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How to buy a house: 13 steps to getting the keys to your new home
If you've decided you're ready to buy a house, you've probably already started looking at potential homes online. Naturally, you want to see the possibilities — and dream about your new home and neighborhood. But just how do you buy that house you fell in love with online? Yahoo Finance has compiled 13 steps to help simplify your path to homeownership.
Here's a step-by-step guide for how to buy a house.
Read more: Everything you should know as a first-time home buyer
13 steps to buying a house
Here are the landmarks you will want to achieve in the home-buying process.
1. Know how much house you can afford
As Step 1, you'll want to determine how much house you can afford comfortably. If you properly gauge your financial capacity, your monthly mortgage payment will feel right from the beginning and get even easier to make over time.
Divide your gross (pre-tax) monthly salary by four. That's a good start for a target monthly payment. But that's not just principal and interest payments. You will also want to include property taxes and homeowners insurance in the total.
Mortgage lenders often recommend your housing costs total around 28% of your gross pay. That calculation is known as your debt-to-income ratio (DTI).
Learn more: How much house can I afford? Use the Yahoo Finance home affordability calculator.
2. Be financially prepared
How much money do you need to buy a house?
Ask yourself how much money you need to buy the type of home you want. Several costs will factor into this amount.
The down payment will be the biggest chunk of cash that you'll need. That can range from 3% of the purchase price (some lenders even offer 1%-down loans) to the optimum 20%. “Optimum” because with 20% or more down, you won’t be charged private mortgage insurance. PMI is a fee that protects the lender in the event that you default on the home loan.
There are also zero-down-payment mortgages, such as VA loans and USDA loans. FHA loans have a minimum down payment of 3.5%. The type of mortgage loan you choose will help determine how much you'll need to save for a home.
Read more: How much money do I need to buy a house?
Pay down debt
Prioritize paying off debt before buying a home. You'll have plenty of new expenses after you move in and will want to have extra spending power available.
Check your credit score
Knowing your credit score is a must. Many financial services providers offer FICO scores for free, and the numbers will vary a bit from each. Knowing generally where you fall on the bad-to-excellent scale will suffice. The higher your score, the better your bargaining power for a lower interest rate and fewer fees.
Dig deeper: Will applying for a new credit score hurt my mortgage application?
Have a cash cushion
Lenders want to see that you've got some money left over after making the down payment and covering the closing costs. It doesn't have to be a huge amount, but showing that you have a bit of a cash cushion during the purchase and once in the home is a good thing.
3. Save for a down payment
Now it's time to actively save for a house. That lump sum down payment has to be in a savings account or somewhere readily accessible. From the minimum 1% of the purchase price to the preferred 20% down, or anywhere in between, it's got to be money ready to be in motion.
Read more: How to save for a house in 7 easy steps
4. Shop mortgage lenders
It seems people may have finally learned this lesson. Over the last nearly 10 years, over 60% of home buyers said they shopped more than one lender, according to Fannie Mae research. Gone are the days when buyers just went with a real estate agent's "preferred lender," no questions asked. Comparison shopping lenders for the best mortgage rates and most favorable fees is a thing. Don't skip it.
Dig deeper: The best mortgage lenders right now
5. Get preapproved
Step 5 is getting preapproved by at least one mortgage lender. Getting a written mortgage preapproval letter in hand is another step rarely taken for granted these days. That's because Realtors and home sellers want to be sure you're a serious shopper.
Learn more: How to get a mortgage preapproval
Yahoo Finance tip: The provider who gives you the preapproval letter doesn't have to be your final lender choice. You'll want to take one more pass at getting a better loan offer once you have a buy-sell agreement in hand.
6: Find a buyer's real estate agent
Now you're set to shop for that perfect house. Almost. You need the right real estate agent on your side — and that's not the seller’s agent shown on the “for sale” sign or the “listing agent” named in the home’s online profile. Talk to two or three buyer’s agents and find a strong negotiator and advocate.
Read more: What is a real estate agent, and what do they do?
7. Find a house (or two)
The fun part: looking at houses. Sure, you skipped down to this house-hunting step a bit early, right? Not to worry, because now that you've completed steps 1 through 6, it's time for a serious search for the perfect home.
Attend some open houses and scour the local real estate market for neighborhoods and amenities that best suit you. Find a couple of contenders: one to make an offer on and some backup options if your favorite falls through.
Read more: Here's what to look for when buying a house
8. Make an offer
Your buyer's agent will handle the details of making an official offer and negotiating counteroffers.
When you make an offer on a house, you'll likely have to put up some earnest money with your written offer. That can be from several hundred to a couple thousand dollars. But don't worry, this isn't a new chunk of cash. It's a small slice from your down payment and will be applied to the total money down later.
Lenders will also want to see a cash cushion available for maintenance, repairs, furniture, and other related expenses, such as moving costs.
Dig deeper: How to make an offer on a house
9. Schedule a home inspection and appraisal
Then comes a home inspection and home appraisal. Both protect you from unknown problems and a valuation issue. A home inspector could find issues such as a leaky roof, mold, or plumbing and electrical problems.
The appraisal assures the lender that the property is worth enough to warrant a home loan approval — and alerts you to the possibility of overpaying for a property that may be worth a lot less than you thought.
Read more:
10. Shop for homeowners insurance
It's time to shop again, this round for homeowners insurance. Your lender will require it, and of course, you need it. It's another round of comparison shopping between multiple providers. Bundle and save? You've got to put every sales pitch to a numbers test.
Learn more: What is homeowners insurance?
11. Choose your lender and apply for a mortgage
With an offer in hand, you can get real-deal loan offers. Each lender vying for your business will give you a written offer. If you have each lender provide a zero-discount-points offer, you can compare apples to apples and then decide if you want to buy discount points to lower your interest rate.
12. Do a final walk-through
Before closing, you'll do one more walk-through with your agent to ensure everything is as promised. Repairs, if any, are completed; things like that.
Read more: What to expect at a final walk-through before closing
13. Close on the loan
You'll face a pile of paperwork, so be patient.
And there are closing costs. Figure those will amount to another 2% to 5% of the home's selling price.
Ask questions and understand what you're signing. If there are any last-minute surprises, you can still walk away. But don't worry, that's not likely to happen. You'll probably have a "Am I really doing this?" feeling, but it will soon transform into delight and excitement when you get the keys.
Congratulations. You bought a house.
Dig deeper: Closing on a house — What to expect and how to prepare
How to buy a house FAQs
How much money should you have before buying a house?
Before buying a house, you should have enough money for a down payment and closing costs, plus some extra savings left over. On a conventional loan, you may be able to put as little as 3% down. Closing costs are usually 3% to 4% of the home purchase price. So if you're buying a $400,000 home, you'll need roughly $24,000 to $28,000 for both the down payment and closing costs.
How can I afford to buy my own house?
First, determine how much house you can afford, including the down payment, closing costs, and monthly mortgage payments. Then, set a financial goal. There are several ways to save enough money to afford a home, such as applying for down payment assistance through a lender or the local government, paying down debts to free up monthly cash flow, or finding a way to earn extra income.
What is the first thing you do to buy a house?
When buying a house, the first thing to do is get your finances in order. Figure out how much house you can comfortably afford (both in terms of the home price and the monthly payments), see if you have enough money, and check your credit score and debt-to-income levels.
How do you buy a house for beginners?
Beginners should know that to buy a house, you'll need to prepare financially, find a real estate agent, shop for homes, make an offer, then pay closing costs on closing day.
What are the steps in order for buying a home?
The first steps in buying a home are knowing how much you can afford and getting your finances in order, including saving for a down payment. Then, you can start shopping for a real estate agent and mortgage lender, get preapproved by a few lenders, and find a house you like. If you make an offer and it is accepted, you'll schedule an inspection and appraisal while choosing homeowners insurance. Finally, you'll officially apply for a mortgage with the lender of your choice, do a final walk-through of the house, and — finally — close on the home and receive your keys.
Is $5,000 enough to buy a house?
You will probably need more than $5,000 to buy a house, but it's possible. Closing costs typically cost between 3% and 6% of your mortgage balance, so it might be enough to cover closing costs if you borrow as little as $100,000. If you get a 0% down mortgage, like a VA or USDA loan, you could be able to swing it.
This article was edited by Laura Grace Tarpley.
