13 steps for buying a house

Smiling family in front of their brand new homeImage: Smiling family in front of their brand new home

In a Nutshell

Do you want the homebuying process to go as smoothly as possible? Check out these 13 steps to buying a house, so you’ll know what to expect and how to stay organized.
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If only buying a home was as easy as clicking your heels three times.

In fact, buying a home takes some work. While touring houses can be fun, you also have to make sure you get all of your financial and logistical ducks in a row — one of the keys to a sound and relatively painless process. Let’s go over what the steps for buying a house look like — from setting a budget and getting preapproved to navigating appraisals and inspections. Once you know the steps to buying a home, you can begin your search with greater confidence.

  1. Consider why you want to buy a house
  2. Review your credit scores and reports
  3. Create a new budget
  4. Determine your down payment
  5. Decide what type of mortgage you want
  6. Find a real estate agent and determine your target area
  7. Get prequalified and preapproved
  8. Start viewing homes
  9. Make an offer and formally apply for your mortgage
  10. Navigate your home appraisal and inspections
  11. Get your home insurance
  12. Negotiate repairs and credits
  13. Close on your home

1. Consider why you want to buy a house

Spending hours browsing Zillow and fantasizing about your future garden? Homeownership is a big step that can be rewarding — but it’ll also present you with new challenges. If you’re going from renting to owning a home, you’ll be responsible for all of the maintenance, taxes and additional costs that come with homeownership.

On the other hand, when you own a home, you can plan for your future in a specific place and design and modify your home to your preferences — plus, you’ll develop equity in the home as you make monthly mortgage payments.

As you consider owning a home, ask yourself the following questions:

  • Are you ready for a single-family home, or would a condo or townhome make more sense for you right now?
  • How much space do you need?
  • How long you do plan to stay in the house?

If you know you’re ready to take the leap toward homeownership, it’s time to start thinking about your finances.

2. Review your credit scores and reports

Before you head out the door to begin home-shopping, you’ll want to get your financial life in order. That way, when you do find a place you love, you’ll know if it’s financially possible to purchase the home.

Your credit scores and reports can play a big factor in the type of loan terms, including interest rates, that you’ll qualify for. Review your credit reports to make sure you’re aware of all the info in them — and whether there are any mistakes.

Mistakes on your credit reports could negatively affect your credit scores. If you find any errors, be sure to dispute them. You’ll want to get a copy of your credit reports from each of the three major consumer credit-reporting companies. You can get a free copy of your credit report from Equifax, Experian and TransUnion once every 12 months at annualcreditreport.com.

If your credit isn’t great, you may want to hold off on buying a home so you have more time to work on your credit, which might help you get a better interest rate on a mortgage.

3. Create a new budget

You’ll also want to think about budgeting as you prepare to buy a home. Do you have enough saved up for a down payment? Are you prepared to cover the closing costs? What kind of monthly payment are you prepared to make on a mortgage? Our home affordability calculator can help you answer these questions.

And even though you haven’t purchased a home yet, you’ll want to start thinking about what your budget would look like after buying a home. Assess your current spending habits and how much room you have in your budget to take on new expenses, including the mortgage, homeowners insurance, property taxes and periodic home maintenance costs.

One key factor in considering how much home you can afford is your debt-to-income ratio. Depending on the type of home loan you get, lenders typically cap DTIs at 43%, meaning that your total monthly debt payments, including your mortgage payment, can’t be higher than 43% of your monthly income.

Mortgage lenders will also consider your employment status and any additional assets you have when determining the terms for the loan.

4. Determine your down payment

Once you have an idea of how much you can afford to spend on your home each month, sit down and figure out how much of your savings you want to allocate towards a down payment.

The size of the down payment you’ll need to put down can vary — one common number you’ll see with conventional loans is 20% of the purchase price of the home. Putting down this much money can help you avoid paying private mortgage insurance, and it can help you get a lower interest rate.

But certain government-backed loans may not require such a large down payment. The stipulations for these types of loans vary, but if you’re not ready to pay 20% toward your down payment, consider looking into the eligibility requirements for government-backed mortgages to see if you have other options.

Here are a few things to keep in mind when determining how much of a down payment you can afford.

  • To find out what your total available funds are, tally up your savings and any investments you’re willing to sell, considering tax and other potential consequences.
  • Add up your estimated costs for moving, renovations, furniture and other financial goals and then subtract that amount from the total funds available.
  • You may want to subtract even more money from that number to ensure you have an emergency fund ready in the event of a job loss or if unexpected expenses arise. Being able to cover three to six months of living expenses is a good idea.
  • Estimate how much it’ll cost to close on the home (including fees) and subtract that number from your total.
  • The amount that’s left is the maximum available for your down payment.

5. Decide what type of mortgage you want

As you prepare to apply for a loan, look into different types of mortgages and decide the best option for you.

  • Conventional loans — Conventional loans are issued by private lenders and aren’t backed by any government agencies. Conventional loans are a good option for borrowers with good credit. 
  • FHA loans — FHA loans are backed by the Federal Housing Administration, and they come with flexible credit requirements and a down payment as low as 3.5%. But if your credit score falls below 580, you’ll need a minimum 10% down payment.
  • VA loans — VA loans are backed by the Department of Veterans Affairs. VA loans help veterans, active duty service members, and eligible spouses buy a home. There are no down payment requirements, but you’ll have to pay a one-time VA funding fee.  
  • USDA loans — USDA loans are backed by the U.S. Department of Agriculture, and they’re designed for low- to moderate-income borrowers living in eligible rural areas. And USDA loans don’t usually come with any down payment requirements. 
  • Jumbo loans — A jumbo loan exceeds the loan amount limits set by the Federal Housing Finance Agency.

Learn more about different types of mortgages.

6. Find a real estate agent and determine your target area

To make the homebuying experience as stress free as possible, it can be helpful to find a great real estate agent to work with and represent your interests.

Your real estate agent should be able to help you find a home, negotiate price and provide you with key background information about the neighborhoods you’re considering. If you’re new to the area or aren’t sure which neighborhood is right for you, a real estate agent might help you find the right fit.

Before choosing a real estate agent to work with, chat with a few different agents to get a sense of their different styles and to learn more about their experience.

7. Getting prequalified and preapproved

Mortgage preapproval and prequalification generally represent different stages of the homebuying process. For prequalification, in most cases the lender does a basic review of your credit and finances to determine if you’re likely to be eligible for a mortgage.

Generally, when you work with a lender to obtain preapproval, you’ll have to share more personal and financial documentation with them. While documentation and other requirements may vary somewhat between lenders, with preapproval you’ll usually get a conditional offer for a mortgage in a specific amount.

Shop around with different lenders

It’s a good idea to get a few offers from different lenders so you can zero in on a mortgage with the best potential interest rates and terms you can get. Paying less in interest over the years can mean more money in your budget to invest in things like repairs, landscaping or decorating your home.

8. Start viewing homes

Next, it’s time to start looking at potential homes. Many people start by browsing sites like Zillow and Redfin, and this can be a good place to start. These sites provide public listings and can help you learn some basic information about different properties.

But pictures can’t show you everything about a home — you’ll need to visit in person to get a feel for things like how big the bedrooms are, whether the home is in good condition and whether it’s located on a busy street.

9. Make an offer and formally apply for your mortgage

Once you’ve found the home you want to purchase, it’s time to make an offer to the seller. Work with your real estate agent to determine an offer amount based on comparable sales in that neighborhood.

You’ll also want to consider any fees, earnest money, and closing costs that you’ll have to pay. And you may want to include a contingency that will allow you to walk away without losing your earnest money if the seller fails the inspection. It’s also a good idea to include an expiration date on your offer, which is the deadline for the seller to respond to your offer.

A seller may reject your offer. If this happens, you’ll need to either send another offer or return to the home search. And if a seller counters your offer, you can review the terms of the counteroffer and decide whether you want to accept or send a counteroffer of your own.

Seller accepted your offer? Congratulations! Now it’s time to formally apply for your mortgage. This process involves giving the lender documentation and completing other paperwork to validate the information you gave when you applied for prequalification or preapproval.

10. Navigate your home appraisal and inspections

After your offer has been accepted, the lender will typically require a home inspection and an appraisal. The purpose of a home inspection is to alert you to any major problems that the home has, so you can negotiate with the seller about fixing the issues or decide if you want to walk away from the sale. The appraisal is an independent assessment that determines how much a property is worth in its local market, which is something lenders typically want to confirm before issuing your mortgage.

11. Get your home insurance

Homeowners insurance is a type of property insurance that covers losses and damage to a residence. Most lenders will require you to have this type of insurance in place, and they may even specify the minimum coverage you must get.

Like choosing a mortgage, you’ll want to shop around for the best homeowners insurance policy. Once you pick your policy, you’ll alert your lender and share any necessary insurance details with them.

12. Negotiate repairs and credits

If the inspection reveals any glaring issues with the home that will require repairs, you may have some room for negotiating the responsibility of covering these costs with the seller. You may be able to discount the overall price of the home or get credits from the seller for covering these costs. The seller can also commit to making any repairs on their own.

But note that sellers aren’t required to make or cover the cost of any repairs. So if the seller doesn’t agree to your terms, you’ll have to decide whether or not to walk away from the home purchase.

13. Close on your home

With all home loan documentation in place, you should be ready to close on the home. Your lender and real estate agent will walk you through this process.

Your lender is legally required to provide you with a Closing Disclosure at least three business days before your closing date. This document contains important information about your home loan, so you’ll want to read it through and check for errors.

At closing, you’ll sign the Closing Disclosure, promissory note, and deed of trust. And you’ll need to be able to pay the closing costs with a cashier’s check or wire transfer.

What’s next?

Once you sign your closing documents, the home is yours! It takes a lot of work to tackle the steps to buying a house, but now you can finally focus on making the home your own and enjoying the fruits of your labor. If you’re planning on doing any renovations, you may want to start researching home improvement loans.

Want to learn more? Check out some of our top mortgage lenders for first-time homebuyers.

  • Homebridge Mortgage: Homebridge offers resources that specifically cater to first-time homebuyers.
  • Rocket Mortgage: Consider Rocket Mortgage if you’d prefer an online-first experience.
  • PennyMac Mortgage: PennyMac offers a wide variety of home loans and shares current rates on its site, which can be helpful for people looking to buy their first home.
  • USAA Mortgage: USAA is a good option for military members and their families. 

FAQs about the homebuying process

What is a good down payment?

It’s customary to put down 20% on a home, but many people put down less than that — especially first-time homebuyers. Look into different types of mortgages to see what works best for you.

How much are closing costs?

Closing costs typically cost between 2% and 5% of the total home purchase price. Use our calculator to get an idea of how much your closing costs could be when buying a home.

What’s the first step in the homebuying process?

Once you’re sure that you’re ready to buy a home, you’ll want to start getting your finances in order.

About the author: Jamie Johnson is a Kansas City-based freelance writer who specializes in finance and business. She covers a variety of personal finance topics, including building credit, credit cards, personal loans and student loans… Read more.