And while it’s possible to successfully navigate a seller’s market, you have to be strategic: “You don’t want to end up in a position where you’re rushing to buy a house. People are acting like it’s their last chance, and it’s not their last chance. There will still be houses next year,” says Jennifer Beeston, a mortgage educator and senior vice president of mortgage lending at Guaranteed Rate.
Buying a house is a major commitment, and likely the biggest purchase you’ll ever make. The best way to ensure you get the house of your dreams and avoid any costly mistakes is to understand the homebuying process and make sure you’re financially prepared for homeownership before you start.
Here’s everything you need to know about how to buy a house — along with tips to help you overcome the challenges of the current market.
What Are the Steps for Buying a House in 2022?
Despite housing market competition reaching record highs, it’s possible to find and purchase your dream home with a little preparation.
From assessing your financial situation to navigating the mortgage process to closing on a home, here are the 15 steps to buying a house:
- Decide Whether You’re Ready to Buy a Home
- Make Sure You’re Not Tied to a Lease
- Check Your Credit Score and Credit Report
- Save For a Down Payment and Closing Costs
- Have a Consistent Stream of Income
- Figure Out How Much House You Can Afford
- Find the Right Mortgage Lender and Loan Type
- Get Preapproved for a Mortgage
- Hire the Right Real Estate Agent For You
- Start House Hunting
- Make An Offer On A House
- Get a Home Inspection and Appraisal
- Secure Your Financing
- Do a Final Walk Through
- Sign the Papers and Close the Sale
1. Decide Whether You’re Ready to Buy a Home
Buying a home is a big life change, and it comes with countless factors to consider. First, take a big-picture look at your financial standing, career goals, and location. Then evaluate whether you’re ready to buy a home and why you want to.
Are you financially ready to make one of the largest purchases of your life? Is the real estate market competitive where you want to live? Will buying a home make you happier? Many of these factors will determine what type of home you buy, where you buy it, and whether you’re committed to taking the leap from renting to paying a mortgage.
While average home prices and mortgage rates can affect what you pay for a house and how much house you can afford, you shouldn’t let market factors like these dictate whether you buy a house or not. Ultimately, your decision should be based on whether owning a home fits with your individual needs and abilities.
Should I Rent or Buy?
Buying a home is the dream for many, but don’t discount renting just because you feel pressure to become a homeowner. Renting offers a number of benefits, such as more flexibility and fewer responsibilities.
Buying a home is one of the best ways to build long-term equity through property value appreciation. But, the upfront costs are much greater than signing a new lease on an apartment, taking into account a down payment ranging from 3% to 20% of the home’s value, plus closing costs ranging from 3% to 6% of the purchase price. Becoming a homeowner also requires having enough in your emergency savings fund to cover unexpected repairs and ongoing upkeep.
Finally, homeowners must either put their home back on the market or find tenants to cover the mortgage if life offers an unexpected reason to move, whereas renters can simply let their leases expire.
All in all, renting vs. buying is a personal decision that comes along with knowing your long-term financial goals and how much flexibility you want to build into your lifestyle.
2. Make Sure You’re Not Tied to a Lease
If you’re a renter thinking about buying a new home, you’ll need to plan accordingly. That means you’ll either need to wait until your lease is up or break your lease early. Breaking your lease early could result in stiff fines and penalties, if your landlord allows you to at all.
“If you need a house and you’re in a position to buy a house, then it’s great. If you’re trying to break leases or really push to get in a house when you’re not ready, you need to get ready first,” Beeston says.
3. Check Your Credit Score and Credit Report
Your credit score plays a big role in buying a house. It tells lenders how risky you are to lend money to, which determines what loans and interest rates you qualify for.
Generally, a credit score of 620 or more will help you qualify for better loan terms. You may be able to qualify for a mortgage with a credit score less than 600, but a lower credit score will often lead to a higher interest rate, raising the cost of borrowing.
You’ll see the lowest interest rates and most favorable terms with credit scores closer to 850, a perfect credit score. You can usually access your credit score for free through your credit card company — check your monthly bank statement or log into your account online to see what your score is before you apply for a mortgage.
Aside from your credit score, be sure to check your credit report as well. Your credit report is a full record of your credit history, from new credit applications to late or missed payments. If you notice any errors on your credit report, dispute them with the credit bureaus promptly. You can check your credit score for free at AnnualCreditReport.com.
4. Save For a Down Payment and Closing Costs
To buy a house, you’ll need enough to cover a down payment and closing costs. Typically, that’s at least tens of thousands of dollars. Saving up that much for a house can feel overwhelming, but it’s more straightforward when you have a plan.
The median down payment among all homebuyers in 2021 was 12%, according to a National Realtors Association (NAR) survey. But if you can, you should really put 20% down on a house, according to Bernadette Joy, founder of Crush Your Money Goals and contributor to NextAdvisor. With a 20% down payment, you’ll build equity faster, pay lower monthly payments because you’re financing less, and you can avoid private mortgage insurance (PMI) — an extra cost your lender tacks on to your monthly payment when you don’t put 20% down.
At a minimum, you should be prepared to put at least 3.5% down, which is the requirement for many government-backed loans.
Here are some examples of recommended and minimum down payment amounts for different home prices:
|Home Price||Median down payment according to NAR (12%)||Recommended Down Payment (20%)||Minimum Down Payment (3.5%)|
5. Have a Consistent Stream of Income
If you’re employed by a company, recent pay stubs and W-2s will do. If you’re a freelancer or self-employed, on the other hand, you’ll need to submit your tax returns as well as any other documents the lender asks of you.
Generally, you should keep your total housing expenses below 30% of your take-home pay, says financial journalist and NextAdvisor contributor Farnoosh Torabi.
6. Figure Out How Much House You Can Afford
Now it’s time to create a home-buying budget.
Start by calculating your debt-to-income ratio — a comparison of your current debts to what you bring home after taxes. This can give you a snapshot of how much money you can afford to spend each month on a mortgage.
In addition to your monthly principal and interest payment, you’ll also need to account for property taxes and homeowners insurance. You may also have to pay homeowners association fees, depending on the property.
It’s important to factor all these expenses into your monthly budget. NextAdvisor’s mortgage calculator is a helpful tool to determine how much debt you’ll be able to take on responsibly. You can adjust various inputs, like the term of your loan or a lower interest rate, to see how each influences your monthly payment.
You may qualify for more than you can afford. If that’s the case, don’t consider the amount you qualify for, but rather the amount that makes sense for your budget, Beeston says.
“You have to remember that you don’t live in the purchase price — you live in your monthly payments,” Ryan Serhant, a New York real-estate veteran and star of “Million Dollar Listing New York,” previously told NextAdvisor.
7. Find the Right Mortgage Lender and Loan Type
Shopping around is key to finding the best mortgage lender for you. Research different mortgage lenders such as banks, online lenders, and credit unions, among others. Knowing all of your options can help you make the right decision.
Find a lender that’s easy to work with, knows the area you’re looking to buy in, answers all your questions, and informs you every step of the way about the homebuying process—especially if you’re a first-time homebuyer.
Also, pay attention to the rate and fee differences among lenders, and factor those costs into your budget. Rates and fees can differ among lenders, even for the same applicant, so be sure you’re shopping around and comparing your options before you settle on one — even a 0.5% difference in the interest rate can save you thousands of dollars over the life of the loan.
Types of Mortgages to Consider
In addition to choosing the right lender, you’ll also need to choose the right type of mortgage for you. The most popular types of mortgages are:
- Conventional loan: The most common type of mortgage, conventional loans aren’t backed by any government entities. Rather, conventional loans are backed by private banks and credit unions. They typically require that borrowers make bigger down payments and have higher credit scores compared to government-backed mortgages.
- FHA loan: The Federal Housing Administration (FHA) is a government agency within the U.S. Department of Housing and Urban Development (HUD). The FHA backs certain loans made by FHA-approved lenders, which absorbs some of the lending risk and makes mortgages accessible to certain borrowers. Lenders offering FHA-backed loans may require lower down payments.
- VA loan: A VA loan is a mortgage available through the U.S. Department of Veterans Affairs. VA loans may refer to purchase loans, interest rate reduction refinance loans, and cash-out refinance loans. No down payments are required, and they typically come with lower interest rates for veterans. There are two types of VA loans:
- A direct loan, in which the VA acts as the actual mortgage lender (only available to Native American veterans)
- VA-backed loans, in which an approved private lender issues a mortgage guaranteed by the VA
- USDA loan: USDA loans refer to mortgages made through the U.S. Department of Agriculture (USDA). The USDA Rural Development program offers mortgages to low- and middle-income households buying homes in rural and suburban areas with populations lower than 35,000. USDA loans are typically more affordable and don’t require a down payment.
Not all lenders will offer all these loan products, so if you want a specific type of mortgage, you may have to narrow down your list of potential lenders to those that offer the loan you want.
Do I Need a Mortgage Broker?
You don’t have to work with a mortgage broker to get a home loan, but it can be beneficial. Mortgage brokers act as intermediaries between the borrower (you) and the lender (the financial institution offering the loan). Mortgage brokers may be helpful in organizing all of the necessary paperwork that the lender needs from the individual in order to complete the home purchase. An experienced, licensed mortgage broker may help you find the best interest rates and the right mortgages you can qualify for based on your unique experiences.
However, mortgage brokers may not always have your best financial interests in mind, as they make a commission from connecting you with lenders. That said, mortgage brokers may have a vast network of relationships in the mortgage lending industry that could translate to fewer fees and more savings for you.
Will I Need Private Mortgage Insurance (PMI)?
Private mortgage insurance, or PMI, protects the lender in case the borrower defaults on their mortgage. Because of this, most private lenders will require PMI on conventional loans if the down payment amount is less than 20% of the home’s purchase price. PMI is typically charged as a monthly premium on top of your monthly mortgage payment and may be tax-deductible in some circumstances.
You can avoid PMI altogether by putting down 20% or more when you purchase your house. You can also get rid of PMI later on by submitting a cancellation request to your lender once your loan-to-value ratio (LTV) reaches 80% or less — meaning you’ve built up at least 20% equity in your home.
FHA loans, USDA loans, and VA loans don’t require PMI. Instead, FHA loans require you to pay an FHA mortgage insurance premium, which consists of both an upfront premium that can be rolled into the loan, and an annual premium. USDA loans require borrowers to pay a guarantee fee that includes both an upfront and annual fee, while VA loans have a one-time funding fee. All of these fees serve the same purpose as PMI on conventional loans. But, unlike with a conventional loan, these fees remain for the life of the loan unless you refinance to a conventional mortgage.
8. Get Preapproved for a Mortgage
Many homebuyers don’t start thinking about financing until after they’ve found a home they want to purchase, but that’s a rookie mistake.
Once you’ve found a mortgage lender, the next step is to apply to get preapproved for a mortgage. This typically involves undergoing a credit check and answering questions about your monthly income, your assets, and the home you want to buy.
During the mortgage preapproval process, be prepared to prove multiple times that you can pay a mortgage. Lenders may take extra steps to verify each borrower’s employment status, up until the mortgage loan is finalized.
For instance, some sellers may ask for a preapproval letter to let a prospective buyer tour the property. A preapproval letter — which typically is valid for up to 90 days — shows sellers how serious you are about buying; it means a lender has already verified important financial information about you, and you know exactly how much you can afford.
9. Hire the Right Real Estate Agent For You
A good real estate agent will represent you and your best interests throughout the entire home-buying process, from start to finish. Your agent can help you find homes that meet your budget, help you write offers, negotiate, and more.
If you’re unsure where to start, ask your friends and family for recommendations. You can also search online or on social media for real estate agents in your area. Schedule phone calls with a few prospects to get a sense of their experience and see if they mesh well with your personality. Don’t be afraid to ask tough questions, and make sure the agent is familiar with the area and understands your budget needs.
“You want someone who is a local expert,” Beeston says. “They need to know the market inside and out. They need to be a full-time [real estate agent]. Ideally, you want someone who you get along with really well because you’re going to be dealing with this person in an intense manner for as long as you’re shopping with them,” she adds.
The cost of working with a real estate agent comes out of the seller’s profit. Typically, the seller will pay the agent’s commission (roughly 6% of the purchase price, split between the buyer’s and the seller’s agent). However, the seller may factor the cost of the real estate agent’s commission into the house’s sale price.
10. Start House Hunting
Finding the house of your dreams comes easier when you’re well-prepared. Make a list of your must-haves for buying a home, like price range, square footage, number of bedrooms and bathrooms, condition of the home, neighborhood, and property value trends, among other things.
The pandemic — and the changes in lifestyle and desires it’s sparked in many people — has changed some of these parameters.
“If you’re going to be quarantined and you’re in the city, you’re stuck in 1,000 square feet. So we have seen a lot of buyers come into our area from the city — not only because of the interest rates but because they also don’t want to be quarantined in that small space,” says Adriana Buenrostro, a Realtor with Prosper Real Estate in Sonoma County, California.
Your real estate agent can help you find houses within your budget and take you to see them in person. You can also let your agent know which specific houses you’d like to see.
11. Make An Offer On A House
When you’re ready to buy a house, your real estate agent will submit an offer letter in writing. There are several provisions included in the offer letter, but most importantly, it states the price you’re willing to pay for the home and a deadline for the seller to respond to your offer.
Your offer could get accepted or rejected, or the seller may make a counteroffer. The outcome of your offer will determine how you and your agent proceed. If rejected, you’ll have to move onto another property.
If the seller comes back with a counteroffer, which means there’s likely been a change in the purchase price or terms, you’ll have the option to accept, reject, or make another counteroffer. Negotiations may continue for a while after you submit your offer.
If accepted, you can move forward with a purchase contract to complete the deal and proceed to the next steps.
In most cases, you’ll need to deposit earnest money — a sum of money to show good faith, which you could lose if you back out of the deal. Think of it like a security deposit for the home you’re about to buy. The earnest money can be held in an escrow account by a third party specified in the contract, such as a real estate company or lawyer, until closing.
Housing demand has increased significantly in the suburbs of metropolitan areas like New York City, Washington D.C., and Los Angeles, meaning sellers are getting multiple offers. In these types of markets, Beeston says you may face a lot of rejection, and your agent may have to write 10 to 15 offers before one is accepted.
Farnoosh Torabi, host of the “So Money” podcast, previously shared with NextAdvisor her best advice for making your offer stand out in a competitive market: “Offer what you can afford — not a penny over — but sweeten the deal by offering to close as soon as possible,” Torabi wrote.
12. Get a Home Inspection and Appraisal
Assuming your offer is accepted, you’ll need to get an appraisal and a home inspection. An appraisal gives you a solid understanding of the home’s value before you fully commit to purchasing it, while a home inspection will tell you the home’s condition — and any existing issues with the house.
“The appraisal will probably be required, the inspection not so much, but you’d be doing yourself a disservice by not having one done by a qualified expert,” David Bakke, personal finance expert and author, previously told NextAdvisor.
Most people pay between $313 and $420 for an appraisal, according to HomeAdvisor, although some could pay as little as $250 or as much as $600 to $1,000. Depending on the size of the home, expect to spend anywhere between $200 to $400 for a home inspection, according to HomeAdvisor.
In this competitive market, you may be tempted to waive the home inspection contingency to close sooner or make your offer more attractive. However, doing so can come with significant risks. Once you close on a house, it’s your responsibility — and you’ll be liable for any costly repairs you didn’t catch initially.
13. Secure Your Financing
Mortgage underwriting can be completed fairly quickly — but it could also take a couple of months, depending on your situation and how busy the lender is. The entire closing process typically takes a total of 30 to 45 days.
To get final loan approval, it’s critical to keep your finances and credit in order during the underwriting process. That means no large purchases, late payments, or sudden changes to your credit.
Your lender may ask you for more paperwork during the underwriting process to see if anything has significantly changed since preapproval. You may be asked for bank statements, tax returns, or additional proof of income. If so, respond promptly.
Once you officially apply for a mortgage, your lender is required by law to provide you with a loan estimate within three business days of receiving your application. This document will detail the fees, interest rate, and all other costs associated with your mortgage. Be sure to read the loan estimate carefully and ask your lender if you have any questions.
14. Do a Final Walk Through
You’ll also need to do a final walk through of the house you’re about to buy. It’s a chance for you and your agent to see every inch of the house and make sure everything looks and works as it should.
Try to schedule your final walk through as close to the closing date as possible, such as the morning of your closing day. Make sure that there is no damage to the property and there’s nothing missing — for example, appliances that you and the seller agreed would come with the house.
If you’ve had a professional home inspection and appraisal like experts recommend, you likely won’t find any big problems on your final walk through. Still, be sure to stay alert, do your due diligence, and take this last chance to ask questions about anything you’re still uncertain about.
15. Sign the Papers and Close the Sale
You’ve made it to closing, the very last step in the home-buying process. Expect to pay your closing costs, get your new house keys, and sign a big pile of paperwork.
Before you close, your lender will provide you with a closing disclosure, which serves as a final summary for all the costs associated with your home loan. In it, you’ll find information about the loan amount and terms, fees and payments, and closing costs. Be sure to check the closing disclosure against the information in your loan estimate form, and ask your lender about any discrepancies before you sign.
After you sign everything, the closing agent will file the paperwork with your county recorder or register of deeds office to make it official.
Once that’s complete, you’re officially a homeowner. You’ve come a long way, but after closing and moving, there’s one more important task: making your first mortgage payment on time. It’s usually due one month after you’ve closed, which gives you some time to plan and prepare.
What Are Closing Costs and How to Afford Them
Closing costs are an assortment of fees associated with purchasing a home beyond the property cost. Common closing costs include:
- Property taxes
- Homeowners insurance
- Lender fees
- Title insurance
- Home inspection and appraisal fees
- Attorney or title fees
- Mortgage insurance premium
Closing costs typically range from 3% to 6% of the home’s purchase price. You can pay them using a wire transfer, cashier’s check, or certified check.
For many first-time homebuyers, coming up with the upfront money to cover the closing costs may be difficult. Luckily, many federal, state, and local first-time homebuyer programs offer assistance with closing costs or down payments. You can search online for first-time homebuyer assistance programs in your area, or ask your real estate agent or loan officer if they know of any options.
You may also be able to get a no-cost mortgage, where you’ll have a higher mortgage rate but your lender will cover some or all of the closing costs. This option could save you money if you don’t plan to keep your mortgage for very long — for example, if you plan to move or refinance in the near future. Be sure to crunch the numbers carefully to figure out if this option makes sense for your financial situation.