So you think you’re finally ready to buy real estate, but you’re asking yourself “What do I need to buy a house?” Buying a house is a major stepping-stone in life, and is not a thing that you should take lightly! It is important to clearly understand all of the steps, weigh every decision carefully, and not trip yourself up with bad decisions, because if you aren’t careful, you will be stuck with a 15 or 30-year mortgage for the property, whether you like it or not!
But don’t worry! If done right, the home-buying process can be a smooth experience, if you know what to expect. If you aren’t sure how to buy a house, we are going to go over the steps to buying a house here, so that you have something you can go over to prepare yourself for this strenuous task!
#1 Prepare Yourself
Yes, you need to make sure your finances are in order, but the first thing you need to do is prepare yourself mentally and emotionally. The process of buying a house can feel stressful, laborious, and difficult. You are going to look at a bunch of houses that you don’t like, some houses that you love but can’t afford, and get into bidding wars over popular houses.
House-hunting is just like owning your own business: you can’t take anything personally. If you do that, you are bound to make bad decisions and hurt yourself in the end. Keep your head level, and remind yourself that you will be committing to the house you are buying for a significant portion of time. You shouldn’t stress over every detail, but you definitely shouldn’t gloss over uncomfortable subjects, either.
If you are buying your house with a spouse/partner, make sure you are on the same page, financially. Prepare your relationship for discussions; make sure you can discuss the pros and cons of each property you look at. Again, you will be committing to this land and house for many, many years, so you don’t want one of you to feel alienated or like their input doesn’t matter, because they’ll never feel comfortable in the new home. Make sure you both feel like you can have safe conversations with the other about houses.
Ask yourself difficult or important questions: Will buying this house mean I or my partner have to relocate? How will my job or my partner’s job affect living here? Does this property have a good amount of things we like here? Is there room for growth or more family here? Do I even want to start a family?
These are all important, big-picture questions you have to ask yourself, which will tell you if you even want to buy a house, or where you should buy it.
#2 Prepare Your Finances
The next questions you need to ask yourself are: “How are my finances? Can I even afford a mortgage? Will I be able to save money or do fun things once I have a mortgage?” These questions will help you prioritize what you are willing to spend, and will show you how much of your budget can go towards the house you want.
You need to calculate your debt-to-income ratio (DTI). To qualify for a mortgage, your DTI should be 50% or less; put simply, if over 50% of your income is going away to bills, the bank isn’t going to be likely to pay you. You’re just too risky of a client. If you have a DTI higher than 50%, trim your spending down, or find a way to get a raise or a better job!
You need to doctor your credit score! Your credit score shows lenders just how trustworthy you are with their money. You can’t expect to get a great mortgage if you have seven unpaid medical bills resting on your credit score, or equally bad, no credit score at all!
If you have no credit, get a small credit card, spend a few bucks on it, and pay it off every month; this will boost your credit score, dramatically, in a few, short months.
If you have bad credit, find out why; check your score with free score trackers, track down the negative hits (too many failed credit card applications, unpaid bills, late payments, etc.), and try to get them removed from your score. Fight to clean up your credit score! Don’t let creditors tell you that they can’t pull the negative marks off: they are required to by law once you fulfill your financial obligation to them.
Another thing to consider is to start saving up for a down payment & closing costs. When you buy your house, you are most likely going to need a hefty down payment. It used to be that 20% was required, but most loans now usually require a much smaller down-payment, anywhere between 2% to 10%. The more you save, the better your down-payment will be, and the less likely it is that you will have to pay mortgage insurance, which comes with lower down payments.
Remember, the more you save upfront, the more you will be able to handle unexpected costs, expected costs, and the stress that comes with it all. A higher reserve means less stress, which is the name of the game, here.
Ask yourself: What do you need to buy a house? Are you capable of doing so yet, or should you wait until you’ve solved some financial issues? There is no shame in waiting, but there is shame in putting yourself in a place where you can’t afford your house payment. Think carefully and intelligently: Don’t make rash decisions, and don’t take them personally. Use your head!
#3 Figure Out What You Want
This is one of the more enjoyable steps to buying a home, and it’s very simple: What do you want in your house? Do you want a house with a huge backyard, or do you want a condo or townhouse? Do you want to have to cut your yard, or would you rather not deal with it? How many rooms do you want? It’s entirely up to your preferences!
What is the best location for you? Would you rather live downtown, in the suburbs, or out in the country? They each have their respective strengths and weaknesses, but which one is right for you? Do you want to homestead yourself, or would you rather have an HOA?
If you are planning on having kids, or do already, think about the school in the area. Are they decent? Do you feel safe leaving your children at that school? For that matter, do you feel safe leaving your children home alone in an emergency?
Also, think about the kind of home you want to buy. Would you rather have a house that is ready to move into, or would you rather buy a fixer-upper? Are you even capable of the skills necessary to fix up a house?
Think about natural disasters. Am I willing to live somewhere that floods a lot? Am I willing to withstand a major hurricane? Are tornados an issue for me where I live, or do I know how to deal with those? This last suggestion is less fun, but is nevertheless important: Safety is important when it comes to your family!
#4 Shop for a Mortgage & Get Pre-Approved!
What mortgage you have affects how well you qualify for any loan, and how you would repay it. You need to carefully weigh the options when it comes to picking the right loan. Everyone is different, and every need is different, so different loans fulfill different roles for people in need.
Conventional loans are just that: regular. They offer lower down payments but are much more strict to enter. This is because they are not backed by the federal government.
FHA loans are easier to qualify for but have strict mortgage insurance requirements. These mortgages are backed by the Federal Housing Administration.
If you are or were in the military at one point, or are a spouse or widow of someone who is or was, you can apply for a VA loan. Backed by the Department of Veteran Affairs, VA loans often have lower interest rates and no down payments!
If you are a member of a federally recognized Native American Tribe or can trace your lineage to someone who is or was, you can apply for a Section 184 Home Loan. These have extremely low interest rates and low or nonexistent down payments.
Finally, a renovation loan will help you lump the costs of fixing up the house into the costs of actually buying the house. This is especially helpful if you plan to do the work yourself, but it is a great way to borrow money for necessary repairs without having to ally for a home improvement loan.
Study each of these loans with a skeptical eye, and figure out which one is best for you! Shop around for mortgages in your area, and find a rate, down payment, and term that works for you.
Once you find out which one you want to apply for, go ahead and get pre-approved for it! You will save yourself plenty of time and heartache in the future, once you sign the contract for your house. Also, your REALTOR will know that you aren’t just wasting their time, since you’re pre-approved. They’ll put you in higher regard than other clients, simply because they already know that you’re ready to buy.
#5 Find Your Real Estate Agent
No one knows how to buy a home quite like a good real estate agent. The right agent can help you so much in the buying process: They will know how to search the market, find you some good deals, and cheer you on when the house search seems bleak or dreary.
Shop around for your agent like you did for your mortgage. Look at all of the options in your area and try to find one that fits well with you. You want to find someone easy to communicate with, someone who understands your financial situation, and above all, someone whose schedule lines up well with yours.
Check with friends. Find out who they used to buy/sell their house, and see if they had a good experience. Make sure your agent isn’t affiliated with any of the houses or properties you are looking to buy; they won’t have a vested interest in the sale and can help negotiate a better price for you, because they don’t have a reason to drive up the price.
Make sure you communicate with your agent on what your wish list is for your home. They’ll be able to help you the most when they know all the things you want or would like in or around your home. Search our agents.
#6 Look for the Right Place
Yet another enjoyable step in this arduous process: House hunting. So many people put this step above everything else, but if you do this after getting pre-approved and finding a good agent, your stress levels will be more easily managed. You won’t have to worry so much about the cost and prices, and negotiating them, because your agent will have already done much of that work for you. They wouldn’t show you a house they knew the seller wouldn’t be selling in your range.
Make sure you take full advantage of your walk-through and research what to look for when buying a house. Pay attention to possible repairs that are needed, things you may want to work on or change, or problems that may arise in a couple of years living there. It’s okay to take pictures—if your agent is okay with it—or detailed notes, to help you jog your memory later. You want to be able to recall as much information about the location as possible.
Please remember that it is very rare for a house to fit perfectly inside the bounds of your wish list. More often than not, you’re going to have to sacrifice something on your list for something else, and that’s alright! Nothing is ever perfect, just make sure the sacrifice you are making isn’t something you can’t live without.
#7 Make Your Offer
Let the haggling begin! Once you’ve found the right place, put in an offer on the price. Be sure to consult with your agent before you offer a price though; they can help you find comparable sale prices and other helpful information to aid in your offer. With their help, your offer will be more successful. The key is to offer lower than their asking price, but not so low that you offend the seller or their agent, and they refuse to counter your offer. You want it low enough where you get a deal, but not so low that they feel slighted.
From there, the sellers and their agents can decide to accept your offer, counter your offer, or drop you like a hat. If they like your offer, congratulations! You get to sign a contract! If not, they will counter, or politely decline any further haggling with you (hopefully, they counter your offer).
Once your offer is accepted, the buyers and sellers sign a contract, and the final steps of this process begin.
#8 Sign the Contract & Finalize the Mortgage
Here, the REALTOR will go over the agreed price with the buyers and sellers, draft up a sales contract for both parties to sign and which they must follow to the letter. Many times, the REALTOR will put clauses in the contract to protect both the buyers and the sellers, in case one party drops their end of the bargain. This contract is a sign of good faith that the buyers intend to buy, and the sellers intend to sell.
At this point, you must also finish the mortgage paperwork with your lender. You will adjust any necessary numbers for the mortgage that you need to adjust and finalize your payments, term, and interest rate.
#9 Get Homeowners Insurance
Since technically, the lender owns your house until you pay it off, they want you to have insurance on the house, to protect their interest on the property, in the event of a major disaster. Home insurance is an extra layer of protection for them, one that lets them know that no matter what happens, they are getting paid. Make sure your coverage is high enough to replace the home, not partially, and that you shop around for the best rates.
Some insurance companies charge you less if you combine your homeowner’s and auto insurance, and some just have amazing rates. Like car insurance, the most expensive and most inexpensive homeowner’s insurance is different for everyone, so make sure you shop around, see what benefits you get with different providers.
#10 Schedule an Inspection & Appraisal
These are technically two steps, but they are often confused with one another, so we will break them down together.
The home inspection will tell you if anything is wrong with the home. The inspector checks for problems with the foundation, mold, poor window seals, bad wiring, bad insulation, air conditioner, and heating problems, and a myriad of other issues. The inspector will comb every inch of the house and let you know what problems—if any—they find. If they do find problems with the house, you may negotiate with the seller to adjust the price due to the repairs, or they can deal with the work, themselves.
The home appraiser works specifically for the lender. They want the appraiser to check the value of the home and compare it to other sales in the area and try to figure how much the home is worth. This way, they know that are not overpaying for the mortgage on your house, and they can be sure that they are going to make money by lending to you. The lender selects and provides the appraiser, but the seller pays them for the job they do.
The difference between the appraisal and the inspection is that the inspection provides peace of mind for you, the buyer because you will be living in the home. He determines the safety of the home. The appraiser determines the worth of the home for the lender, so they know that if you can’t make the payments, you won’t be sticking them with a house they can’t make money on.
#11 Address Any Changes
Once the appraiser and the inspector finish their looks at the property, the buyers and sellers will convene to discuss what changes need to be made to the arrangement. Now, you can convince the seller to drop the price of the house because it needs more work, or you can ask them to fix the problems before they sell to you. It generally is better that they credit you the cost of the change, though, because then you can pay for the work yourself, and you know it will get done the way you want it to be.
Changes can be difficult to make, though the market largely determines that. If you’re lucky, you won't have much to fix or update.
Finally! The last step! Here, you will pay the costs for the appraiser and the inspector, as well as do a final walk-through of the house, and meet the agents or sellers one last time. Familiarizing yourself with your closing documents can help to expedite the process, though you should still take your time and read every word closely. Don't rush through the last step: check the agreed-upon prices—and make sure to discuss any changes you see.
Congratulations! With the closing, you have officially bought your new home! Throughout the chaos and confusion and the constant struggle to keep up with tons and tons of paperwork, you have beaten the odds and now own your very first home!