8 Steps to Buying a House
From getting your finances in order to finding a mortgage lender, the home-buying process can feel complicated and overwhelming. If you consider the “seller’s market” we’re in today, with a highly competitive buying landscape, you might be second-guessing the purchase of a new home.
But, don’t let cold feet keep you from your dream home! Homes are still an excellent long-term investment. This step-by-step home buyer checklist will help the buying process feel more manageable.
Buying a House 101
1. Get your financial house in order
As you begin your house-hunting checklist, start with your finances. This includes:
- Checking your credit score. Use any number of free credit score sites, such as Credit Karma to see where you land on the 850-point scale. Major lenders may require a minimum score of 620 to take out a mortgage. The higher your credit score, the lower your mortgage interest rate will be, which will result in lower monthly payments. While 700 is considered excellent, a score of 680 is still good. But if your score drops to the 640 to 660 range, it may be harder to get some of the more conventional loans.
- Deciding how much you’ll put down. Homeowners don’t have to put down 20% these days. The average homeowner is putting down 3-5% in order to buy now in the seller’s market. The average down payment is 7%.
- Determining what you can afford. Some lenders say your mortgage should be no more than three times your household income. For example, if your combined household income is $150,000 per year, you can afford a $450,000 home. Others look to the “28/36 rule” (don’t spend more than 28% of your gross monthly income on housing costs, and no more than 36% on total debt). Make sure you include taxes, mortgage interest, insurance, maintenance and renovations into housing costs. Having a high debt-to-income ratio can result in higher interest rates or in not being able to get the home loan at all.
2. Budget for closing costs
One of the most common mistakes new home buyers make is forgetting about the closing costs. You need more than just a down payment. Closing costs can total 2% to 7% of your new home’s total cost. That’s as much as the down payment, in some circumstances, maybe even more!
What goes into the closing costs?
- One-time fees for the purchase of the house:
- Application fees
- Appraisal fees
- Fee for running your credit score
- Recurring costs paid upfront for the first time:
- Property taxes for the remainder of the year
- Prepaid loan interest
- Title insurance
- Homeowner’s insurance
Pro tip: Some home buyers include closing costs in their mortgage loan.
3. Find a mortgage lender
When it comes to fulfilling your home-buyer checklist, finding your mortgage lender is just as important as finding the right house. People have many different criteria for choosing a mortgage lender, from the ease of use to proximity to types of loans available. Shop around to make sure you are getting the best deal. A little extra time at this stage could save you hundreds, maybe thousands, on your mortgage.
Credit unions are a great mortgage lender choice for many reasons. Besides the low rates and fees, credit unions also offer more personal face-to-face service and a higher chance your mortgage will be approved. Plus, a credit union is less likely to sell your loan once the deal is done.
4. Decide on the right mortgage for you
Be prepared for deciding among a plethora of mortgage options: Adjustable-rate. Fixed-rate. Conventional loan. Government-backed loan. There are pros and cons to every loan type of loan, so do your research to see which best fits your lifestyle. Your mortgage lender can help explain the pros and cons of each.
5. Get pre-approved
You’ve checked the real estate sites, and there it is—the perfect bungalow! You want to make an offer on it now, but you don’t know if you can. That’s where loan pre-approval comes in.
Pre-approval shows buyers your creditworthiness. It tells you how much you can borrow so you know the price range of potential houses you can buy. Getting pre-approved is usually free and takes just a few days. It’s important to note that pre-approval is not the same as pre-qualified, which means a lender has said it’s likely you’ll be approved for a loan but hasn’t actually given pre-approval.
And, most importantly, when the market is hot, and there is competition for buying, pre-approval shows sellers you are serious about buying. That can help you win the bid on that adorable bungalow!
6. Pick your real estate agent and the perfect house
Of course, you can’t rely on the perfect bungalow to fall in your lap. Start interviewing real estate agents. Ask friends and family members who they have used in the past. Ask prospective agents for a list of references. Choose one you trust.
Working with your real estate agent, start making your house-hunting list. This is the fun part of buying a house. Decide what is important to you. What are your must-haves? What are you going to need now? How about in 10 years? Is a good school district relevant, or is proximity to arts and culture more important?
Remember, you’re not just buying four walls and a roof—you’re buying a neighborhood. Visit it often. Get familiar with the area and its vibe during the day and the night.
7. Make the offer, submit your loan application
You found a house you like and know it’s the one. You’ve made an offer, so it’s time to put in your loan application.
“Didn’t I do this with the pre-approval?” you may be wondering.
Well, yes and no. Your pre-approval got you started on the loan application, but now you need to apply for the loan. This will require several supporting documents like pay stubs, W-2 forms, tax returns, bank statements and more.
8. Buying a house
You’ve made your offer. It was accepted. How long is it going to take until the house is yours? The average time to close on a house with a traditional mortgage loan is 30 days. First-time homebuyer and other specialized loans can take up to 45 days.
When you’re excited to start the next chapter of your life, this wait can seem like a long time. But it takes that long to collect documents, conduct a home appraisal and finish any home repairs if needed.
During the closing, you will go over mortgage and sale documents, pay closing costs if they are not already included in the home loan and have the property title transferred to you. The most exciting part? You’ll get the keys to move in!
Let’s get started!
At Greater Alliance, we offer various First Time Home Buyer Programs, down payment assistance and grants for closing costs, as well as adjustable-rate, fixed-rate and conventional mortgages with comparable interest rates, excellent customer service and speedy, efficient approval. Use our loan calculator to see how much you can afford.