Buying a house is probably the most intimidating experience for millions of homebuyers. Whether you are a new homebuyer, rich or poor, you can lose money if you don’t follow the proper steps to purchase a house. For example, you might end up with a home that needs expensive repairs, such as a leaking roof or outdated plumbing systems, if you don’t include inspection in your contingencies. A lack of a budget can also lead to buying a house you cannot afford, leading to long-term financial stress and foreclosure for much worse.
What if there was a memorable and fun way to buy a house that also saves you money? This guide is all you need to buy a house, even if it is your first home. In this article, I will explain the necessary steps to buy a house and how to make your home-buying experience fun and memorable.
Without further ado, let’s get started.
1. Make a wish list with your partner
The first and most crucial step in buying a house is talking to your partner about your need for a home and the type of house you want.
You need to be on the same page about a house that will work for both of you. Discuss your needs and wants and list things you must have in the new house. Each of you can come up with 20 elements in a home, such as the following.
- The number of bedrooms and bathrooms you want
- Do you want a kitchen with an island?
- Yard size requirements
- Do you want fenced property?
- What is your desired location?
- How many floors do you want?
- Could multifamily such as condos or townhouses work if you cannot find a single-family property?
- What is your desired location?
- Do you need a patio
- Paint color,
- Open concept or closed in?
- Do you want new construction or a fixer-upper?
- What is your desired square footage?
- Decide the size of the closet, master suit, etc.
The list is essential as it allows you to buy the house you want without leaving anything to chance, only to regret it later.
After making the list, go over it and together decide what you must have and what you can compromise on. You can then narrow the list to three to 5 items you must have in the new house. These requirements help your real estate agent throughout the house-hunting process. Bear in mind that you might not get everything on your wish list.
2. Check your credit score
Your credit score is one of the main pieces of the puzzle to work on before looking for houses. Lenders use credit scores to assess your creditworthiness and determine the interest rate you will pay on the loan. Before buying a house, you must meet the credit score requirements. Typically, the minimum credit score you need to buy a home for most mortgages is 620. However, government-backed loans such as the Federal Housing Administration (FHA) loan require as little as 500 credit scores.
While having credit scores in the 600s qualifies you for the loan, having a 740+ credit score guarantees a lower interest rate. For example, you must have at least a 620 credit score to buy a house with a conventional mortgage.
The credit score requirements also vary depending on the loan you use to buy a house.
Types of mortgages and credit score requirements
- Conventional loans. The minimum credit score is 620, but the higher, the better.
- VA loans. These don’t have minimum credit score requirements, but most lenders prefer a 620 score, similar to conventional loans.
- FHA loans. You need at least a 500 credit score for 1a 0% down payment or a 580 score for a 3.5% down payment.
- USDA loans typically don’t require a minimum credit score, but some lenders require at least a 640 score.
- Jumbo loans. Jumbo loans usually require a much higher score, usually in the 700s, and a lower DTI ratio.
If your credit score is falling short of what is required to qualify for a loan, take some action and raise it. Typically, it can take a few months or years to increase your score, depending on negative information on your credit reports. Start by cleaning up your credit reports, lower your credit utilization, and maintain on-time payments. I have written a quick guide to raising your credit score in 30 days you can use to boost your score fast before you buy a house.
Also, check out this guide to getting an 800 credit score and tips on maintaining a high credit score. Don’t forget to check the factors affecting your credit score, as they can help you build a healthy credit history.
3. Know how much home you can afford to buy
After establishing your wish list and checking your credit score, you will then need to evaluate your current financial conditions to calculate how much home you can afford to buy.
This is the time to look into your pockets to see if your current situation allows you to take on more loans. You need to calculate how much you can safely spend on a house without putting you and your family in financial crises. A budget is usually a great tool to help you evaluate if you can buy a home and how much you can afford to spend. Decide the maximum amount you will pay and be serious about it. You don’t want to go over budget, which can easily lead to long-term financial hardships.
If your budget allows you to buy a $300,000 home, you must look for homes sold lower than $300,000 to accommodate other closing costs, which usually range between 2-5% of the loan amount. Check out this guide detailing how much it costs to buy a house.
Even if you may get approved for a higher loan amount, you must not spend more than what you planned for in your budget. A budget will protect you from temptations if you get approved for a higher amount. You must look for a house based on how much you are willing to spend, not how much you have been approved for.
I have written a quick guide to help you estimate how much you can afford. Check it out before moving to the next step in buying a house.
4. Prepare a down payment
After you have decided what your budget will be, you will need to work on your down payment. Lenders expect you to put down at least 20% of your total house cost for a conventional mortgage. Of course, the more you put down, the better. Some lenders may take a less than 20% downpayment if you purchase private mortgage insurance(PMI). Some government-backed loans, such as FHA loans, require down payments as low as 3.5%.
You need to know the types of loans you want to use and the down payment requirements for that loan.
Check out these loan types and down payments you are expected to have.
- Conventional mortgages require a 20% down payment. You can still qualify for a lower down payment when you purchase private mortgage insurance(PMI).
- Va loans usually don’t require a down payment.
- FHA loans require a 10% down payment for a 500 credit score or a 3.5% down payment when you have a 580 credit score.
- USDA loans usually don’t require a down payment.
- Navy Federal Loans don’t come with a down payment requirements.
Know which loans you want to use and their down payment requirements. For example, to buy a $300,000 home with a conventional loan, you must save $60,000, a 20% down payment. Putting down less than $60,000 on such a purchase might result in purchasing mortgage insurance, which will stay in effect until you have at least 20% equity in home equity.
5. Don’t forget to save for your closing costs
One of the most significant costs of a home purchase is closing costs. Most closing costs, such as commissions, are usually paid by the seller; buyers also incur closing costs tied to the mortgage process. These costs typically range between 2-5% of the loan amount. Remember that closing costs are not the same as a down payment.
Depending on your agreement with the property seller, you might also agree to cover a portion of the commission. For example, the seller may decide to renovate the kitchen if you cover all or some of the commission, which usually ranges between 3-6% of the total purchase price.
You must be prepared. Putting closing costs together will help you when you are buying a house. According to Zillow, closing costs are estimated to be between 2%-5% of the total cost of the house. For example, if you buy a $300,000, expect to pay between $6,000 and $15,000 in closing costs.
6. Find a real estate agent/a realtor
Finding a real estate agent is another crucial step in buying a house. You need a good agent to guarantee a smooth house purchase process and accurate application. Real estate agents are bridges between buyers and sellers in real estate. An agent will help you find a house by connecting you with a seller. You can find realtors from friends’ referrals, lender referrals, online, etc. Ensure you interview many agents and select the most qualified and knowledgeable agent.
Stick to agents who serve the area where you want to buy a property, as they know the market better and can help you get a good deal.
Your agent will book showings and advise you when you make a mistake. They will also do all the paperwork and ensure the home purchase process is done correctly to avoid future legal issues. According to Realtor, real estate agents earn a commission of up to 6% of the total cost of the house, but this is shared between the seller and buyer agents when both agents exist in the transaction.
7. Shop for mortgage options and get pre-approved
You are probably one of many people who cannot afford a house with cash. If this is the case, you will need a mortgage. There are many mortgage companies, including banks, credit unions, and online loan companies, to choose from. However, you don’t need all of them to help you. You need to find the cheapest among them. I mean the best quote possible.
You will need a mortgage company to give you all the money you need at the lowest possible interest rate. Start from your bank if you use one and get a quote. Continue getting quotes from multiple companies, including other lenders in the area besides banks and credit unions.
After getting all these quotes, it is time to sit down and compare them. Cross off the ones that don’t align with your financial goals. The best way to do it is to rank them from the best to the worst. Once you have found a lender with the best terms, get pre-approved for the loan. Typically, you get a loan pre-approval letter before looking for a house. This letter confirms how much loan you will get but also shows buyers that you will get the money. Never look for a home without a pre-approval letter.
The lenders may pull your credit, which results in a hard inquiry on your credit reports and can knock off 5-6 points from your credit score. When shopping around for pre-qualification, don’t let lenders pull your credit. However, a lender who gives you a pre-approval letter might need to pull your credit report.
7. Start looking for houses with your agent
This is the home-buying step that everyone loves. Touring dozens of properties and picking the ones you love the most. Doing tours also gives you a picture of what you should expect to get and how much it costs. To buy the right house, tour as many properties as possible in the area you want to buy.
A big mistake many home buyers make is to tour one house and say they found their dream home. One home is not enough. Your agent should show you dozens of properties before you decide. Even if you like the first home, it is always a good idea to tour many properties before you pick one. It comes into play if you remember the checklist you made in the first test. As you tour different homes, compare them with your checklist. Your dream job is within budget but gives you all or most of the items on your checklist. Never buy a house because you love it or think your dogs will enjoy the fenced yard. Use your budget and checklist as a guide.
After you have decided which house to buy, the agent will help you put in an offer and continue with the rest of the home purchasing process.
9. Put in an offer
This is the moment you have been waiting for. Making an offer on the house you fell in love with. You will work with your realtor/real estate agent to decide your initial offer price. Do not offer the asking price unless it is a seller’s market. You need to bargain for your dollar.
Sellers always post their houses above their fair market values. It is your job to ensure you don’t get ripped off. Even if you pay lower than the asking price, it does not mean you got a good deal. To avoid paying more than the home is worth, the agent will help you estimate the cost of the house. The agent will assess the property’s value by performing a comparative market analysis (CMA). This is a process where the agent compares similar properties recently sold in the same area and market to help estimate how much yours is worth.
Another option is to appraise the property the loan company usually requires before closing. An appraiser inspects the house and tells you how much the home is worth.
You can also quickly compare the house you want to buy with similar properties recently sold in the area on websites like Zillow, realtor, or Trulia. While this analysis does not give you the home’s exact value, it gives you an idea of how much you should expect to pay.
10. Get an official inspection of the house
Before you buy a house, it is recommended that a home inspection be conducted on the property.
You should never skip an inspection, no matter how much you like the house or how badly you want to move in. While you might have toured the house three or four times, you did not check the electrical, plumbing, leaky roofs, etc. These are tasks performed by a trained and certified property inspector.
A home inspection is like taking a used car to a mechanic. The mechanic tells you if the vehicle has engine or transmission problems. The same concept applies when you are buying a house. You can not tell if the home has hidden structural problems or outdated electrical systems. Learn more about the benefits of house inspections.
Should your inspector find significant problems with the property you did not know about? You can use them to renegotiate the price to get a discount on the house. You can also ask the seller to fix problems found during the inspection. If these problems are big and the seller does not want to do anything about them, you can legally walk away from the deal. Make sure the inspection is included in your contingencies. Depending on the property size, the inspector can cost as little as $300 to thousands of dollars.
11. Buy the house if all contingencies are met
Assuming everything went well and there were no other complaints about the property, you will move on to the closing phase. This is when you do paperwork (lots of them), pay all the money, and wait for the key. The house will be yours when you have the key in your hands.
While you can move in right after closing, some factors might delay your move-in day, such as final inspection, final walkthrough, punch list, furnishing the home, etc.
