The process of buying a home can appear so daunting that homeownership may seem more like a distant dream than an attainable goal. But you might be ready to purchase a home sooner than you think — especially if you can afford to make a down payment and keep up with monthly mortgage payments.
We’ve broken down the homebuying process into a step-by-step guide to help you navigate your way to homeownership. Here’s the general path, along with some answers to your first-time homebuyer questions.
1. Assess Your Finances
A great place to start is by sitting down and taking a good look at your financial situation.
Determine how much you can afford
Before you even start looking at houses, you need to know your budget. Use online calculators to crunch the numbers and find out how much of your income you can dedicate toward homeownership without becoming “house poor.” That’s when your monthly housing expenses eat up too much of your money — leaving you without enough to achieve other financial goals.
Save up for a down payment and closing costs
Many homebuyers work on saving up for a down payment over time. Putting at least 20% down with a conventional loan allows you to avoid paying for private mortgage insurance, but some lenders may offer these mortgages with a down payment as low as 3%. Certain government-backed loans that have low down payment requirements may also be available to eligible borrowers.
In addition to the down payment, it’s important to not underestimate closing costs. You can expect closing costs to range from 2% to 5% of the total purchase price. So, if you’re buying a $300,000 home, then you’ll likely pay anywhere between $6,000 and $15,000 in closing costs.
Improve your credit score
Your credit score is a major factor that influences the interest rate you’re offered. That’s because lenders use your credit history to predict how reliable you’ll be when it comes to paying back your mortgage. Generally speaking, a higher credit score gets you a lower interest rate.
To improve your credit score, you can focus on:
- Paying all your bills on time.
- Catching up on any overdue payments.
- Reducing your credit card balances.
- Limiting the number of new accounts you’re opening.
Calculate your debt-to-income ratio
Your debt-to-income ratio is another factor that influences your eligibility for a mortgage. Lenders use this figure to help assess whether you’ll be able to make your monthly mortgage payments as you pay off other debts.
You can calculate your DTI ratio by adding up all your monthly debt payments and then dividing that number by your gross monthly income. For conventional loans, the maximum DTI ratio is 50%, but having a lower DTI ratio generally helps your mortgage application.
2. Get Preapproved For a Mortgage
Once you’ve gotten a handle on your financial situation, it’s time to find out how much you’ll be able to borrow. You can do this by applying for mortgage preapproval from lenders. A preapproval letter tells you the amount that a mortgage lender may be willing to lend to you, and shows sellers that you can likely get financing — so they should take your offer seriously.
It’s important to note that preapproval isn’t a guarantee that you’ll secure a loan, and getting preapproved doesn’t mean that you’re committed to the lender. Also keep in mind that preapproval letters typically expire 30 to 60 days after the issue date, so you’ll want to hold off on getting one until you’re ready to kick into high gear and start house hunting.
3. Find a Good Real Estate Agent
Your real estate agent or Realtor will become an important teammate throughout the homebuying process. Real estate agents are licensed professionals, and you can tap into their knowledge, experience, and network to help guide you through each step.
Be sure to ask your friends and family members if they can refer you to any real estate agents. You could also search for Realtors in your area using the directory from the National Association of Realtors.
4. Tour Different Homes and Neighborhoods
The fun part is when you get to start touring different homes and seeing what’s out there. Common home types include:
- Single-family homes, which stand apart from other houses and offer more space, privacy, and autonomy.
- Condominiums, which are units within a larger building that provides amenities and common areas in exchange for homeowners association fees.
- Townhouses, which are homes with one or two shared walls, some yard space, and oftentimes multiple stories. You can think of them as the middle ground between single-family homes and condos.
As you get a feel for the market, make sure to give some thought to the following questions:
- What’s your target area where you’re looking for homes?
- How many bedrooms and bathrooms do you need?
- Would you rather have more space or live in a central location?
- What would your commute to work or school be?
- What are your must-have features — like a yard, for example — in a home?
- Would you consider a fixer-upper home?
- What is each home’s proximity to shopping, restaurants, and entertainment?
5. Make an Offer
Once you think you’ve found the one, it’s time to make an offer on the house. Your real estate agent can help you put together an official offer and assist with any negotiations. Depending on the amount of interest in the home, you might be able to negotiate with the seller on the final price, or get them to cover repairs or certain closing costs.
If your offer is accepted, then you and the seller will enter a binding legal contract known as a purchase agreement. It should clearly state the contingencies, which are conditions that allow you to walk away from the deal without penalty.
Common contingencies include:
- If your financing falls through because a lender won’t approve a loan to you.
- If the inspection reveals major problems with the home.
- If the appraisal comes in lower than expected.
- If there are any disputes over the property title.
- If the seller can’t close by the agreed-upon deadline.
6. Apply For a Mortgage
To get a mortgage, you’ll need to decide whether you want a fixed or adjustable interest rate, and which type of home loan is best for your personal situation. A conventional loan is the most common mortgage type, but there are alternative loan options. These include mortgages backed by the Federal Housing Administration, Department of Veterans Affairs, and Department of Agriculture.
Here’s a quick breakdown of each loan type:
Eligibility Requirements for Different Types of Mortgages
|Requirement||Conventional Loan||FHA Loan||VA Loan||USDA Loan|
|Eligibility||Conforming loans limited to $647,200, or $970,800 in high-cost areas, for 2022||Limited to $420,680, or $970,800 in high-cost areas, for 2022||Eligible service members, veterans, and their surviving spouses||Low-income homebuyers in eligible rural areas|
|Minimum down payment||5%, or 3% for eligible borrowers||3.5%||No down payment required||No down payment required|
|Minimum credit score||620||500||Depends on lender||No minimum credit score, but a score of 640 or higher gets you a streamlined credit analysis|
|Mortgage insurance||Required if your down payment is less than 20%||Required for all loans||Not required, but borrowers pay a one-time funding fee||Not required, but borrowers pay upfront and annual guarantee fees|
Compare mortgage offers
When you apply for a mortgage, you’ll receive a form called a loan estimate, which spells out important details like the estimated interest rate, total closing costs, and monthly payment. It’s smart to compare mortgage offers from different lenders before you make a final decision, because doing so will help you find the best deal and keep the overall cost of your loan as low as possible.
7. Get the Home Appraised and Inspected
Once you’ve chosen a mortgage, the lender needs to confirm two things: the price of the home, and whether you can afford it. This part is called underwriting, and requires you to provide documents that verify your financial situation.
The underwriter will order a home appraisal to determine the fair market value of the home and confirm for the lender that your loan amount is appropriate. The appraisal also helps you, as the buyer, avoid overpaying for the home.
This is the time to get a home inspection as well, so you can make sure there aren’t any major flaws with the property that will require costly repairs. To avoid inheriting the former owner’s problems, you’ll want to catch these issues before you close on the home.
8. Perform a Final Walk-Through
The final walk-through is a relatively quick but important step in the last stages of the homebuying process. At the walk-through, you and your real estate agent will have the chance to inspect the home room by room before it becomes yours. Make sure all the major systems are working, the home’s condition is as expected, and any agreed-upon repairs have been completed.
You’ll want to schedule the final walk-through no more than two or three days before your closing date, so that new problems are less likely to pop up in the meantime.
9. Close On Your New Home
This is it — the part when your purchase becomes official. Your real estate agent will help you schedule and facilitate the closing, so be sure to ask any remaining questions you have. On closing day, you’ll sign some documentation, make your down payment, pay closing costs, and get the keys to your new home.