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Published: Mar 03, 2022 19 min read
Illustration of a person looking at a house with an inviting, open door. The path to the house forms a dollar sign.
Rangely García / Money

Buying a house can be challenging under the best of circumstances, never mind when you have to navigate a competitive real estate market. Taking time to prepare will lessen the stress and make the home buying process smoother.

Whether you’re a first-time homebuyer or a seasoned pro, these steps will help you prepare.

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1. Decide if homeownership is right for you

Take a good look at your goals, finances and job outlook before jumping into a home purchase.

Is it time to stop renting and buy?

Owning your home can provide long-term stability but is also a long-term commitment. So, how can you decide if you would be better off owning a home than renting?

  • Homeownership can provide housing security

One advantage of owning over renting is predictability. With a fixed-rate mortgage neither your interest rate nor monthly payments will change.

Renting, on the other hand, means that you are subject to any rent increases your landlord may impose. However, renting provides flexibility, and you generally aren’t responsible for repairs and maintenance.

  • Buying may be less expensive than renting

On a monthly basis, owning will be cheaper than renting for many people. The median monthly rent on a two bedroom property was $2,003 at the end of 2021, according to Realtor.com. Meanwhile, the monthly principal and interest payment on an average-sized mortgage is $1,454, according to data provider Black Knight.

However, also consider the up-front costs of buying. If you buy a $300,000 home with a 20% down payment and 4% closing costs, you’ll need $72,000 in cash at closing.

The easiest way to calculate how long it will take you to breakeven is with a rent vs. buy calculator such as this one from Realtor.com.

  • Homeownership is a way of building generational wealth

Owning real estate is a means of building wealth not only for yourself but for your descendants. Home values have historically appreciated between 2% and 4% in value every year, slowly increasing homeowner equity.

Some years, the gains will be larger. Thanks to rising home prices, homeowner equity increased by an aggregate of $10 trillion last year — a 35% increase, according to Black Knight.

Assess your finances

Getting ready to buy a home means taking an in-depth look at your finances and identifying areas that need work to increase your chance of getting approved for a mortgage at a low rate.

What’s your credit score?

Mortgage lenders use credit scores to determine how likely borrowers are to repay the loan. In general, you need at least a 620 to qualify for most loans and the higher your credit score, the lower your mortgage rate. You’ll generally qualify for the best rates with a 740 or above.

Your credit score is based on the information in your credit report. In addition to checking your score through your credit card provider or a site like Credit Karma, request a free copy of your credit report from each of the credit bureaus at annualcreditreport.com. Verify that the information is correct and report any errors to the credit bureaus.

If your credit score is legitimately low, take steps to improve your score before applying for a mortgage.

What’s your debt-to-income ratio?

Your debt-to-income ratio is the share of your gross monthly income that goes toward paying debts. Ideally, no more than 36% of your income will be spent on debt (including your new mortgage), although some lenders will accept DTI’s as high as 50%. If your DTI is on the higher end of the scale, lower it by paying down your credit cards and personal, auto or student loans.

Mortgage lenders also like to see that you have enough money to cover at least six months of living expenses.

What’s your income and employment status?

You’ll need to provide proof of employment for the two years prior to your loan application. You’ll also be asked to provide your most recent pay stubs and W-2’s to verify your income. If you’re self-employed, lenders will ask for at least two years of income tax returns.

If your income or employment may be at risk, it might be best to wait until your financial situation has stabilized before buying a home.

Do you have cash to cover a down payment and closing costs?

While a mortgage will provide the bulk of the money to buy a house, you generally still need to cover a down payment and closing costs.

While a 20% down payment will allow you to start with meaningful equity in the home and to avoid paying for private mortgage insurance — a policy that protects the lender, not the borrower — you can put as little as 3% down on many loans.

If you don’t have enough, there are first-time homebuyer programs that provide different forms of down payment assistance. You may qualify for these programs even if you’ve owned a home before. Most consider anyone who hasn't owned property during the three years ending on the date of closing a first-time buyer.

Meanwhile, closing costs include attorney and title fees, lender fees, home appraisal costs and title search fees, among others. These costs will typically run between 3% and 6% of the mortgage amount. Some lenders will allow you to roll these costs into the loan. You can sometimes negotiate with the home seller to cover part of these costs.

Lenders like to see money that has been ‘seasoned’ — placed in a bank account for at least 60 days prior to applying for a mortgage. If you’re counting on the sale of an asset or a gift, obtain the money before applying for a loan.

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2. Shop for a house

It helps if you start your search with a clear idea of what you want and what you can actually afford, especially in a housing market as competitive as todays.

How much house can you afford?

The first step in your home search is figuring out how much house you can afford. Lenders use the 28/36 rule to determine how much money they are willing to lend you.

The 28/36 rule means that a maximum of 28% of your gross monthly income should be paying your housing expenses. The second part of the equation means that no more than 36% of your gross monthly income should go towards paying all your monthly debts including your mortgage.

Once you have a ballpark figure of how much you can comfortably afford, you can narrow your search area to neighborhoods with homes in your price range.

Get a mortgage pre-approval

Getting pre-approved means submitting to a full financial review so a lender can approve up to a certain amount for a home purchase. A pre-approval letter can help you compete, since it signals to the seller that the purchase is unlikely to fall through because of a lack of funding.

Pre-approval letters are usually valid for 60 to 90 days. You’ll want to get pre-approved before touring homes so you can act quickly when you find the right house. In today’s competitive housing market, the typical home is only on the market for about two months, with many homes having an accepted offer within two weeks of being listed.

You can find out more about mortgage qualifications and learn about different loan options down below.

Make a wish list

Make a list of the home features you can’t do without — perhaps a number of bedrooms or proximity to a certain school. Then make a list of features you would like to have but are willing to compromise on if necessary.

As you tour homes and see what’s available in your price range, these lists may change and that’s okay.

Hire a real estate agent

While you can look at homes on your own, it helps to hire a real estate agent that is knowledgeable about the local market. A good agent will tell you whether a home is well-priced for the area, identify potential problems a home may have and negotiate on your behalf when it’s time to make an offer. Ask for referrals from friends and family and interview several agents before settling on the right one for you.

Comparison shop and tour houses

You can start with virtual tours to narrow the field, but it pays to tour in-person as well. Sometimes it’s hard to gauge room sizes or how the house flows from a video. Certain flaws may not be visible online.

Start your search by looking at different neighborhoods and get a feel for what living there might be like. Consider home prices but also traffic patterns, noise level and proximity to parks and other amenities.

In a competitive market, be prepared to schedule tours soon after a home is listed.

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3. Make an offer

Once you’ve found the right home, it’s time to make an offer. Your real estate agent will help you draft an offer and present it to the seller or seller’s agent. Some of the information included in your offer is the purchase price, the amount of earnest money (a deposit to secure the property that becomes part of the down payment), any contingencies to the deal (such as the home passing inspection) and how much time you’ll need to close and move in.

Be prepared to negotiate

The seller may accept, reject or make a counteroffer to your purchase proposal. If the offer is rejected, you can make a new offer.

If the seller makes a counteroffer, it will then be up to you to either accept it, reject it, or make your own counteroffer. Be prepared to negotiate the purchase price and other terms in order to reach an agreement but set limits to how high you’ll go on price and which contingencies you’re willing to be flexible on.

Prepare for a bidding war

You want to make a strong initial offer but shouldn’t assume yours is the only — or best — offer on the house.

Be realistic about how much over your initial offer you’re willing to go and what contingencies you’re willing to waive in order to win. The best option is to find a price point you’re comfortable with, set a maximum percentage above that price you can reasonably afford, then stick to that number.

Hire a real estate attorney

Some states and mortgage lenders require you to hire a real estate attorney who can go over the purchase contract (usually drafted by the seller’s attorney) and protect your interests should any issues arise. Even if it’s not required, hiring a lawyer is a good idea.

Attorney fees vary depending on the services they provide. Hourly rates range from $150 to $350, although some attorneys will charge a flat-fee for specific services. Attorney’s fees may be negotiated as part of a purchase agreement, with costs sometimes being assumed by the seller or rolled into the mortgage. Make sure you understand what services will be provided and how much it will cost before hiring a lawyer.

Be prepared for disappointment

Having an offer rejected can be discouraging at first but shouldn’t be seen as the end of the road. Go over your offer with your real estate agent and see why it fell short. This will help you make a stronger offer on the next property.

Be careful not to let the disappointment of a lost bid lead you into making an offer that will put you in a precarious position next time. Stick to your budget. Don’t budge on contingencies that are important to you, such as a required home inspection. You may lose out on one house, but you’ll find other opportunities.

4. Apply for a mortgage

Once your offer has been accepted, it’s time to complete the home buying process. If you have already been pre-approved (which is wise) you’ll complete some of these steps earlier.

Learn about different loan options

Each type of mortgage has pros and cons, but fully understanding your options ensures you’ll pick the best one for you.

Here’s a quick breakdown of the most common home loans:

Conventional loans

Conventional loans are offered by private lenders, are not backed by the U.S. government and are divided into two categories —

  • Conforming loans: These loans do not exceed the lending limits set by the Federal Housing Finance Agency. This year, lending limits are set at $647,200 for a single family home in most of the country and $970,800 in higher-cost markets.
  • Non-conforming loans (also known as jumbo loans): Exceed the FHFA lending limits and are therefore not eligible to be purchased by Fannie Mae or Freddie Mac.

Government-backed loans

Government-backed loans are also provided by private lenders but are insured by the federal government, which means borrowers can often find better rates and terms than on a conventional loan. This loan category includes:

  • FHA loans are insured by the Federal Housing Administration and have lower credit score and down payment requirements than conventional mortgages .
  • VA loans are backed by the Department of Veteran Affairs and are available to members of the Armed Forces and qualifying spouses.
  • USDA loans are backed by the United States Department of Agriculture and available to eligible homebuyers in rural and some suburban areas.

Shop around for a lender

Getting pre-approved by one lender doesn’t mean you have to get your mortgage application from them. It’s always better to shop around to find the best mortgage lender. Borrowers who obtain one additional quote saved an average of $1,500 over the life of the loan, according to Freddie Mac. Those who obtain five additional quotes save $3,000.

You can also do your shopping when you’re applying for a pre-approval letter. Settling on a lender early allows you time to gather all the required documents to complete the application and lock in a rate early.

Get an appraisal

Mortgage lenders require a home appraisal and will only lend up to what a licensed appraiser declares as the home’s fair market value. If the appraisal comes in below your offer, you can request a new one from a different appraiser. However, don’t count on the result being significantly different and consider if you are able to pay the difference.

To protect your investment, you can include an appraisal contingency in your purchase offer. If the home appraises for less this will allow you to renegotiate the price or walk away from the deal without losing your earnest money deposit.

Get a home inspection

While a home inspection isn’t required by lenders, it’s a good idea. A home inspection certifies that the property is in livable condition and identifies structural defects and necessary repairs.

You can include an inspection contingency in your offer as well. The contingency could include a clause where the homeowner agrees to assume the cost of repairs or a clause allowing you to walk away from the purchase without losing your deposit should the home fail the inspection.

Buy homeowners insurance

Lenders require homeowners’ insurance. Insurance will protect your investment in case of damage or total loss. Costs and coverage will vary among insurance companies, so it’s a good idea to shop around for the best homeowners insurance to meet your needs.

In terms of coverage, you want to get enough to allow you to rebuild your home if it is destroyed. If you’re buying a home in a flood prone area, you’ll also need to buy a separate flood insurance policy.

Do a final walkthrough

Do a final walkthrough of the home once the seller has moved out and before closing on the property. You want to make sure belongings aren’t left behind or that the property hasn’t been damaged during the move.

If you requested repairs, make sure they’ve been completed. Check the cooling/heating systems, electrical switches and plumbing to make sure everything is working properly.

Close on the home

You’ll spend several hours at a designated location reviewing and signing the sales contract, as well as the mortgage note where you promise to repay the loan on time. You’ll need to bring enough funds to cover your down payment and closing costs.

Once you’ve signed the required paperwork, you’ll be the proud owner of your new home.

How to Buy a House FAQ

What credit score is needed to buy a house?

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The minimum credit score required to buy a house will depend on the type of loan you apply for. You'll need a minimum score of 620 for a conventional mortgage, while an FHA loan requires a score of 580 (500 if you make a minimum 10% down payment). While VA loans and USDA loans don't set a minimum, most lenders will require scores of 640 or above.

How long does it take to buy a house?

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From start to finish it could take over a year and a half to financially prepare for, shop, find and purchase a home. It takes an average of four months to find a home and another 40 to 50 days to close. Getting your finances in shape can take a year or more.

What do you need to buy a house?

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You'll need a credit score of at least 620 to qualify for a conventional loan and 580 to qualify for an FHA loan. Your debt-to-income ratio should ideally be 36% of your gross monthly income but could be as high as 50%. You'll also need to have enough cash available at closing to pay for a down payment and closing costs.

How much money do you need to buy a house?

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You need to have enough cash on hand to make a down payment and pay for closing costs. A 3.5% down payment on a $300,000 loan, for example, equals $10,500. You'll need $45,000 if you plan on making the recommended 20% down payment. Closing costs run between 3% and 6% of the loan amount. You also need to have six months of mortgage payments in reserve.

When is the best time to buy a house?

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In a typical (non-pandemic) year, the best time to buy a house depends on whether you want less competition or more homes to choose from. The late fall and winter months usually have the lowest competition among buyers, causing home prices to fall slightly. However, fewer homeowners list during these months, so there may not be as many options to choose from. The spring and summer months are usually when more listings come on the market. On the other hand, these months also tend to be the most competitive as many buyers seek to purchase a new home before the beginning of the next school year, causing home prices to increase along with demand.

How to Buy a House Bottom Line

Before buying a house, you need to make sure it’s the right time in your personal and financial life. By asking the right questions you can determine if you’re ready for homeownership, then formulate and implement a plan of action to achieve that goal. While the journey may get bumpy once in a while, by learning about the process and being prepared you’ll be able to safely navigate the home buying process.