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How to Buy a House

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If you’re considering a mortgage, congratulations! The steps to buying a house are straightforward, but they’re not necessarily intuitive. This guide will help you break down the process into manageable, cost-saving chunks.

Here are the steps we'll cover:

  1. Get your credit in shape
  2. Honestly assess your financial situation
  3. Build savings
  4. Figure out how much house you can afford
  5. Get pre-approved by multiple lenders
  6. Choose a real estate agent and view homes
  7. Choose a home and make an offer
  8. Get a home inspection
  9. Close and get your keys

1. Get your credit in shape

An easy first step in your journey to buy a house is to get a copy of your credit report from each of the three major credit bureaus. Review these for accuracy. Correct errors. Most mistakes can be easily fixed when you’re viewing your credit history online.

Use one of the many free credit score websites to get your FICO® Score or VantageScore. Find out what negative factors are affecting your score and take time to address them. You might be able to raise your score enough to qualify for a lower mortgage interest rate.

2. Honestly assess your financial situation

How do you know when you're ready to buy a house? Start with the basics and take stock of your financial health.

The amount of debt you have dictates how much of a mortgage you'll qualify for. For most mortgages, the lender looks at your debt-to-income ratio. That's a measure of your required debt payments compared to your gross income each month. The mortgage you qualify for will have a payment that doesn't push your debt-to-income ratio over allowed limits (usually about 43%).

Here's an example of what this looks like. If you earn $4,000 per month, your total debt payment each month can't exceed $1,720. (That's the 43% mentioned above.) Say you have existing monthly debt payments that total $650 (like a car loan). That leaves you with $1,070 for housing.

If your property taxes, insurance, and other home fees come to $350 each month, you'll have $720 left for the principal and interest payment on your loan. That translates to a $150,000-$180,000 loan to buy a house, depending on the mortgage rate you qualify for.

3. Build savings

Got an emergency fund? If the answer is no, get it squared away before you buy a house. When unexpected expenses come up, there will be no landlord or property manager to take care of it. You might also have to pay for moving costs and home repairs before you move in.

You'll also need cash to pay your closing costs, or they'll be rolled into your loan and you'll pay interest on them for the life of the loan. Some lenders don't charge closing costs, but your mortgage rate will be higher as a trade-off.

If you're buying your first home, you might wonder how much you'll need in savings. Read our first time home buyers guide for more information on maintenance costs, closing costs, and other details you'll encounter in the house buying process.

The importance of a down payment

Now let's talk about your down payment. A bigger down payment could mean a smaller loan, which means less mortgage interest over time -- or even a loan that you can pay off faster.

Some home buying programs require a low or no down payment. But if you have a small down payment, you might have to pay other fees. For example, your interest rate will be higher. You'll probably have to pay for private mortgage insurance (PMI) every month, too.

Down payment help

Finding it hard to stockpile cash for a down payment? You might be able to get help.

First, look for lenders that offer a low down payment loan option like an FHA loan or Home Possible® loan. The FHA loan requires the home buyer to come up with a down payment of 3.5% and the Home Possible® loan requires 3% down.

Then, see if you qualify for a special loan or grant to help you buy a house. Many cities and states offer interest-free loans, low-interest loans, or non-repayable grants. Start at the Department of Housing and Urban Development for down payment assistance programs in your area. You can also search for "down payment assistance" in your city or state.

4. Figure out how much house you can afford

Calculate your monthly payment before you shop for loans to buy a house. Find out what you can afford monthly, and decide how much you can borrow based on that monthly payment.

Mortgage lenders may tell you how much you can borrow, but they aren't always correct. You can (and should) take the reins here. Let the lender know the amount that works for you. Don't max out your monthly budget just to buy a house. Unexpected expenses aren't an "if." They are a "when," so leave yourself some breathing room.

No matter how much you are approved to borrow, stick with your budget when you buy a house.

5. Get pre-approved by multiple lenders

If you've successfully completed the first four steps to buying a house, you're ready to gather important information and get pre-approved.

Every mortgage lender has its own pre-approval application requirements, but you should expect to provide these items when you're getting pre-approved to buy a house:

  • Social Security number (and you'll authorize a credit check)
  • Copy of your photo ID
  • Employer name and address
  • Pay stubs from the last two months
  • Bank account and asset account statements from the last two to three months
  • Tax returns and W-2s from the last two years if you are employed
  • Business tax returns and 1099s if you are self-employed
  • Documentation for any unearned income that you want considered (like Social Security, disability, alimony, child support, pension)
  • Documentation for any gift funds you plan to use toward the purchase
  • Proof of homeowners insurance (you'll buy the actual policy when you are ready to close)

Once your offer is accepted on a home, the lender will also need information about the property.

Make your all your applications within 14 days of each other

An application for a new mortgage can cause your credit score to drop. However, multiple mortgage applications made within a short period will be counted as a single inquiry. This lets you shop for the best loan without a significant negative effect on your score.

The mortgage loan shopping time period ranges from 14 to 45 days, depending on what credit scoring model is used. When you’re applying to buy a house, you won't know which model a creditor will use. So the best way to protect your credit score is to make your applications within 14 days.

Each lender you apply with will give you a loan estimate. This is a standard form that spells out the details of the loan the lender is offering you. This form makes it easy to compare mortgage rates, fees, and other details in mortgage offers.

What if you're turned down?

If you don't qualify for a mortgage, find out why. You can ask the loan officer for feedback. Then you can work on improving whatever factors hurt you, and hopefully try again in a few months.

In some cases, you just need to look for a different type of mortgage. Maybe you don't qualify for a conventional loan because you don't have enough for the down payment. Talk to mortgage lenders for first-time buyers about your eligibility for a government-backed loan that requires a smaller down payment. Both the VA loan and the USDA loan have no down payment requirements. Either is a great choice for individuals who want to buy a house and qualify for these programs.

Also, self-employed professionals can have a hard time finding a mortgage. These folks need to talk to a lender who makes non-qualified mortgage loans, where the underwriter can verify income in different ways. If this is your situation, check out our guide to self-employed mortgages for more detail on your next steps.

Depending on your situation, you might want to find a mortgage broker who can help you buy a house. These professionals have more resources and might even have expertise in the type of loan program you need. Some brokers are paid by the lender, and some add the fee to the borrower's closing costs.

6. Choose a real estate agent and view homes

One of the most important steps to buying a house is to find a good agent. A real estate agent is a licensed professional who represents a buyer or seller in a real estate transaction. Their job is to know the housing market in your area and the best strategies to buy a house. A REALTOR® is a licensed real estate agent who is a member of the National Association of REALTORS®. Not every agent is a REALTOR®.

A seasoned buyer's agent will know the home-buying process very well and can help you get the greatest advantage possible. Real estate agents do earn a fee. This fee is usually paid by the seller when you buy a house.

The real estate agent is your advocate in a search and bidding process that can be complex and frustrating. Without help, you could be more likely to miss important listings, limitations, or exclusions. You might offer too much or too little for a property. Real estate agents know how to buy a house and help you negotiate the entire process, from perusing listings, looking at homes, making offers, and helping you get through closing.

7. Choose a home and make an offer

Making an offer on a house is one of the most exciting parts of the process.

Sometimes, the biggest potential obstacle in house buying is competition from other buyers. You might have to make offers on several homes before a deal goes through. If you're shopping for your first home, chances are there are other people looking in the same price range. And unfortunately, investors love to snap up the more affordable homes. So you could find yourself in a bidding war.

Talk to your real estate agent about the best strategy to buy a house in your market. Some buyers jump in with an offer above the asking price, especially if the home is a perfect fit. Others write a personal letter to the seller or even make a video message. Plenty of sellers would prefer to put their home into the hands of a family rather than an investor, so a personal appeal could be worth a try.

8. Get a home inspection

After your offer is accepted, get the home inspected by a licensed home inspector. This is to alert you of any red flags before you buy a house. The inspector will look at things like the home's heating and air conditioning system, plumbing, electrical, foundation, roof, basement, windows, doors, and certain structural components.

If there are any serious problems, they will be noted in the inspection report. Then you have the choice to negotiate with the seller, buy the home as-is, or back out of your offer. Keep in mind that the purchase is not contingent on a satisfactory inspection unless that condition was specified and agreed to when your offer was made and accepted. If the purchase is not contingent on the inspection and you choose to walk away, you might lose any earnest money you've paid.

Home inspections help protect you but are not usually required. The appraisal protects the lender and is almost always required.

9. Close and get your keys

Even in the digital age, when you buy a house, most lenders still require the home loan closing to be done in person so you can sign in ink in the presence of a notary public. Some lenders can hold the closing at your home or office at a convenient time for you. Others are held at a title company office or other location.

At closing, you will sign many documents related to your loan. You are not required to sign anything you don't understand. Take your time to read each document, and ask questions if you need to.

This puts you at the end of your house-buying path. All that's left to do is to collect your keys. Congratulations on your home purchase! And if you still have questions, check out our comprehensive Home Buyer Checklist.

Still have questions?

Here are some other questions we've answered:

Ready for mortgage pre-approval?

Getting pre-approved for a mortgage loan is an important step in the home buying process. Our experts recommend mortgage pre-approval before you begin looking at houses or deciding on a real estate agent.

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