How To Buy a House in 11 Steps | 2021 Guide
Casey Morris, Home.com Editor
11 steps to buying your first home
Buying a house can positively change the direction of your life and create wealth and security for generations.
But like anything this important, homeownership comes with a fair amount of work, sacrifice, and some risk.
Fortunately, it may not be as difficult as you’ve built it up to be. And there are a ton of resources — both online and in real life — to help.
Ready to find out if you can (and should) buy a home? Here’s your guide.
Table of contents
- Decide whether it’s the right time for you to buy a house
- Take stock of your finances: How much can you afford?
- Find a mortgage lender
- Get prequalified/preapproved
- Decide what type of home you want to buy
- Start looking at houses
- Understand which loan type may be right for you
- Submit an offer. Then submit another one. And another
- Move forward with loan approval
- Schedule a home inspection
- Close on your house
- Homebuying FAQ
- First-time home buyer checklist
- I’m ready to apply
1. Decide whether it’s the right time for you to buy a house
Is it a good time to buy a house?
The answer depends on your goals, plans, and current situation.
Perhaps the better question is this: Is it a good time for you to buy a house?
To answer, start with these questions:
- Do you need more space for your growing family?
- Are you ready to put down roots in a specific location?
- Do you want to start building your own wealth instead of your landlord’s?
- Hoping to pay less on a mortgage than you are on rent?
Those are great aspirations, but a poor one would be that everyone is doing it or because interest rates are low.
Forget what you’ve read about interest rates.
You may have read that interest rates were at historic lows in 2020 but are now going up.
While rates may go up, there are two important things to know:
- Mortgage rates very well may stay near historic lows throughout 2021.
- You should buy a house based on your readiness rather than what’s happening in the market.
The rates you see in the news don’t necessarily reflect what you will pay. Lenders set rates based on several factors, including your credit score. If you want to get the best possible interest rate, focus on things you can control:
- Pay your bills on time
- Avoid too much debt
- Get educated about mortgages and know you received a solid deal
Low rates are great, but even a 0% interest rate won’t make up for the potentially huge costs that come with buying when you’re not ready.
Look at the big financial picture.
Monthly mortgage payments are just one cost of homeownership. You’re also responsible for things like a leaky roof or burst pipe.
Having full ownership of your home can be rewarding. Responsibility leads to fulfillment. But it requires a certain amount of savings and financial planning to maintain a property, which we’ll talk more about later.
In short, build an emergency fund for repairs, a job loss, medical emergency, or other unforeseen event.
Expect prying questions from lenders
Buying a house is a financial transaction, yes. But it’s also deeply personal. Your lender will ask a lot of questions about your finances, and that’s a good thing! Their job is to ensure that you can afford the mortgage, for their sake and yours.
If your monthly payments become a burden, you may have to sell the house quickly or end up in foreclosure. Either option could mean significant financial and emotional losses.
When a lender vets your finances, they can recommend loan programs and amounts you can comfortably afford.
Still, it’s not a lot of fun to have someone combing through your bank statements or calling your employer. If you simply don’t have the time or energy to buy a home…start anyway. You’d be surprised at what you can handle if you just make the first step.
Don’t let inconvenience hijack your goals.
There are always exceptions. If you are starting a new job, about to have a baby, or entering another stressful stage of life, it’s worth putting off homebuying for a few months.
If you’re in a steady state, do whatever it takes to buy a home.
Build nerves of steel when it comes to financial inquiries. Be prepared for the highs and lows of house-hunting.
If you’ve been dreaming of buying a home for years and you’re sure now is the time, you can move onto step 2: taking stock of your finances.
Rent vs. buy: Which is best for me?
There’s no rule that says you have to buy a house. Historically, only 65% of people own a home, according to the U.S. Census Bureau. For many people, homeownership doesn’t make sense.
Renting might be better if:
- You prefer flexibility to pick up and move at any time
- Your company might relocate you
- Your housing needs may change soon due to a marriage or baby
- You don’t want to fix and maintain the property or pay someone to do it
- Your credit isn’t high enough to qualify
And of course, cost is a consideration. You’ll often hear people say that it’s cheaper to own a house than to rent. If you look solely at monthly mortgage vs. rent payments, they may be right.
However, there’s a lot more to homeownership than your mortgage. You’ll need money to maintain the property, especially if you buy an older home. Then there are heating and cooling expenses, which can be costly in less energy-efficient houses. And the list goes on.
But one advantage that homeownership has is that your rent won’t keep going up $50 or $100 per year. Your mortgage payment is locked in as long as you choose a fixed-rate mortgage. Your taxes and insurance can go up, but the bulk of the monthly cost is constant.
Buying a home takes some of the guesswork out of future housing costs.
2. Take stock of your finances: How much can you afford?
The best way to find out how much house you can afford is to get prequalified with a lender. But you can get a general sense by looking at your current monthly income and budget.
Here’s an example monthly budget:
|Student loan, car payment||$800|
In this situation, the homebuyer knows she can spend at least $1,500 per month on a mortgage because that matches her rent. And she can go considerably higher since she has some room in her budget.
But she will have to make a decision: What’s her maximum “comfortable” payment?
If she has great credit, the lender may approve her for a bigger payment than she’s comfortable paying. So it’s wise for her to go into a meeting with a lender knowing her personal limits.
Help! I have no room in my budget
The above scenario is fairly plush. Perhaps, for you, money is tight every month.
In that case, find items to cut from your monthly spending. Yes, this is where we talk about limiting visits to Starbucks and cooking at home. But those things are obvious.
You also may want to get more creative. Consolidate student loans, refinance your car loan to a longer term, find a roommate for your future home. Maybe even consider living with your parents to save a bigger down payment. Inconvenient? Yes. Worth it? Certainly.
‘Practice’ making your mortgage payment
A powerful strategy is to “practice” making your mortgage payment before you have to. How?
- Determine your desired mortgage amount. Estimate a home price and subtract your down payment. Use a mortgage calculator to find your principal and interest payment
- Add estimated property taxes — a good estimate is 1% of your home price per year. Divide by 12
- Add homeowners insurance — usually between $50 and $100 per month for most homes
- Add mortgage insurance if you’re putting down less than 20% — let’s estimate 1% per year
Here’s how it might look
|Item||Est. Monthly Cost*|
|$300,000 home with 10% down, principal and interest||$1,150|
If you currently pay $1,200 per month in rent, put an additional $525 per month away in savings each month — before any other spending — and don’t touch it.
If this is easy for you month after month, congratulations. You can likely afford a home. If you come up short each month, you likely have to cut your spending or reduce your target home price.
Practicing your payment is likely the most effective way to prove to yourself that you can afford a home.
Check your credit score
There’s more to affording a home than simply coming up with the cash each month.
You might make a ton of money, have room in your budget, and still get denied for a mortgage because of your 450 credit score.
One of the first things a lender will do when you apply for a loan or prequalification is check your credit. Your credit score indicates a few key things: payment history, credit utilization, and current debts.
Why do these matter? Lenders assume you will handle a mortgage the same way that you treated past debts. If you’ve never, or rarely, been late on a payment, there’s a good chance you’ll be reliable again. But if you frequently miss due dates or you’ve defaulted on loans in the past, they may worry about your ability to manage your money.
That doesn’t mean you won’t qualify for a loan, especially if the default or missed payments happened a long time ago. But the lender may ask for a letter of explanation about those events before they make a decision.
Even if you make all your payments on time, you still may have a low score. This is likely because all your “revolving” accounts (credit cards and other open-ended accounts) are always maxed out.
Credit bureaus look at your credit utilization ratio — the amount of available credit you’re currently using. For instance, if you have a $10,000 credit card limit acoss three cards, and your balance is $9,500, that will drag down your score.
The top way to increase your score is getting that utilization ratio below 30% — $3,000 in this case. Credit scores have been known to pop 100 points or more if the rest of the profile is strong.
If you want to buy a home, paying down debt — and avoiding taking on new debt — may help boost your credit score and increase your chances of getting approved for a mortgage.
What credit score do I need for a mortgage?
The minimum credit score needed for a mortgage varies based on loan type and lender. For instance, government-backed programs such as FHA and VA loans (more on those in Step 7) come with minimum guidelines set by the federal government.
However, individual lenders can add their own requirements on top of those (known as overlays). So some lenders may approve you while others don’t.
Before applying, you can ask lenders about their loan criteria and the types of borrowers they typically work with. That will give you an idea of whether they’re the right fit for your needs.
For instance, if you are a first-time homebuyer, work with a lender that often helps people get into their first house. Same goes if you’re a freelancer or gig worker with non-traditional income.
Still, it helps to know the general guidelines so you can start thinking about the pros and cons of different loan programs.
Here are the minimum credit score requirements for some common types of mortgages:
|Mortgage type||Minimum credit score*|
How do I find my mortgage credit score?
You can check your credit score for free with Experian, one of the three credit bureaus, though you’ll have to create an account. The other bureaus, TransUnion and Equifax, allow you to check your score if you create a paid account.
If you have a credit card, you may be able to check your credit for free through your online account, assuming the card issuer offers that feature.
However, the scores you see on those sites don’t show your mortgage credit score, which is what lenders will use to approve you for a home loan.
When lenders run your credit for a mortgage application, they use a strict scoring model tailored to home lending. Oftentimes, borrowers’ mortgage scores are lower than the ones they’re able to see through free sites.
If you really want to know whether your credit is strong enough to buy a house, it’s best to talk with a lender. They can prequalify you for a mortgage, which means they will pull your credit and gather some information about your income and debts and give you an estimate of how much you can borrow.
From there, you can either start looking at houses or create a plan for boosting your score and applying in a few months or a year.
Your credit score also impacts your interest rate. High scores can lead to lower rates, so there are good reasons to wait on buying if you think you can increase your score.
But if you need or want to buy now, don’t let your free credit score discourage you. Some loan programs have flexible credit requirements, and a loan officer will be able to explain your options. Talking to a pro will give you insight into your borrowing eligibility.
Look at your savings: Do you have enough for down payment and closing costs?
Most mortgage programs require some form of down payment, though you don’t need the traditional 20% down to get a loan.
In fact first-time home buyers put an average of 6% down, according to the National Association of Realtors.
You can see down payment requirements here:
|Mortgage type||Minimum down payment|
|FHA||3.5% with credit score of 580+, 10% with scores 500-579|
Don’t forget to add closing costs to the equation as well. Closing costs typically represent 2-5% of your total loan and may include:
- Loan origination fee
- Appraisal fee
- Inspection fee
- Prepaid taxes and insurance
- Points (money paid upfront to lower your interest rate)
When you apply for a mortgage, lenders will give you a loan estimate document that details your closing costs and other expenses associated with your loan.
Closing costs vary by lender and loan program, and your down payment depends on your loan type and the house’s sale price. But here’s an example of what your upfront expenses might look like.
Let’s say you’re buying a $300,000 house with an FHA loan. Your credit score is 620, so you’re able to put down 3.5%.
|Loan costs (loan origination, appraisal, escrow, title, etc.)||$4,500|
|Taxes and insurance that you prepay upon closing||$3,000|
Closing costs are certainly one of the most surprising things about buying a house. It’s disappointing to find out that, even though you have the required down payment, it’s not enough to cover closing costs.
Fortunately, there are ways to avoid closing costs, and in some cases, even the down payment.
Down payment and closing cost assistance
If you’re struggling to save up for a down payment, you may be eligible for a down payment assistance program. There’s no national program, but different states, counties, and cities offer help in the form of grants, forgivable loans, and other types of financing. Some programs include closing cost assistance as well.
Keep in mind that many programs have income or geographic limits. You can look for local programs through the Department of Housing and Urban Development’s (HUD) website.
But the easiest way to find programs is by employing this hack: Google “down payment assistance programs in [enter your city, state, and county here].”
You will be surprised to find that almost every city, county, and state in the U.S. offers some kind of assistance. Many come with income limits and other restrictions, but keep looking until you find something for which you may qualify.
Miscellaneous mortgage costs
Down payment and closing fees are the big upfront expenses when you buy a home. But they’re not the only costs you need to save for. A few others to consider:
- Private mortgage insurance (PMI): If you put down less than 20% on a conventional loan, you’ll pay PMI as part of your monthly installment
- Cash reserves: Some loan programs require that you have a certain amount of savings available after the down payment and closing costs to cover your mortgage payments if you lose your job or experience a drop income
- Home repairs: It’s a good idea to have a savings fund for maintenance and repairs
- Furnishings: If you’re moving into a bigger space, you’ll likely need new furniture and appliances
Examine your debts.
Another factor lenders look at when you apply for a mortgage is your debt-to-income ratio (DTI). Most loan programs have limits on DTI, because lenders need to ensure that you can afford your mortgage on top of your existing debts.
There are two ways to look at DTI:
Front-end DTI: This refers only to your potential monthly housing debt, including your mortgage principal, interest, insurance, and other associated fees.
Back-end DTI: The back-end DTI represents all of your debts — housing expenses plus any other payments you’re required to make.
DTI limits depend on the loan program you choose, and some offer more flexibility than others. But lenders can implement their own DTI requirements as well, another reason it’s a good idea to request quotes from several companies.
Generally speaking, though, you’ll need a DTI of 45% or less to qualify for a mortgage.
What counts toward DTI?
Lenders calculate your DTI using debts listed on your credit report — think credit card balances, car loans, personal loans, and student debt. But they also include bills that don’t show up on your credit report, such as tax and medical debt, and even alimony and child support.
Even if a monthly debt doesn’t show up on your credit report, lenders will see it when they look at your bank statements. It’s best to share all of your debts with your lender right away so they can give you an accurate estimate of how much you can borrow.
If they find out later that you have much higher monthly debt obligations than they realized, they may not be able to approve your loan.
How do I figure out my DTI?
Use the following formula to estimate your DTI. But remember this will just be a starting-off point. The DTI lenders use to determine loan eligibility will include estimates for interest, homeowners insurance, private mortgage insurance, and other factors.
However, if you’re thinking of buying a home and want to know where your current debts stand, this is a quick way to figure it out:
Total monthly debt payments ÷ monthly gross income = DTI
For example, if you make $7,500 per month before taxes, you may be approved if all debts, including future house payment, total no more than $3,375 (45% of $7,500).
If your DTI is on the higher end, consider ways to reduce your debts quickly, such as:
- Pay more than your monthly minimums
- Transfer high-interest credit card debt to a 0% interest card
- Trim your monthly budget to free up money for larger debt payments
- Sell unused household items and electronics and put the money toward your debts
- Take on part-time work or pick up a freelance gig
3. Find a mortgage lender
Finding the right mortgage lender is critical. For one thing, you’ll work closely with them throughout the loan process so you want to choose a lender you like and trust.
More importantly, they need to close your loan on time. A seller has the legal right to walk away with your earnest money if you miss the closing date on the purchase contract.
Most won’t, but they can, so it’s crucial that you choose a lender focused on home purchase loans. Don’t even apply with one that will put you in the back of the line behind their refinance files.
Before deciding on a lender, check out their online reviews and ask friends and family for recommendations. Ask them to be candid about their experiences: Did their loan close on time? Did they feel heard and respected by the lender? How easy or difficult was it to get in touch with them or submit documents?
To ensure you’re getting the best value, request quotes from at least three lenders. Be sure to submit all of your applications within a two-week timeframe to avoid multiple hits to your credit score.
Before deciding which one to work with, ask them a few questions:
- What is their average time to close on a loan?
- Do they offer any closing guarantees?
- Have they worked with buyers who are similar to you (first-time homebuyers, veterans, self-employed, etc.)?
- Do they offer the loan programs you want? If so, how much experience do they have with those loans?
- How quickly can you expect a response when you have questions?
- Who will be your primary point of contact throughout the loan process, and how will they be in touch?
Your goal is to identify a lender that has a track record of on-time closings, specializes in your needs and fits your communication style and expectations. Look at the full picture and choose based on the best overall fit.
You might click with a loan officer interpersonally, but if they’ve rarely done a USDA loan and you’re buying in a rural area, you want someone with that expertise. If you’re a veteran, you want a lender with a history of successfully closing VA loans.
Finally, look beyond the interest rate a lender offers. Yes, interest rates matter. But you could lose money if you go with an inexperienced loan officer or one who can’t close your loan on time. Focus on choosing the all-around right lender that you trust to get you into your new home on schedule.
Mortgage lenders vs. mortgage brokers
You’ll learn a lot of new terms when you start the homebuying process, and it can be tough to make sense of them all.
But here are two worth understanding: mortgage lenders and mortgage brokers.
A mortgage lender loans you the money to buy your house. They’re the ones who approve your application, vet your finances through underwriting, and help you close on your mortgage.
You can apply for your mortgage directly through a lender. But remember how we said it’s important to request quotes from at least three? If you don’t have time to research lenders on your own, you can work with a mortgage broker.
Mortgage brokers source loan options from a broad range of lenders. They’ll then present you with recommendations for which programs align with your situation and goals. Essentially, brokers do the legwork of figuring out the loans you qualify for, and they may be able to find competitive rates.
People with tougher scenarios may do better with a broker. That’s because banks are often limited to the programs they offer in-house. Brokers can look at dozens of banks and find one that may approve your loan.
Some lenders are also brokers, which means that if they don’t have a loan that works for you, they can connect you with a partner company that does.
It really comes down to what you’re comfortable with. If you prefer to be hands-on in the selection process or you want to develop relationships with lenders before applying, then the mortgage broker option may not appeal to you.
4. Get prequalified or preapproved
OK, by now you’ve calculated your estimated home price based on your credit and budget — but the lender has to agree. They have the final say on how much you can buy based on your savings, income, and credit score.
If you’re ready to start looking for a home, it’s smart to get prequalified or preapproved with a lender. Some real estate agents, whether they’re the buyer’s or seller’s agent, and sellers themselves require a preapproval letter before they’ll show you a property. They want to know you’re a serious buyer.
A “prequal” or preapproval benefits you because it sets realistic expectations for how much house you can afford. Then you can focus your search on great properties within your price range, rather than being disappointed when you discover the houses you fell in love with on Zillow aren’t really options (for now).
You’ll notice that some lenders refer to prequalification, while others refer to preapproval. These terms are often used interchangeably, and some lenders define them differently than others. But here’s a way to think about the distinction.
What is prequalification?
With a prequalification, you give a lender your contact information, and some details on your income, debts, and assets. They’ll use that data to make a preliminary assessment about whether you’d qualify for a loan and how much they’d likely lend to you.
A prequal can be fast — it could take just minutes. But it’s not as accurate because the loan underwriter has not seen your documentation. Prequalifications don’t include credit approvals or vetting by underwriting. They can be a good starting point for buying a home, but a lender will need to verify all of your financial information before they can approve the loan.
It’s probably not a good idea to get a prequalification if you are self-employed, have spotty employment history, make bonus or commission income, have lower credit, or any other “outside-the-box” situation.
What is preapproval?
A preapproval, on the other hand, usually goes more in depth. The lender will examine your income, assets, and credit. Once the loan application has been submitted, you’ll provide more documentation, and the process could take days or weeks, not minutes, for a preapproval.
But a preapproval, while more work and time, is often a better assurance to the seller that you’re a creditworthy buyer and your loan won’t fall through at the last minute. A preapproval doesn’t guarantee that you will get the loan. But depending on the lender, it may be more solid than a quick prequalification.
How to get prequalified for a mortgage
If you’re ready to apply for prequalification, here’s what you need to do:
- Organize income documents. These may include W2s, 1099s, pay stubs, or tax returns.
- Provide personal information. Lenders will need your full name, address, Social Security Number, and driver’s license details to run a prequalification or preapproval application.
- Authorize a credit pull. Your lender will need you to OK them pulling your credit, which will appear as a hard inquiry on your report. You may also have to pay a fee (about $30 or less) to cover the cost of the report. But that is the only fee lenders can require until they’ve given you a loan estimate. If a lender asks you for any other fees at this stage, that’s a major red flag, so walk away.
5. Decide what type of home you want to buy
Once you’re prequalified, you’ll know your price range. This will help you narrow down what types of homes you can look for.
Don’t be afraid to compromise at this stage. This doesn’t have to be your forever home. It’s OK if you had your eye on a three-bed, two-bath single-family home but now all you can afford is a two-bed condo. First-time buyers rarely end up in their perfect home. It’s harder to afford the mythical “dream home” at this stage. Don’t beat yourself up if you start small.
But you should still get into a home that is as comfortable as possible within your budget.
- Consider your lifestyle. What type of house suits you best? If you have a family or plan to have children, how many bedrooms do you need? Is a yard or finished basement important to you? Do you plan to eventually have parents or in-laws live with you? In that case, a mother-in-law suite or extra bedroom might be a priority. How will you use the property? If you plan to rent part of it out for income or list a room on Airbnb, you’ll need a house that accommodates those goals. Use your intentions to refine your search.
- Where do you want to live? What’s important to you in a neighborhood — schools, restaurants, commute? You’ll probably be in this house for at least a few years, so search in areas where you’ll be excited to live.
Here’s a hack: If you don’t plan to have kids, buy a home in an area with a poor school district. Neighborhoods with great schools come at a premium that you don’t need to pay. The same applies to nearby employment. If you work remotely, don’t spend the money being close to downtown. Decide what’s important to you, and only pay for those home attributes.
- How long do you plan to live in the home? If it’s a forever home, you may not want to compromise on space or acreage. But if it’s a starter home and you expect to sell and move in a few years, ask yourself what you really need during that time frame. You may decide to sacrifice some amenities now so you have more money to spend on your dream home in the future.
6. Start looking at houses
Now that you’ve done all the legwork on organizing your finances, getting prequalified, and deciding what type of house you want to buy, you can move onto the fun part: looking at houses!
You’ve got a couple options for how to do this:
Look at online listings or schedule appointments yourself. Sites like Zillow, Trulia, and Realtor are great jumping-off points. Keep an eye out for open houses. You can show up and tour the home without a formal appointment.
Another option is to cruise the neighborhood to scope out For Sale signs to make sure you don’t miss anything
Added benefit of the cruise-and-scope approach: You’ll learn more about the area by visiting it repeatedly. Is it a family-friendly neighborhood or full of young singles? Does every house seem to have a dog? How bad does traffic get during rush hour? (No really — drive to work from that neighborhood during your regular commute time!) How long does it take to get to the closest restaurants, supermarkets, and other amenities?
Work with a real estate agent
A good real estate agent can be an asset when looking for a house. And the best part: they don’t cost you a thing. They are paid by commission out of the seller’s proceeds.
Be sure to choose the right one, though. Before enlisting an agent’s help, ask about their typical clients and the loan types their clients use. Do they work with first-time buyers, veterans, or buyers with situations similar to yours? What’s their track record with getting these offers accepted? Finally, let your agent know your non-negotiables so they’ll only show you homes you’re likely to love.
A couple more notes on house-hunting
It’s easy to get caught up in the aesthetics of a house. And if you find a home with great bones and your kind of interior design, so much the better.
But cosmetic features like paint colors, flooring styles, and fixtures are relatively easy to change. Focus on the big ticket items, such as the roof and foundation. Make sure the square footage meets your lifestyle requirements. Those are less easily remedied (and they cost a lot more than aesthetic upgrades).
Google Earth is your friend. Before making an offer (Step 8) look around the home on Google Earth. Is there a chicken farm next door? How about a neighbor with 30 old cars in his backyard? These are things you don’t want to find out later. If you’re buying in a rural area, find out whether there are concentrated animal feeding operations (CAFOs) nearby. Depending on the home’s proximity to a CAFO, you can experience some serious stink.
7. Understand which loan type may be right for you
Your lender will explain the different loan programs for which you qualify. But it helps to brush up on your own before making a decision. Then you can come prepared with any questions or concerns you have ahead of making a formal application.
We’ve mentioned some popular loan programs earlier in this guide. Now it’s time to break down what they are and who might benefit from them.
|Loan type||What is it?||Minimum credit score*||Down payment required|
|Conven-tional||Standard mortgage offered by private lenders||620||3%|
|FHA||Mortgage backed by the Federal Housing Administration with low down payment, low closing costs, and easier credit requirements||500||3.5% if credit score is 580+; 10% if credit score is 500-579|
|VA||Loan for military servicemembers and surviving spouses||580-620||0%|
|USDA||Zero down payment mortgage for low- to moderate-income borrowers to buy homes in qualifying rural areas||640||0%|
You may be eligible for multiple loan programs or just one. The criteria for each depends on a number of key factors, including your credit history and credit score, your income, debts, and savings.
But where you buy matters as well. If you’re buying a house on the outskirts of town, for instance, you may be able to get a USDA loan with no money down.
Each program also comes with certain restrictions and requirements. For instance, FHA, VA, and USDA loans may not be used to purchase investment (rental) properties. However, you can use an FHA loan to buy a multifamily house if you plan to live in one unit and rent out the others.
USDA loans also have income limitations based on where you plan to buy. A VA loan, on the other hand, has no income limits. As of 2020, there are no purchase price limits either, which can make it a really attractive option for qualifying veterans.
FHA loans are designed to make homeownership accessible to people who may have less-than-perfect credit and can’t save up a large down payment. However, you’re required to pay mortgage insurance on an FHA loan (called “MIP” or “mortgage insurance premium”) regardless of how much equity you build in the property.
The only way to stop paying mortgage insurance on an FHA loan is to refinance to a conventional mortgage. (Or, if you put down more than 10%, MIP falls off after 11 years.)
Therefore, if you have strong credit but only have enough savings for a small down payment, you may want to explore a conventional mortgage over FHA. The down payment requirement is slightly lower, and you only have to pay PMI until you’ve reached 20% equity.
But all of these loans have pros and cons. Your goal is to find the most affordable mortgage with a lender you trust. And that lender will help you figure out which program makes the most sense.
Fixed-rate vs. adjustable rate mortgages (ARMs)
Another question to discuss with your lender is whether you want a fixed-rate or adjustable rate mortgage. With a fixed-rate loan, your interest rate will always stay the same. That’s helpful for budgeting, and it may give you peace of mind if you’re worried about rates jumping in the next few years.
An adjustable rate mortgage, also known as an ARM, typically begins with a low rate for a set period of time, after which the rate increases incrementally. These may be attractive if you only plan to be in a home for a few years before selling. You can also refinance to a fixed-rate mortgage if the rate environment becomes too volatile for your comfort, though you may pay an origination fee and other costs to refinance into a new loan.
8. Submit an offer. Then submit another one. And another
Once you find a house, submit an offer. A real estate agent can give guidance on how to put in a competitive offer. They can also help you negotiate on price or the seller’s counteroffer, especially if the house needs major repairs. The seller may come down in price if you agree to take the home as-is and don’t require them to make big fixes before you close.
Tips on making a competitive offer:
- Offer above the asking price. Agreeing to pay more than a seller initially asked for a house is a great way to get their attention. But in a hot market, you may not be the only buyer willing to go above and beyond, so set a limit for yourself. As great as a house may be, you don’t want to take on a bigger payment than you can handle.
Another thing to consider: If you offer more than an appraiser thinks the home is worth, the lender won’t lend on the full purchase price. You’ll need to make up the difference in cash if you still want the home.
- Increase your earnest money. “Earnest money” is a deposit to show you’re committed to buying a house. If a seller accepts your offer, your earnest money will be placed in an escrow account until closing. When you close, that money counts toward your down payment and closing costs.
How much earnest money you need depends on the local housing market. In a competitive area, you may need more earnest money to edge out other buyers. But if you’re buying in a sleepy community that’s not seeing a ton of interest, you may be able to get away with very little earnest money upfront. Just remember that you need the earnest money on-hand within about 24 hours of getting an accepted offer.
- Get personal. You never know what the seller truly values. For many, it’s simply cash. But others want to know a nice family will live in their home. Or maybe you have the same kind of dog as the seller. Perhaps your agent can give you insights on how to write a letter that appeals to the seller that you can include with your offer.
- Be open to fixer-uppers. Going after homes that need significant repairs is a good strategy in this market. They come with less competition. In many cases, you can finance repair costs into the home purchase loan via a renovation loan.
If your first — and second and third — offers don’t work out, keep trying. In this hot market, few buyers get their first offer accepted. Be prepared to submit a dozen offers or more if the seller selects another buyer.
9. Move forward with loan approval
After a seller accepts your offer, it’s time to move forward with your loan. If you received a preapproval, it’s already gone through an initial pass with underwriting.
But now the lender will more closely review your income, debts, and other financial details. They may ask you for additional documentation or verification, and it’s best to respond to their questions right away. Prompt responses are critical to sticking with your closing timeline.
Remember to avoid taking on additional debt at this point. You’re probably excited to start shopping for furnishings or other necessities. But hold off until you’ve closed the loan, because a jump in debt or sudden decrease in your savings could jeopardize your mortgage.
Lenders must follow strict guidelines when approving a loan, and they need to be sure you can make your payments. If that ability is suddenly in question, you may not be able to close.
10. Schedule an inspection
At this point, the lender will schedule an appraisal. An appraiser determines the value of the house so the lender knows whether it’s worth the amount of money they’re letting you borrow.
Many new buyers believe that the appraisal will reveal every issue with the house. That’s not true. The appraiser will note huge problems — like the roof caving in or a missing deck. But it won’t tell you about a leaky faucet or that half the outlets don’t work.
Enter the home inspector.
Though most lenders don’t require an inspection, it’s a good idea — — to schedule one anyway. This is for your protection. An inspection may reveal worrying issues that cause you to renegotiate the terms with the seller or cancel the contract altogether.
There are many horror stories of people foregoing an inspection and finding out about a $100,000 problem after the sale is final. Don’t be that buyer.
A home inspector looks for major structural issues, as well as any red flags with your heating and cooling systems, plumbing, electricity, and other essential home components. You can also schedule a pest inspection, during which the inspector will look for signs of rodents, termites, and other creatures you don’t want making themselves at home in, well, your home.
There’s no going back after the sale is final, so do your due diligence before signing on the dotted line.
11. Close on your house
You’re in the home stretch! Here’s what to expect in the final stages of the homebuying journey:
As you move toward closing, the lender will require a title search before fully approving the loan. A title company will verify whether there are any outstanding claims or liens on the property that might conflict with the purchase.
Prior to closing, you’ll need to deposit cash for your down payment and closing costs into the escrow fund. If you put down earnest money, that will already be in the account and you’ll just need to deposit the difference.
You’ll get to make one last visit to the house before you sign the loan and receive your keys. Now is your chance to make sure any agreed-upon repairs are complete and look for any final red flags.
Three days before your closing date, you’ll receive closing disclosure documents from your lender. Read these thoroughly, as they include all the details of your loan, as well as a breakdown of the full cost of your mortgage. Ask questions if you need to — you want to feel 100% confident before you take possession of the home.
Many refer to the date on which you sign final loan documentation as the “closing date.” This is confusing, since this is not when your loan closes. It closes, or “funds,” a day or two later, after the lender receives your signed docs.
On your signing/closing date, you’ll meet .
Depending where you live, you may also be required to have an attorney represent you at closing.
Closings/signings can also happen with all the relevant parties in the same room, depending on local custom and law. However, some lenders now offer eclosings, in which the entire process happens via virtual meetings. The industry acceptance of this practice was greatly accelerated by the coronavirus pandemic. In any case, your lender can tell you at the outset whether your closing will take place in person or online.
Funding/getting the keys
After signing, it usually takes a day or two for the lender to receive and review final loan docs.
Verify your funding date with your loan officer. Be on call the entire day. It’s not uncommon for “surprises” to come up during funding. Often, the lender will pull your credit and verify your employment on the day of funding! Be ready to assist with any issues that arise.
If all goes well, the lender funds your loan. The title company records the new ownership with the county or other local authority. The home is yours!
Arrange with the seller’s agent and/or your agent to pick up the keys the same day. Now, it’s time to feel proud of your journey and turn the key to YOUR home for the first time. Enjoy this moment — you’ve earned it!
Closing times vary by lender. It can take as little as two weeks or longer than 60 days to close. Even longer on tough scenarios or for renovation loans. The time it takes to find a home you want to buy really depends on your needs and the local market. In a popular area, it might take months or more than a year to find the right house and get your offer accepted. The search might be a lot quicker in a less populated or less in-demand city or neighborhood.
First, take a look at your finances to figure out whether you have the credit history and savings to take out a mortgage. Next, get prequalified with a lender. Prequalification gives you an estimate of how much you’ll be able to borrow, so you can narrow your home search to properties within your price range. Some real estate agents and sellers require a prequalification or preapproval letter before they’ll show you a house, so it’s an important step in the process.
That depends on the house you want to buy and the type of mortgage you choose. If you buy a home with an FHA loan, you’ll need at least a 3.5% down payment plus closing costs. With a conventional loan, you’ll put down 3% or more. However, if you qualify for a VA or USDA loan, you could get a mortgage with 0% down.
You’ll need money for closing costs as well. Closing costs are typically 2-5% of the loan, so the higher your purchase price, the more you’ll need. Conversely, you may be able to save on closing costs if you opt for a smaller home with a lower price tag.
Credit score requirements vary based on the type of loan you take out, but conventional loans often require a minimum credit score of 620. However, you may qualify for an FHA loan with a score as low as 580 with a 3.5% down payment or 500 with a 10% down payment. Keep in mind that many lenders set their own minimums above these levels.
You’ll need some money saved to buy a house with most types of mortgages. But if you qualify for a VA or USDA loan, you can buy with a 0% down payment. Most loan types also allow you to use gift funds, lender credits, and seller credits toward your closing costs.
The major costs associated with buying a home are the down payment and closing costs. Down payments rate from 0% to 20% or more, depending on the loan you choose. Closing costs range from 2-5% of your loan amount. Your closing costs may include a loan origination fee (1% of the loan amount), appraisal ($500) and inspection fees, a title fee ($300-$1000+), and prepaid taxes and insurance (6-12 months’ worth of each prepaid at closing), among others. But you’ll also need money for ongoing costs, such as homeowners association fees, maintenance, and repairs.
Interest rates will likely remain low for some time, so it may be a good time to buy — if you’re financially ready. It’s more important to get your credit score, down payment, and debts in order than to try and time the market.
Avoid making other significant purchases (such as buying a car) or taking out new loans and credit card debt before or during the mortgage process. A car loan payment and high credit card bills will increase your debt-to-income ratio, which may signal to lenders that you can’t afford your monthly mortgage payments. Wait until the loan is closed and funded before making any purchases. Also, avoid changing jobs, going part-time, or changing your income stream in any way.
First-time homebuyer quick checklist
- Check your credit. Use a free site to get an estimate of your credit score.
- Pay down debt if needed. If your debt-to-income ratio seems high, look for ways to pay down some of your existing accounts before you buy a home.
- Save up your down payment. The more you can save, the less you need to borrow — and that means you’ll pay less in interest and own your home outright that much sooner.
- Figure out your monthly budget. Your monthly mortgage payments should fit comfortably within your budget. You shouldn’t need to cut corners on other essentials just to stay in the home.
- Get prequalified with a lender. A prequalification tells you how much you may be able to borrow, and it also inspires confidence in real estate agents and sellers.
- Start looking at homes! Use your prequalification letter as a guide to the types of homes you can likely afford.
I’m ready to apply. What now?
If you’ve decided it’s time to make this thing happen, congratulations. It’s a journey you will never forget and one that you can feel proud of.
The next step is to get started by completing a short, one-minute form. From there, we’ll check your eligibility and get you started in this exciting process.
Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation which has not been reviewed by Underwriting. Final loan approval is subject to a full Underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.
A pre-qualification is not an approval of credit and does not signify that underwriting requirements have been met.