Carey Chesney14-Minute Read
UPDATED: July 25, 2023
So, you’re thinking of buying a new house. How exciting! Planning for your new home and envisioning your future there can serve as a daily pick-me-up. Whether you’re a first-time home buyer or a seasoned home shopper, the process can be very rewarding.
But finding and purchasing the right home can also feel overwhelming at times. You probably have a lot of questions and concerns as you start on your home hunt: Will I find the right house? Will I overpay? How do I go about buying a house and what are the steps I need to take?
Getting an overview of the entire home buying process is a great place to start answering those questions. It can set you up for success and help you turn that dream home into a reality.
Luckily, you aren’t the first person to buy a house. Afterall, recent data shows that 66% of Americans own a home in 2022. Knowing this, we can assume prospective home buyers all over the U.S. are going through the same steps toward buying a house day in and day out, just like you.
The home buying process may seem overwhelming, but we’re here to simplify it for you. We’ve broken down the process of buying a house into 12 steps to help you navigate the experience like a pro.
The home buying process begins with some honest soul-searching to decide if you should buy a house now or wait. Proper preparation for the home buying journey is the key to a smooth home search and mortgage process later on.
Buying a home is usually the single largest investment people make in their lives. Depending on where you live, you could be spending hundreds of thousands of dollars on your next home. This is why many first-time home buyers look to a mortgage to help them buy a house.
To secure a loan, you first need to make sure all of your personal finances are in order. Two ways to do this include reviewing your debt-to-income ratio and creating a budget. Let’s take a closer look at these two components below.
Your debt-to-income ratio is the amount of debt you pay monthly divided by your gross monthly income.
Here’s an example to help you calculate your DTI: If you pay $2,000 for your mortgage, $200 a month for an auto loan, and $800 a month for other debts, that means your monthly debt payments are $3,000. Let’s say your gross monthly income is $9,000. $3,000 is 33.3% of $9,000 so your DTI would be 33%.
As you might imagine, borrowers that have a higher debt to income ratio are less attractive to lenders. Afterall, the less spendable income a person has each month, the harder it is for them to make their mortgage payment. For this reason, most lenders require a debt-to-income ratio at or below 43%.
It’s critical to have a realistic budget for buying a home before you start searching. Creating a budget involves looking at your monthly expenses, monthly debt, savings and monthly income.
Our Home Affordability Calculator is a great place to get started. This tool will take all of your financial information and input tax and insurance estimates based on your location to determine what monthly mortgage payment you might be able to afford. Setting your budget early and using it to filter your search will ensure you have the best chance at securing one of the homes you look at.
Having a good credit score when applying for a mortgage is essential. It’s one of the key factors lenders look at when evaluating you for a loan. The better your score, the more likely you are to get approved. In addition, a good credit score means more favorable terms on your mortgage loan. Among other things, this includes paying a lower interest rate. Concerned your credit score isn’t where it needs to be? Check out these eight tips for improving your credit.
While securing a mortgage will help you cover a large chunk of the cost to buy a home, you can’t come to the table empty handed. You’ll still need to have money saved up for the down payment and the closing costs. A down payment is a percentage of the overall home price you bring to the transaction as a lump payment. Closing costs are fees paid to your lender in exchange for their loan services. Both need to be factored into your budget.
Down payments for a conventional loan can be as low as 3% of the purchase price of the home. However, in very competitive real estate markets, buyers can run into bidding wars where they might be expected to make all-cash offers to get their offer accepted.
Having a larger down payment can be an alternative way to show sellers you’re serious about buying and are well-qualified to make an offer on their home. A conventional loan with 20% down might seem more attractive than a conventional loan with 3% down.
Not sure you can afford a down payment? There are a number of programs specifically aimed at providing down payment assistance. Keep in mind that down payment assistance only applies to certain types of mortgage loans. These are Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, United States Department of Agriculture (USDA) loans, and conventional mortgages.
Closing costs can run between 3% – 6% of the home’s purchase price. When doing your calculations, try to run the numbers on the higher end, because there are few seller concessions to be considered in the current market.
In a buyer’s market, sometimes sellers will pay for some of the buyer’s closing costs in the form of seller concessions to get the deal done. In the current seller’s market, they often don’t need to do this because there are so many buyers lined up with offers on their home.
Once you’ve gotten your finances mortgage-ready, it’s time for some research. This includes educating yourself about home buyer assistance programs, neighborhoods, loan programs, lenders and more.
There are a variety of first-time home buyer programs to help home buyers secure their first home. In addition, there are also programs aimed at low- and middle-income wage earners, primarily through the U.S. Department of Housing and Urban Development (HUD). HUD oversees the FHA home loan program, offers the services of approved home buying counselors and a variety of special home buying programs like Good Neighbor Next Door (GNND). They also provide a very helpful list of local home buyer assistance programs that can give you an insight into resources that may only be available in your state.
When you start thinking about where you’re going to live, make sure you are researching down to the neighborhood level to save time on the house hunting phase. If you start looking in an entire state or city, the possibilities will be overwhelming. Narrow your search down to a few specific neighborhoods you think you might like living in.
Be sure to familiarize yourself with the different types of home loans available to you. There are many different types of loan programs that apply to different people and locations, so researching early will help you find the loan program that’s right for you.
Educate yourself on the mortgage process and what to consider when you’re looking into lenders and rates. Not all lenders are the same, and some can offer better terms than others, so it’s smart to shop around for a lender that’s right for you. Talk to your friends and family about a lender they can refer you to. Finding someone you trust is essential.
With the prep work done and some solid research on your side, it’s time to start the journey to secure your next abode. Throughout these middle steps, you’ll be working on getting approved, and putting together the team that will help you start your home search in earnest.
Now that your finances, savings and credit are in order, it’s time to begin the process of getting a mortgage, sometimes called the preapproval process. A preapproval letter is typically required when making an offer on a home, so make sure you get preapproved before actively beginning to house hunt.
Along with a traditional mortgage approval, Rocket Mortgage® also offers their Verified Approval. By verifying additional aspects of your finances, a Verified Approval gives the seller a more accurate estimate of how much you can afford. This includes verifying your:
After everything is verified, Rocket Mortgage issues Verified Approval Letters that let sellers know they’ve vetted all the borrower’s information and they’re ready to lend.
You may have started the process of buying a house on your own, but enlisting the services of an experienced real estate agent is a huge asset when buying a home. If the home you’re interested in is being sold by a seller’s agent, you’re going to want someone to represent your best interests when it comes to issues like price and terms.
What many first-time home buyers don’t realize is that retaining a buyer’s agent is essentially free for the home buyer. The reason is that the seller pays both agents’ commissions out of the sale price of the home.
When you meet with potential agents, come prepared with your preapproval letter, your budget and some sample listings of homes that meet your criteria. This will help both you and the agent decide if you’re the right fit for each other. It will also ensure that once you find a real estate agent, they can immediately hit the ground running in finding you your future home.
Searching for homes for sale online is exciting, but in a seller’s market, it can be daunting as well. To best prepare for finding your dream home, you’ll need to understand current housing market conditions. Is it a buyer’s or seller’s market? And what other market conditions should you consider?
In a buyer’s market, inventory is high and demand is low. This allows buyers to be picky and often secure their next abode for under the asking price. In a seller’s market, inventory is low and demand is high, often resulting in bidding wars and multiple offers over asking price. In a balanced market, inventory and demand are relatively complementary, so it doesn’t favor buyers or sellers.
As you’ve probably heard, we’re in a seller’s market. Buyers who are currently in the market for a new home are facing higher prices, lower inventory and rising mortgage interest rates. Mortgage rates directly impact your future monthly mortgage payment and how much house you can afford. Because of this, it’s essential to know what current rates are and whether they’re expected to rise in the near future so you know you’re finding houses within your budget.
So you found the home you want – now it’s time to go get it. In a buyer’s market, this part of the process involves making offers and counteroffers, but in the current seller’s market, you may end up scrambling to make the highest, all-cash offers with no contingencies to get an offer accepted. But be careful, because without contingencies, you can lose your earnest money deposit (EMD) if you decide to walk away from the sale for any reason.
Once your offer is accepted, the real estate agents involved will draw up a real estate purchase agreement, or sales contract, that reflects the agreements between the parties. Prior to signing, make sure you have a real estate attorney to represent you at closing.
In the loan preapproval stage, the borrower has to meet requirements. At this point, though, it’s the home’s value – and whether it’s enough to cover the amount of the loan – that the lender is scrutinizing. An appraiser assists with this process by determining the value of the home compared to the agreed upon sale price.
The inspection involves a professional inspector reviewing every square inch of the home to determine if any undisclosed defects are present. If they find some, the buyer can ask the seller to pay to have them fixed or simply walk away from the deal.
Buyers in all-cash deals may choose to waive the home inspection and appraisal. But as previously mentioned, that’s very risky because if they back out of buying the house, they can lose their EMD.
Once you are through the inspection and appraisal, the finish line is well within sight! All that’s left is the final walk-through, the closing process and moving in.
Plan a final walk-through to make sure that everything in the home matches the terms of the purchase agreement and nothing in the house changed since you last saw it. This should be scheduled as close to closing day as possible.
You’ve gotten through the hard part. The house is about to be yours! But before you receive the keys, you must fill out final paperwork and transfer funds to the seller. These last steps will be taken care of at closing.
You should receive a Closing Disclosure no later than 3 days prior to closing. This is the final statement of costs you’ll receive, so review it closely and be sure to clear up any questions or mistakes prior to closing day.
Your agent will provide you with a detailed list of what you need to bring to the closing table. However, you should be prepared with your ID and enough money to pay for the down payment and closing costs. Your closing costs will most likely include:
Each fee amount varies, but your real estate agent and mortgage lender will walk you through what you need to know so there are no surprises at closing.
After you write checks or wire the funds and sign all the documents, you’ll be able to collect the keys to your new home and move in. You can officially pack up and begin the moving process.
Now that you know the process for buying, you may be wondering if it’s a good time to buy a house. Well, economic forces at play in the housing market may be easing slightly, because the Federal Reserve has been raising interest rates to counteract inflation. This is influencing housing market predictions for 2023. Higher interest rates aren’t good news for home buyers, but it might cool demand for houses somewhat.
Many home buyers might need to rethink their housing goals in the near term, like buying a starter house instead of a forever home. In the longer term, this could actually work in your favor. You may choose to make your starter home a rental property when you find that forever home, resulting in a new monthly income stream.
A seller’s market can be tough for many home buyers, but you can help improve your chances by getting your finances, credit history and plans prepared before applying for a mortgage. If your finances are in good shape and you’re eager to get started searching for your dream home, start the approval process with Rocket Mortgage.
Viewing 1 - 3 of 3
Besides a down payment and monthly mortgage, do you know all the fees associated with buying a house? Here are 11 common fees you’ll pay when buying a house.
It’s a good idea to buy a house online if you’re seeking convenience as you purchase your dream home. Uncover some key tips for buying a house on the internet.