February 4, 2022
What are the Steps to Buying a Home?
There are dozens of steps to buying a home. Not only that, but there are also several different parties involved. To make sure your homebuying experience goes well, we’ve broken down the steps for you. Read on to learn more.
The preliminary step to your homebuying journey is to get prepared. That includes being familiar with your credit report and fixing any inaccuracies that could affect your score. You’ll also want to have a general idea of the maximum mortgage payment you feel comfortable with. It’s important to set your own comfort level based on your budget and lifestyle.
Now let’s review all the steps involved in buying a home. We’ll link to additional details when needed. This is a general overview list to help you better understand each step and where you might be in the process.
12 Homebuying Steps
- Getting pre-qualified
- Finding a home
- Getting preapproved
- Making an offer
- Applying for a loan
- Getting a loan estimate
- Locking in your rate
- Getting an inspection
- Getting an appraisal
- Getting your loan closing disclosure
- Closing on your loan
1. Getting Pre-Qualified
Getting pre-qualified for a loan is different than getting a preapproval. Pre-qualification is a tool to help you and the lender better understand what you may be able to afford. The first step is filling out a mortgage loan application. Although the information you provide at this point is not verified or validated by your lender, it’s important to be as accurate as possible.
A pre-qualification is simply a way to estimate your financial ability to purchase a home. Once you’ve given your loan officer the needed information and they’ve had time to review it – if it’s possible for you to buy a home, you’ll receive a pre-qualification letter. This letter will state how much home you can afford., And it will help you and your real estate agent know the price range you can afford and what you should be looking at.
2. Finding a Home
This is typically the fun part. Armed with some very basic financials from your pre-qualification, you can begin to find a realtor, start looking at areas and houses online, and begin your search. For some, this process can go on and on as they see all of the different neighborhoods, types of homes and better understand how their needs fit all of the homes they see.
Really understanding your housing needs is a great way to capture your needs, wants, must-haves, and nice-to-haves.
3. Getting Preapproved
When you first started this journey, you were prequalified and most likely received a prequal letter. Once you find a home you want to put an offer in on, it’s time to go to the next level with a preapproval. If you haven’t already provided income and assets documentation, you’ll need to now.
This will likely include the following:
Proof of Income (all sources)
- Wage-earners: W2 for last two years, last two paystubs
- Self-employed: previous two years taxes (business and personal), 1099s, year-to-date P&L
Proof of Assets (for all sources you’re using to qualify with)
- Bank statements for the last two months. Include all pages, even if blank
- Retirement and brokerage accounts statements
- Two months statements for IRAs, CDs, and investment accounts
- Your lender will verify all borrowers' employment, make sure they have the contact data they need.
Good Credit Score Verification
- If your credit hasn’t been pulled yet, it will be now to verify your score is sufficient to qualify for the loan program you’re applying for.
- Note – your credit may be pulled one more time right before you close on your home, so it’s vital that you don’t incur any more debt.
4. Making an Offer
Armed with your preapproval letter, your search for the perfect home can take you to the next step in making an offer to the seller. There are lots of things to consider in this offer, and your realtor can have a wealth of information here to help you save money. Here are some points to consider with your offer.
- You don't want to pay too much, so look at the comps — in the area and how this home compares in price, size, location, or amenities — like a pool.
- You also don't want to make an offer too low that might turn the seller off or be insulting.
- You want to consider things like the age of the home, things that you see need work, how long the home has been on the market, and how quickly properties in this area have been selling.
- Is it a buyers’ market or a sellers’ market? For a buyers’ market, there are generally lots of available homes to choose from, and you can typically negotiate more. Conversely, with a sellers’ market, the seller may have the upper hand in negotiations.
- Think of writing a personal letter stating why you love the home. Often times that can make the difference in a seller accepting your offer knowing you plan to take care of the home and grow in it.
5. Applying for a Loan
At this point, you’ve found a home and put in an offer that’s been accepted. Now you have a signed sales contract. Whereas when you were preapproved, the property address of the home you were buying on your application was “to be determined,” and it was for an estimated loan amount, now you have the property address and the exact numbers, including:
- Home sales price
- Annual taxes
- HOA dues (if any)
- Insurance premiums
- Private mortgage insurance (if any)
Some of the documents you supplied initially will now need to be updated, including:
- Most recent two-months bank statements
- Most recent two-weeks paystubs
- Certificate of Eligibility if getting a VA mortgage
- Any other documents the lender needs
You’ll also need to supply the sales contract signed by all sellers and buyers.
6. Getting a Loan Estimate
Your loan estimate is delivered to you within 3 business days of your completed application. The loan estimate typically supplies you with the following information about your loan.
- Projected monthly payment with principal and interest broken out, including all taxes, insurance, and other assessments
- Overall list of expenses, if there is a prepayment penalty, how much and over what periods of time the rate can increase — used with an adjustable-rate mortgage (ARM)
- Estimated closing costs and cash needed at the time of closing
- Things you'll need like appraisals, inspections, pest inspection, etc.
- Lender fees itemized
- Discount points if used
7. Locking in Your Rate
Once you've applied for your loan, you'll want to keep an eye on rates to estimate when the best time is to lock in your rate with your lender. For example:
If interest rates seem to be on the rise, you may want to lock in as soon as you’re under contract before rates climb too high.
The opposite also holds true if interest rates are trending downwards. In that case, you may want to hold on locking in your rate until the last minute to take advantage of any further rate reductions.
8. Getting an Inspection
There are differences between getting an appraisal and getting an inspection. Let’s go over what they are.
An Inspection of the home is carried out by a licensed inspector who walks through all the workings of the house, condo, or townhome. Your inspection report will likely cover items like the age and condition of your roof, appliances, heating and air conditioning, windows, plumbing, and more.
You shouldn't be surprised if an inspection report is many pages long. A good inspector will document in writing and with photographs, conditions of the various areas of the home. Information about potential wood rot or items that may be out of current building codes — would be included in this report.
At this point, depending on what comes up on the inspection – your realtor may need to negotiate and ask the seller to pay for some of the repairs. But don’t expect the seller to be willing to fix everything wrong – especially in a hot market. The inspection will give you a good idea of the property’s condition and whether you want to move forward. It also lets you know what will need repairing or replacing later if you buy the home.
9. Getting an Appraisal
An appraisal is used to determine the value of the home to obtain a loan. The appraisal is completed by an unbiased third party whose job is to understand the values of homes in the area and how this property might compare.
The appraisal justifies to the bank the loan amount that could be available for the home. In other words, an appraisal protects the lender from lending more money than the home is worth.
If the appraisal comes in lower than the asking price – it’s back to the negotiating table.
Underwriting may sound scary, but it really is the verification process of your documents and your property details to justify your home loan. Underwriting happens in the background. During the process, you may be asked to supply additional supporting documents, information, or letters to verify your income, assets, or property.
Here are some things to consider during underwriting.
- Appraisal of the home
- Income validation
- Credit score
- Review of your assets
11. Getting Your Closing Disclosure
Much like the loan estimate above, a closing disclosure supplies what is now the detailed and expected final information concerning your loan. This document is to be delivered to you within three days of closing so that you completely understand all of the financial requirements and closing costs.
12. Closing on Your Loan
Closing day is an exciting time, and you should have your signature hand well-rested as there are a lot of papers to sign. In addition, you'll need to bring whatever necessary cash — cashier’s check — that is required from your closing disclosure to signing. Once all of the documents have been signed and notarized, you will likely be given your keys, and your new life in your new home begins.
To learn more about PenFed loans or what loan is right for you: