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Buying a house can be exciting, but nerve racking. Especially if you are buying your first home.
I can spend a lot of time thinking, comparing and budgeting on a small purchase like a laptop, but purchasing a house?
There is never a time in your life you will make such a large dollar purchase so it’s important to be prepared and know the process of buying a home.
Plus, there are a lot of things that can go wrong. You don’t want to lose out on your dream house because of a simple but costly mistake.
I once heard a story about someone who was going through the closing process on a home.
Naturally excited to be getting a new house, they went out and made a bunch of credit card purchases to buy new furniture before closing.
But that seemingly innocent action cost them the whole real estate deal!
Because of the purchases they made, their debt-to-income ratio was changed, killing their loan approval and making them lose the house!
Below are steps to buying a house for the first time and some important tips to help you navigate the real estate purchasing process.
Table of Contents
Step-by-Step Guide to The Home Buying Process
You might be asking yourself “What are the first steps to buying a home?”
The process of buying a house for the first time may seem daunting. But if you understand the steps and stages, it isn’t as bad as it seems!
Below are the steps of the home buying process as well as some important points to keep mistakes from happening.
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Step #1: Save Money for a Down Payment on a house
One of the first steps to buying a house is making sure you have a save up enough money for a down payment.
You can’t purchase a house unless you have enough cash for the down payment and closing costs.
The good news is you may not need as much as you think!
Did you know you can buy your first house with a down payment as low as 3.5%? An FHA loan allows you to do this.
This means you could buy a home that is $150,000 with as little as $5,250.
But, you can also save more for a down payment if you want to help keep your monthly mortgage payment lower. You can put 5%, 10% or even 20% down on your home purchase.
In some states you may even be able to get down payment assistance.
In addition to knowing the down payment you need to purchase a home, you should also figure out how much house and how high a monthly mortgage payment you can afford.
If you need help, try this article on how much to save each month that tells what your budget breakdown should be. Interest rates will affect this of course, so you may need to get your pre approval letter for a loan before you fully know the answer to this.
Before you start the steps to buying a house, you should find out your credit score. If your score is low, see if you can work for a few months to improve it. Learn how to increase your credit score with credit tradelines!
The better your score is, the better interest rate you will get which will lower your monthly mortgage payment.
And, the lower your monthly mortgage payment, the more expensive a home you can purchase!
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Step #2: Apply for a Mortgage Loan
One of the first steps to buying a house is looking at mortgage lenders and securing a loan.
Unless you have a ton of cash just sitting in a bank account, you will need a mortgage loan to purchase a home.
You can check out options with reputable lenders like Koalify for competitive and tailored financing solutions that align with your needs and financial goals.
And, follow these tips for finding the best mortgage deal.
On of the most important stages of buying a house is getting a pre-approval letter for a home loan.
Without a pre-approval letter from a bank, you can’t even make an offer on a house. It will basically tell you what mortgage payments you can afford.
So before you start looking at homes on your Zillow app, you need to have your home loan in place.
Not only does it give you the ability to make an offer as soon as your dream house hits the market, it also lets you know what price-range you can look at.
Getting your heart set on a $350,000 house and then finding out you are only approved for $300,000 is disappointing.
The good news is a pre-appproval to purchase a house can take as little as an hour! You will have to answer questions about your income and debt and the your credit score will need to be pulled.
Generally, banks are the ones that provide loans for purchasing a house.
However, it is a good idea to shop around and talk to more than one bank or financial institution. This will let you make sure you are getting the best interest rate, service, and approval amount.
This is one instance where getting more than one credit report pull from a bank won’t lower your score. There is some latitude when it is obvious you are looking for a mortgage.
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Types of home loans:
FHA Loans: Federal Housing Loans are easier to qualify for than conventional. But they require more homeowner’s insurance.
Conventional Loan: This is what most mortgage loans are. The have pretty strict qualifications but lower down payment requirements.
VA Loans: If you are a veteran you can get a loan from the Veteran’s Affairs. You can actually get these without a down payment!
Jumbo Loans: These are for homes that are more expensive than the maximum lending limits of conventional. They usually have higher interest rates though.
An important point to remember when purchasing a house:
It is important to know that a pre-approval does not 100% mean that you have the loan. It means that they have the request under consideration and it appears to the bank that you might be approved to borrow this amount of money.
Later on in the process they will pull paperwork from you to make sure everything you told them is accurate.
However, if there are things that have changed in your job scenario or debt load it is possible for the pre-approval to not go through.
So first of all, make sure that you tell the loan company accurate numbers. Don’t fudge anything because at some point in the home-purchasing process you will have to show paperwork to prove your finances.
Keep your financial situation steady when you are house shopping!
And, second of all, make sure you don’t have a change in your financial situation. Like adding debt or changing jobs to a lower paying one.
Don’t go out and buy a new car, or increase your credit card balance.
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Step #3: Create a Wish List
This is one of the fun parts of the home buying process. When you get to figure out exactly what you are looking for.
Now that you know how much home you can buy, write down all the things you want. Make sure you make a “dealbreaker” column.
With whatever home you buy, you will likely have to make some concessions. You can’t get every single thing you want, there is always some negative about a house.
But writing down your “must haves” or dealbreakers will help you know what the most important features are. Then you can know which things you can do without in order to make sure you get those.
Some important factors to think about to guide you:
- Location, location, location
- Are you ok with a fixer upper?
- Hardwood floors vs. carpet
- Big kitchen
- Walk in closets
There are tons more items to consider. But figure out if you would rather get something that needs updating in order to afford the location you want.
In general this is actually a good thing to do. Buying the worst house in a good neighborhood means a lot of brand equity for you!
Always keep in mind that it is easy to repaint a house, or change the floors or counters. What you can’t change is the layout so that is something important.
I highly recommend if possible you look for something that has rentable space. I made a lot of money on AirBnb renting out a private portion of a home I lived in.
So, if you can find something with a garage apartment or DADU structure (like a little she shed someone can live in that is legal) you should look for that.
Some homes have finished basements with separate entrances that make ideal apartments to rent out.
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Step #4: Find a Good Real Estate Agent
With so many online real estate websites, it has definitely become easy to look for houses. You can compare prices, see photos and inspect virtual neighborhoods all from your iPad.
However, you still need a professional on your side, a real estate agent you can trust. You will need a real estate agent to actually show you the homes you are interested in buying.
And also you will need one for the paperwork and legalities.
Plus, a real estate agent can give you the edge you need in a booming market. A good agent can potentially save you thousands by fiercely negotiating your price in a competitive market.
Make sure you choose an experienced real estate agent who can help guide you through the process of buying a home.
Tips to finding a good agent:
- Ask around for recommendations, also ask on Nextdoor.com
- Look for someone who is honest and won’t just try to sell you on anything
- Meet with more than one to make sure you find the best
- Go to open houses to find a real estate agent you like
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Step #5: Make an Offer on a house
Now the fun part! Once you have a loan pre-approval in place you can actually start house shopping.
I highly recommend Redfin.com. They are linked in with the MLS so all the listings are kept instantly up-to-date. Plus, you can set up instantaneous email alerts for new homes that hit the market and match your wish-list.
One of the down-sides of sites like Zillow is that they are not linked to the MLS and are therefore not updated. You might find your dream house and it shows as available on Zillow but when you actually look at the MLS listing it is already under contract.
When you find your dream house, you can decide on what you want to offer the seller.
Your agent will put together the official paperwork for this including any contingencies. (Like if you want to buy their furniture also.)
After the offer on the house is made the seller decides if they want to counter or accept it. If they decide to counter your offer it just means they reply with a different price for you to pay which you can then counter or accept.
Kind of like a stressful back and forth tennis match!
At this point you have to write a check for what is called the “Earnest money.” It is basically a deposit to prove you really want to buy the house and aren’t wasting anyone’s time.
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Step #6: Schedule an Inspection and Appraisal
Once you and the seller agree on a price and the paperwork is signs, it’s time to schedule an inspection of the house.
An inspection usually takes 3-4 hours and will provide you a list of any issues with the house or repairs that need to be made.
The nice thing about the inspection is it gives you another negotiation piece. Now, you can ask the seller to make some of the repairs or take money off the price in exchange for the repairs.
It is also a time when you can pull out of the deal altogether without losing your earnest money.
If something serious is wrong with the house and the seller won’t make repairs, you are allowed to walk away without penalty.
At this point you will also need to schedule an appraisal as required by your mortgage lender. They want to make sure the house is worth the amount it is being sold for. This is another key piece where things can go south.
If the amount of the loan you are receiving is more than what the house is worth, your mortgage lender will say not to the loan!
It isn’t a good financial choice for them to fund a loan that is more than the house value. The good news is that this is a rare ocurrence!
Step #7: Make it through Escrow
An important part of the process of buying a home is the Escrow period.
Escrow is the period between your offer and the closing. There are a lot of things that happen during the escrow period. This is when your mortgage loan moves from pre-approved to approved.
The bank will ask you for a laundry list of paperwork like bank statements and pay check stubs. Here is a great checklist of what you will need.
You also have to get home insurance in place during this period. This protects not only the house but is also required by your lender.
Remember not to use credit cards or make major purchases during the escrow period!
2-3 days before your scheduled closing date, your mortgage loan bank will pull your credit again to make sure nothing major has changed. If at that time your credit score has decreased or your debt load has increased it could possibly crash the whole deal.
Step #8: Close on the House
This happens on a specific day that was actually specified in the offer. Often times the buyer and the seller come to the same place.
A title company is in charge of making sure all the details line up and will be present as well. Closing day is when you will sign a whole lot of papers! It is the last step of the process and when ownership of the house is officially given to you.
On closing day you will need to bring your cash-to-close amount as specified by the bank.
The cash to close you need includes your down payment, escrow amounts of taxes and insurance on the house for the year, and additional fees required by the lender.
Once you close on the house you have a grace period of one month before your first mortgage payment is due.
What does a mortgage payment include?
Monthly mortgage payments have 3 important parts:
- Principle – this is the part of your monthly payment that goes into paying down your loan.
- Interest – this is the part of the monthly payment that goes to the mortgage company for giving you the privilege of borrowing their money.
- Escrow Account Contribution – this is the part that covers your property taxes and homeowner’s insurance.
Depending on how much money you put down there may be one more item.If your down payment is less than 20%, then you will also have to pay Private Mortgage Insurance (PMI.) This can add up to $100 or more, depending on the price of the house.
The nice thing about your mortgage payment is that it includes everything wrapped into one payment.
So, instead of having to come up with a bulk payment for your property taxes all at once, the cost gets spread out over the year in your monthly mortgage payment.
Steps to Buying a House for the First tIme
Whether you are buying your first home, or your twenty-first, the steps to purchasing a house is the same as what is listed above.
You just may need to make sure you get a really good realtor and mortgage lender since you won’t be as experienced.
Plus, you if you are a first time home buyer, you can look into the FHA loan we mentioned above for first time home buyers that allows you to put less money down.
First Time Home Buyer Checklist
If you are buying a home for the first time, here is a checklist of important tips and to-dos.
- Make sure you have enough saved for a downpayment
- Get your loan pre-approval first, before you start looking
- Don’t make any new large purchases, take out credit or loans during the process
- Get a good realtor you can trust
Frequently Asked Questions About Buying a House
Below is a list of commonly asked questions about the process of buying a home that might help you.
What is the MInimum Credit Score to Buy a House?
Most conventional loans require you to have a credit score of at least 620 points but it can vary slightly from one state to another.
However, FHA loans sometimes allow lower credit scores.
What is a Good Credit Score to Buy a Home?
While most conventional loans require a credit score of at least 620, it is ideal for purchasing a house to have a credit score of at least 740.
The higher your credit score is, the better. If you have a good credit score, you will get a better/lower interest rate on your mortgage.
This means that your monthly mortgage payment will be less and you will end up paying less money over the years for the home.
How Much Down Payment do I Need to Buy a House?
Well, it depends! The amount you need for a downpayment depends on how much the house you are going to buy is and the type of loan you are getting.
The down payment is calculated as a percentage of the home purchase price. Conventional loans require at least 5% down.
So, if you are buying a house that is $300,000, your down payment needed would be $15,000.
As we mentioned earlier, as a first time home buyer you can actually buy a house with a down payment as low as 3.5% of the home purchase price. An FHA loan lets you to do this.
But, you can also put more down if you want to lower your monthly mortgage payment. You can put 10% or even 20% down on your home purchase if you prefer.
If you are able to put down 20%, you can avoid PMI insurance which is an additional fee added into your mortgage payment every month.
What are Closing Costs?
Closing costs are additional fees you have to pay for the process of closing on the house For instance, the real estate agents will get a commission, the mortgage lender and the title company that will actually handle the closing itself.
How Much are Closing Costs?
You will typically need cash to cover the closing costs and in general, they are about 3%-6% of the home purchase price. However, sometimes you can negotiate with the seller to cover some. of the closing costs as part of your purchase.
This can help lessen the amount of cash you need to purchase a home. A good realtor can help work this into your contract.
How Long Does it Take to BUy a House?
The length of time it takes to buy a house will depend. If you are included the time it will take you to find your dream home, it could be a few months.
But from the time you make an offer on a house until the closing date when you can move in is usually around two months. Of course, if you are paying cash and not using a mortgage that timeline could be much faster.
Final Thoughts on the Process of Buying a Home
That’s it in a nutshell! While the process seems scary, the steps to buying a house are simple and the end result is worth it.
Purchasing a house is an investment worth making. Paying a monthly mortgage is so much better than making someone else rich with your rent check.
So start saving for that downpayment today!
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