What are the Steps to Buying a Home?

There are several steps to the homebuying process regardless of whether you are a first-time homebuyer or an experienced homeowner. Even if you have purchased a home in the past, you can forget a good deal about the homebuying process in between moves.

Your financial situation, interest rates, and rules and regulations may have changed, so understanding each step and doing your research ahead of time is time well spent.

How do you buy a house?

Your homebuying process may not flow in the exact order that is outlined in this article. For example, you may be driving around a neighborhood, see a great house you fall in love with, and immediately want to find an agent before you have even thought of doing research or figuring out how much you can afford.

Do not feel like you are doing it wrong. Everyone is different, but planning ahead of time will help you make the smartest decisions, and having a good understanding of the homebuying process is a great way to get into your new home.

Steps to buying a house

Looking at an overview of the steps to buying a home will help you decide where you need to spend more time or do more research to make the best decisions. Here are all of the steps you can expect to encounter as you begin your own homebuying journey.

1. Determining how much home you can afford

Understanding how much home you can afford includes numerous factors such as your salary, overall expenses, current and future debt, and your credit score. A great online tool that can help you understand the affordability of a home purchase is a mortgage affordability calculator. It can show you estimates of your monthly payments based on rates, down payment amounts, and loan types.

Here are some other things to consider when figuring out what you can afford:

• Insurance costs

• Property taxes

• Homeownership costs

• Water

• Garbage

• Maintenance costs like lawn work, tools, and repairs

• Electric and utilities

2. Saving for a down payment and closing costs

Once you have an estimate of the affordability of buying a home, it is important to start saving for the initial costs as soon as possible. Even if you plan to use a mortgage for your home purchase, there are a few up-front costs that you will have to cover at closing. The two biggest costs associated with buying a home are the down payment and closing costs.

• Down Payment. This will likely be the largest amount of money you have to provide when you close on a home. However, your down payment depends on the type of mortgage you choose to fund your real estate purchase. Here are a few home loans and their down payment requirements:

• Veterans Affairs (VA) Loan: If you plan on getting a VA loan, you may not need a down payment. One of their many benefits include a 0% down payment requirement. Instead, if you are eligible, you are only required to pay for the smaller VA funding fee.

• Conventional: If you plan on getting a conventional loan, the standard down payment is 20%. Though the minimum down payment requirement is 3% to 5%, depending on your lender, 20% is often recommended by experts in order to avoid the need for private mortgage insurance (PMI), which is required on home loans with a lower down payment amount.

• FHA loan: Many people, particularly those buying their first home, have a difficult time coming up with a 20% down payment, so Federal Housing Agency (FHA) loans are available for a 3.5% down payment.

• Closing Costs. Closing costs are provided to you by your lender in the form of a loan estimate within three business days of your application. The loan estimate will outline all of the costs needed at closing. It is difficult to estimate your exact closing costs within this article because there are so many factors, such as tax requirements in your area, insurance, and your down payment which are all taken into consideration.  

Here is an example of a down payment and closing costs on a $200,000 home:

• Down payment of 5% = $10,000
• Closing costs between 3% to 6% = $6,000 to $12,000

The approximate total down payment and closing cost estimate on a $200,000 home is between $16,000 and $22,000. This calculation can end up being higher or lower depending on many factors. 

3. Getting pre-qualified or pre-approved for your home loan

Pre-qualification is an early sign from your lender that you can begin your home search within a specified price range. To get pre-qualified, you will need to supply your income, debt, and credit history to receive a maximum home price you will likely be approved for. This is an easy process and can usually be completed over the phone with your lender. Although the home price you will likely qualify for is not a guarantee, pre-qualification provides a basis for you to start your home search.

Pre-approval moves you closer to getting your mortgage. Your lender will need additional financial information such as bank statements, pay stubs, and a full credit report. This is also not a guarantee you will get a loan, but a pre-approval shows real estate agents—and the seller—that you are serious about buying a home and ready to negotiate a price.

Homebuying tip: Choose the best mortgage lender

Selecting the right mortgage lender can have a huge impact on your homebuying experience. Working with a loan officer requires trust—you are going to be giving them all of your financial and personal data. You want to make sure that you make the right choice.

Also, if you know you are going to apply for a particular type of loan—for example, a VA loan—it is important to work with a lender who has experience with that type of mortgage. For example, when it comes to VA loans, the best lenders have a deep understanding of guidelines and they know how to move a VA loan along as quickly as possible.

4. Finding a great real estate agent

You may initially consider choosing a real estate agent simply because they are the listing agent on a house that caught your eye. Here is something to know about agents. There are typically buyer's agents and seller's agents. Just like it sounds—buyer’s agents represent the buyers. And seller’s agents represent the best interests of the sellers.

Generally, as a buyer, you will not want to use the same agent as the seller. You will want an agent that is representing your best interests. Whether you are buying or selling, it is essential to meet and interview multiple real estate agents until you feel comfortable with your choice. You may spend a good deal of time looking at dozens of homes. Ensuring that your agent understands your needs and wants from the beginning will save everyone valuable time during the home search.

Some lenders will be able to provide references to real estate agents who their borrowers have worked with in the past or even have a whole network of agents available for your needs. Be sure to consult with your lender for agent connections.

One thing to make sure of is that your agent is available to show you homes at times that are convenient to you. An agent who is not available because they are too busy with other clients or works part-time can be a source of frustration, especially in a competitive market—so choose wisely. A real estate agent referral from your lender can be an excellent place to start. But before you agree to work with an agent, it is wise to meet and interview several before making your final choice.

Homebuying tip: Review the real estate agent’s history

It is important to take your time reviewing an agent’s history of buying and selling. Ask questions about their experience and their knowledge of the area. Look at this process like a job interview. The agent you choose is going to be working for you and your interests. Understand their qualifications and ask them why they would make an excellent agent for your needs.

Lastly, you may want to choose a real estate agent who is very familiar with the neighborhood you are looking to buy in. They will know a good deal when it comes up, and on the reverse side, they will recognize when a home is overpriced. Their experience and knowledge will help you in crafting a good offer.

5. Establishing your new home priorities

When purchasing a home, there are multiple things you need to consider. Here are a few points to think about when you start viewing properties:

• Are you focusing on a single-family home, a condo, a townhouse, or a duplex? Does the property have additional homeowner association (HOA) dues?

• Would you like to live in a gated community? If so, what special rules do they have?

• What is the commute to and from work? What does that look like during rush hour in terms of time and congestion? Make the trip during rush hour before you put in an offer to test this out.

• How much property are you looking for? Do you want a large yard for kids and pets? Be sure to understand the upkeep, maintenance costs, and workload.

• Do you have pets? Take a look at the yard, the proximity of area parks, and any condo, HOA, and municipal restrictions before you finalize your buying plans.

• What are the schools like in the neighborhood? Many people choose their communities by the quality of the schools.

• What is the home’s proximity to parks, downtown (in an urban or suburban area), events, and other recreational and entertainment venues?

• How much privacy are you looking for and does the home afford you what you need?

• Is the neighborhood quiet, or is there street or other noise that could be a problem?

• Does the neighborhood have ample streetlights, sidewalks, and other safety features?

• Do the neighbors keep their homes in good repair or is the area rundown?

Another point to consider is if you want a 100% move-in ready home that you will not have to do any upgrades on or whether you would be open to purchasing a home that might need some updating? That choice might come down to your other obligations and whether you have any construction skills yourself.

Homebuying tip: How do you tell if a home price is fair?

One of the best ways to tell if a home is priced right is by looking at the comps (comparable home sales) over the last six months. And that is for homes sold—not the prices homes are currently listed for. Often, especially in a hot market, a seller might put their home on the market for a high price just to see if they can get it.

If there are not any offers, the seller will start lowering their price. That is especially true when winter is around the corner. So do not be fooled by a high-priced home, step back and see what happens. It is important not to overpay because, after all, a home is an investment.

6. Making an official offer

Choosing a knowledgeable real estate agent can go a long way in crafting and understanding what kind of offer you should make. You do not want to make such a low offer that it is insulting to the seller. Yet you also want to make an offer that provides you with the lowest possible purchase price.

Working with a smart and skillful agent, you can craft offers that could be a win-win for both buyer and seller. For example, you may have a very strong pre-approval from a lender, and excellent credit, but you might lack cash up front. In this case, the offer might be closer to the asking price, but your real estate agent could work with the seller’s real estate agent to arrange for the seller to pay some of the closing costs. This is an example of a benefit of doing your homework and choosing the best real estate agent for your needs.

However, it is important to keep in mind that the type of market you are buying in will have a significant impact on how you write your offer. When it is a seller's market, that means that there are more buyers than homes for sale. So, in that case, the sellers have the upper hand. They will probably be less willing to help with any buyer’s closing costs, complete deferred maintenance, or lower their price.

On the other hand, every home shopper hopes for a buyer’s market. In that case, there are more homes for sale than buyers. It comes down to supply and demand. When there are few buyers, the sellers who want to sell their home are willing to lower the price, help pay for some buyer’s closing costs, and often make repairs the buyer is requesting.

Once your offer is accepted, you will be well on your way to completing the home appraisal process and moving on to closing day. Remember that these steps are an overview of what a typical homebuying experience can look like, but everyone’s situation is unique. The important thing is to do your research and gather a homebuying dream team that can help you through every step of the journey.