Step 1: Determine your budget and Evaluate your preferences
Before determining your budget, take a look at your current financial situation. Consider your income, savings, and any debt you may have. After you have evaluated your finances, you can set a budget for yourself.
Some of the first things to consider when you’re buying a home are how much you want to spend, where you’d like to live and what’s important to you as a buyer.
Prioritize your wish list to fit your budget
Once you have a rough budget in mind, make a list of must-have home features. Your price point will likely dictate the size, location and amenities of your future home. Here are a few examples of wish list items to consider:
- Number of bedrooms and bathrooms
- Square footage
- Outdoor space
- Preferred location
- Type of home
- Layout, features and finishes
- School district
- Pet-friendliness
- Work commute
Step 2: Improve your Credit Score
Before you permit a lender to check your credit score, you’ll want to do a thorough review of your own credit report.
What is a credit report? A credit report pulls data from three major credit reporting agencies: TransUnion, Equifax and Experian. It is the report used to calculate both your FICO score and your Vantage score.
What is a FICO score? A FICO score is the score lenders use to evaluate your creditworthiness. This is calculated by Fair Isaac & Co. and ranges from 350-850.
What is a Vantage Score? A Vantage Score is the credit score you’ll see when you check your score on consumer-facing credit check websites. Your Vantage Score can vary from your FICO score. Lenders do not use your Vantage Score to evaluate your creditworthiness.
The higher your credit score, the lower the interest rate you’ll receive. Generally speaking, a credit score of 720 or higher will get you a good interest rate on a conventional loan, but qualification criteria depends on the specific lender. For FHA loans, you can usually get approved with a credit score of 580 or higher.
If you’re trying to improve your credit score before applying, you should understand factors that can impact your score:
- Payment history
- Total debt
- Length of credit history
- New credit
- Type of credit
Step 3: Get Pre-Approved
Once you have a budget in mind, you can start the pre-approval process for a mortgage. Pre-approval is a great way to determine what loan amount you may be eligible for and what your monthly payment may look like. It’s also a great way for potential lenders to get a better idea of your financial situation.
When you’re pre-approved, you’ll receive a pre-approval letter. Not only does it officially let you know how much you can borrow, but it can come in handy when submitting an offer. A pre-approval letter shows a seller you’re serious about buying their home. This is especially important in a hot market, when you’re likely competing against other offers.
In order to get pre-approved, a lender will calculate your debt-to-income ratio and assess your overall financial health by reviewing your:
- Income statements, like W2s, 1099s, rental income and tax returns
- Assets, like bank statements and retirement accounts
- Debts, including monthly expenses like student loans, credit cards and other mortgages
- Records of bankruptcies and foreclosures
- Current rent, child support payments, alimony payments and any down payment gifts
Step 4: Find The Right Real Estate Agent For You
Most buyers find it helpful to have a professional real estate agent on their side to guide them through the process. 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.
Here are some areas where a buyer’s agent can help:
- Market insights: identifies home value trends, new developments, buyer demand and overall state of the market
- Offer price: determines what a home is worth and recommends a competitive initial offer amount
- Negotiating: knows when to argue for a lower price and how to negotiate contingencies and repairs
- Local familiarity: has insider tips about the neighborhood and area schools
- Professional recommendations: provides referrals for a trusted lender, attorney, contractor or other vendors
- Experience: simplifies the process by handling hiccups, staying on top of due dates and overseeing paperwork
Step 5: Begin House Hunting
Searching available homes online is a great way to start your house-hunting process.
Your real estate agent will help you hunt for houses within your budget. It’s a good idea to make a list of your top priorities, some of which might depend on whether you’re looking for a starter home or forever home and what type of house you are looking for.
Here are some things you might want to consider when shopping for a house:
- Price
- 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
- Property/real estate taxes
Try to stay flexible — you’ll probably need to adjust your criteria as your home search continues. For example, you might decide it’s worth sacrificing an extra bedroom to be in your desired neighborhood. Play around with search parameters and see what your money would buy if you changed your wish list a bit.
Step 6: Schedule Showings
Your agent can send you listings and schedule showings. Rank your priorities from most 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.
What to look for when touring homes
Once you start visiting homes in person, be sure to consider the home’s “health” so you’ll have an idea of any major challenges that might be coming your way if you decide to make an offer. Ultimately, the inspection will give you an official report on the home’s quality and condition, but while you’re touring, keep an eye out for the following:
- Structural defects and cracking
- Water pressure (turn on faucets and shower heads)
- Electrical issues (try the light switches)
- Functionality and heat retention of doors and windows
- Roof and exterior quality
- Noise from neighbors or traffic
Step 7: Make an offer
Once you’ve found the right home, you should make your offer based on a comparative market analysis (CMA) done by your agent. The CMA is a calculation of a home’s market value based on comparable recent sales in the same area.
Using the CMA as your baseline, your agent should help you determine a fair offer price and help you decide if you should leave some room for negotiation — this depends on the state of your real estate market.
Above and beyond the CMA, here are some other things to take into consideration when making an offer:
Disclosures: Disclosures are known problems related to structural issues, unpermitted work, natural hazards and flood risks. Most states require sellers to provide disclosure documents, so make sure your agent requests them.
Closing date: When you’re buying a home with a mortgage, it will take 30-45 days after the contract is executed to close on the home. When you submit an offer, you can request a later closing date to fit your moving timeline, but the seller may push back on this request.
Contingencies: A contingency is an agreement between the seller and the buyer or the lender and the buyer regarding conditions that need to occur for the sale to move forward. Some contingencies are necessary, like the appraisal contingency your lender will require to ensure they’re not overpaying on your loan. An inspection contingency is up to you, but it’s highly recommended.
Earnest money: An earnest money deposit is a sum of money you’re willing to put down when you make your offer to show that you’re serious about buying the home. If you close on the home, the earnest money simply becomes part of your down payment. If you back out of the purchase (outside of a contingency), you’ll lose the deposit.
It’s important to note that not every offer works out. It can be disappointing, but try not to feel discouraged if you don’t get the first home you put an offer on.
Step 8: Schedule A Home Inspection
During a home inspection, an inspector will go through the home and specifically look for problems. They will test electrical systems, make sure the roofing is safe, make sure appliances are working and much more. After the inspection closes, the inspector will give you a list of problems they found in the home.
When you receive your inspection results, go over each item line by line and look for major issues. 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.
Bear 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 inspection reveals an expensive problem (like cracks in the foundation or poorly installed windows), you may want to reconsider the purchase.
It’s common for homebuyers to include a home inspection contingency in their purchase offer. A contingency gives buyers the option to back out of a purchase (or negotiate repairs) without losing their earnest money deposit if the home inspection reveals major issues with the home.
Usually, the inspection is scheduled within a week of the contract being signed. It’s recommended that you attend the inspection, as it’s a good way to get a better understanding of the inner workings of the home. Usually, your agent will attend as well. After you receive the official inspection report, you’ll have time to discuss the findings with your agent and decide how you want to respond to the seller.
Step 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 considering 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 owner (FSBO), 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.
Step 10: Shop The Best Mortgage Rates
You do not have to use the same lender to finance your loan that you used for your pre-approval. It’s always best to get estimates from multiple lenders and compare interest rates and fees before actually opening your mortgage.
Even if you’ve been pre-approved, you still need to take a few additional steps to officially submit the mortgage application. Once you’ve completed the following steps, assuming everything checks out, you should receive the “clear to close,” which means that the lender has approved your purchase.
Loan application
If you decide to officially apply for your loan with the same lender that did your pre-approval, they already have some of the documents you’ll need for your application. Likely, you’ll need to provide updated financial statements. The most important thing you can do during this process is to respond to requests quickly. For example, if the lender asks for your W2, send it promptly to avoid a delay in your closing. If you decide to move forward with a different lender, they will tell you the list of documents they need in order to complete your application.
Step 11: Get A Home Appraisal
A home appraisal is a review that gives the current value of the property you want to buy. You must get an appraisal before you buy a home with a mortgage loan.
Appraisal
Your lender will hire the appraiser, so there’s not much for you to do here. Your real estate agent should work with the seller’s agent and the appraiser to schedule the appraisal. After the appraisal is complete, you and your agent will receive copies of the appraisal report, so you can see the appraised fair market value and check out the comps that were used in the calculations.
If the appraisal matches your offer price: You should be clear to close.
If the appraisal comes in above your offer price: Even better! This means not only are you clear to close, but you’re purchasing the home for a price below market value, giving you instant equity.
If the appraisal comes in low: Your lender won’t approve the full loan amount, as in their eyes, you’re overpaying for the property. You’ll need to either make up the difference between the appraised value and the offer price in cash or try to re-negotiate the offer price with the seller. If you believe the appraisal was incorrect, you can try to request a new appraisal from your lender.
Home buyers should also include an appraisal contingency in their offer. Appraisal contingencies are often drawn up to allow buyers to back out of a purchase (or negotiate a lower price) without losing their earnest money deposit if the home appraises for less than the offer amount. As with inspection contingencies, appraisal contingencies may vary, so make sure you understand the nature of your agreement.
Step 12: Purchase a homeowners insurance policy
You’ll need to have proof of a homeowners insurance policy before closing, so if you already own a home, ask your existing agent to help you open a new policy. If you don’t own a home, shop around for a policy that works best for you. Your lender may be able to help you coordinate a policy that can be paid through your monthly escrow account.
Step 13: Do A Final Walkthrough
You should do a final walkthrough 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 everything in order.
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.
Step 14: Close and move
Many buyers choose to have a final walkthrough a day before or the morning of closing. Its purpose is to be sure that the property looks the same as when you made your offer and that the seller completed agreed-upon repairs (if applicable).
On closing day, expect to spend at least a few hours at the title company signing paperwork. You should also be prepared to bring funds to cover your closing costs, which typically range between 3-5% of the sale price.
Once the signing is complete and the sale is recorded, you’ll receive your keys. The house is yours!
You can now set up utilities for the new home — things like electric, cable and internet. If you’re buying a condo with an HOA that covers some utility costs, double check contract responsibilities with your real estate agent.
Congratulations on your new home, you are ready to move!
