fully verifies all the information on your application to give you an official approval. Preapprovals are conditional; the underwriting process is where loan officers make final decisions.
During underwriting, it’s important that you do not make any changes to your finances without notifying your lender. For example, don’t buy a new car or open new credit cards because these changes can jeopardize your mortgage. Your lender will likely ask for additional documentation during this process. Stay by the phone and check your email regularly. Responding quickly to requests during underwriting can speed things up.
Home appraisals. Aside from scrutinizing your finances, the lender will order a home appraisal. An appraisal is an unbiased review of what the house is worth. The appraiser typically judges the home versus similar ones sold in the local market to determine the home value. Lenders order an appraisal to make sure they’re lending you the right amount of money for the property since the property is securing the mortgage. The buyer usually pays for the appraisal.
Underwriting and the appraisal can be the nail-biting part of the homebuying process. But if all goes well, you should get a final walk-through and closing date.
Step 9: The final walk-through
The final walk-through happens before loan closing. It can happen several days before or right before depending on when the previous owner moves out of the property. You’ll get a date for this event, so mark your calendar. The final walk-through is the opportunity for you to identify any last-minute problems before settlement.
Step 10: Closing on your home
Closing day is the day you should tie up loose ends, sign documents and get your keys. The people who are at closing can vary. You, the seller, your agent, the seller’s agent, attorneys, title agents and the lender are parties that may be present.
Three days before closing, you should get closing documents to review. Look over these documents carefully and bring up any questions you have right away. On closing day, you hand over funds for the down payment and fees. If closing goes through without a hitch, you’re officially a homeowner.
See it through until the end
In a perfect world, every homebuyer would run through these steps in lightning speed. Some setbacks can prolong the process, making it a bit stressful. You may not get financing right away; the process of securing a mortgage can take up to 30 days or more. The seller may counteroffer or you could find problems with the home that could lengthen the homebuying timeline. For this reason, it’s essential that you hire individuals — agents, lenders, inspectors — who are responsive and keep you in the loop. Delays may happen, but you eventually get rewarded at the end with the keys to your new home.