Whether you’ve found a starter home in your budget or are ready to buy your dream home, buying a house is an exciting milestone. But it’s also a complex process that requires careful planning and preparation. From ensuring you meet lender requirements to securing the best mortgage for your situation, you’ll want to be prepared.
Whether you’re a first-time homebuyer or a seasoned property owner, this comprehensive guide walks you through the essential steps to make your dream of homeownership a reality. Read on for tips on how to buy a house, from scouting out locations to closing on the purchase. Keep reading to see how you can get personalized offers from our trusted partners through MoneyLion!
17 steps to buy your dream house
Embarking on the journey to buy a house might seem daunting, but breaking it down into a series of manageable steps can make the process smoother and less overwhelming. It can also help to prepare ahead of time for all necessary requirements.
1. Ask yourself why you need a house
Before you begin the house-hunting process, take a moment to reflect on your priorities. It’s essential to determine why you need a house and what your ideal house is. Consider your income, total budget, property location, and neighborhood.
Are you seeking more space for a growing family? Do you want the stability of owning your own home? Or are you looking for an investment opportunity? These questions don’t have to be mutually exclusive, but clearly defining your goals helps you focus your search. It’s possible to find a property that meets your needs, whether it’s a spacious suburban home, a cozy urban condo, or a fixer-upper with the potential to become your dream home.
2. Consider the location
Location and neighborhoods are also very important. Consider the schools, parks, and commercial centers like shopping malls and office complexes. If you’re buying a home in an area you’ve been living in or are familiar with, you probably have an idea of this already. If not, an experienced real estate agent can help guide you to specific agents.
3. Make sure you meet the requirements
Lenders have specific criteria that prospective homebuyers must meet to qualify for a mortgage. Understanding these requirements from the outset can help you better prepare and increase your chances of approval. Here’s what you’ll need to consider.
Credit score
Your credit score is a crucial factor that lenders consider when evaluating your mortgage application. Generally, a credit score of 620 or higher is required for conventional loans, although some lenders may accept lower scores, as low as 580 or 500 for government-backed loans like FHA or VA loans.
Recommended: What Kind of Home Loan Can I Get with a 650 Credit Score?
Debt-to-income (DTI) ratio
Lenders need to ensure you have sufficient income to comfortably make your monthly mortgage payments. You can calculate your debt-to-income (DTI) ratio by dividing your total monthly debt payments by your gross monthly income. The total debt includes the proposed mortgage payment. Most lenders prefer a DTI ratio below 43%, although some look for a DTI of 36% or less, with no more than 35% going towards the mortgage.
Income and employment status
Lenders typically require stable and verifiable income, often requesting pay stubs, tax returns, and employment verification. If you’re self-employed or have irregular income, be prepared to provide additional documentation such as bank statements and two years’ tax returns.
Down payment
While some loan programs allow for low or no down payment, most conventional mortgages require a down payment of at least 20% of the home’s purchase price. Putting down less than 20% may require you to pay for private mortgage insurance (PMI), which can add to the total cost. The average monthly cost of PMI is 0.46% to 1.5% of the loan amount.
Closing costs
In addition to the down payment and potential PMI, you’ll need to budget for closing costs, which can range from 3% to 6% of the home’s purchase price. These costs cover items like lender fees, title insurance, and transfer taxes. Some lenders allow you to roll these costs into the total mortgage amount.
4. Organize your finances and set a budget
Before you start house hunting, assess your financial situation. Review your credit reports, pay down debt, and create a detailed budget that accounts for your income, expenses, and potential mortgage payments. This process helps you determine how much you can realistically afford to spend on a home. Learn how to improve your credit score in three months.
5. Save for the down payment and closing costs
Saving for a down payment and closing costs can be a significant hurdle for many homebuyers. Consider opening a high-yield savings account to help your money grow faster. Many states also offer down payment assistance or grants to help first-time homebuyers. Explore down payment assistance programs and grants in your area and be prepared to save more to help reach your savings goals or try these savings challenges.
MoneyLion offers a convenient marketplace to compare high-yield savings accounts from our trusted partners that could help grow your money.
6. Select the best mortgage for you
Different mortgage options cater to borrowers’ needs and financial situations. For example, government-backed loans can help homebuyers in certain areas secure a home with a lower down payment or interest rate. Here are some of the most common types of mortgages you can consider.
Conventional loans
Conventional loans are the most common type of loan, and their market share has ranged from about 55% to 80% in recent years. These loans are not insured by the government but can be available through or guaranteed by a private lender or by the two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac. To qualify for a conventional loan, you typically need a credit score of at least 620 and a down payment of 20% of the home’s value.
FHA loans
FHA loans, insured by the Federal Housing Administration, allow for lower credit scores. In some cases, you could qualify for an FHA loan with a credit score as low as 500 and down payments as low as 3.5%. In that case, you need to pay private mortgage insurance (PMI) premiums.
USDA loans
The U.S. Department of Agriculture offers loans with no down payment requirements for eligible borrowers in rural areas. To qualify, you’ll need to meet local income requirements and purchase a property in an eligible area. You can check the USDA loan eligibility map to check the area you’re interested in and see if you qualify.
VA loans
Veterans, active-duty military personnel, and eligible spouses may qualify for VA loans. These loans require no down payment and no private mortgage insurance. Additionally, VA loans offer competitively low interest rates and limited closing costs, making them an excellent choice if you qualify.
To be eligible, you must meet certain service requirements, including at least one of the following:
- An active duty member who has served at least 90 consecutive days during wartime, or 181 days during peacetime.
- A veteran who has served at least 181 days of active duty peacetime service.
- A National Guard or Reserve member with at least 6 years of service.
- The surviving spouse of a service member who died while on active duty or from a service-related disability.
- You can learn more about VA loan qualifications to see if you qualify.
Jumbo loans
For higher-priced properties that exceed the conforming loan limits set by government-sponsored enterprises like Fannie Mae and Freddie Mac, jumbo loans are an option.
The conforming loan limits set by the Federal Housing Finance Agency (FHFA) change each year. For 2024, the upper limit is $766,550 in most areas and up to $1,149,825 in certain high-cost areas.
Renovation loans
If you’re planning to purchase a fixer-upper, renovation loans like the FHA 203(k) loan or the Fannie Mae HomeStyle Renovation loan can provide funds for the purchase and necessary renovations. With these loans, you’ll access the funds for a wide range of renovation projects, from repairs and energy updates to landscaping or luxury upgrades.
7. Get pre-approved for a mortgage
Getting pre-approved for a mortgage is a crucial step that gives you an advantage in the homebuying process. It demonstrates to sellers that you’re a serious buyer with the financial means to follow through on a purchase.
The pre-approval process involves submitting your financial information and credit history to a lender, who then provides you with a pre-approval letter that outlines the maximum loan amount you qualify for and the interest rate you’re likely to receive. During the preapproval process, the lender looks at your credit score, income, and total debt. It may ask for additional documentation like paystubs or bank statements.
8. Find a real estate agent
While it’s possible to buy a house without a real estate agent, working with a knowledgeable and experienced professional can be invaluable. A real estate agent can help you navigate the purchase process, provide insights into different neighborhoods, research average rental and sales prices on comparable properties, and negotiate on your behalf. Ask for referrals from friends and family, or research agents with a proven track record in your desired area.
9. Shop around for houses
Once you have your pre-approval letter and a real estate agent, it’s time to start shopping for houses. Attend open houses, scour online listings, and drive through neighborhoods that interest you. Make a list of your must-haves and deal-breakers to help narrow down your search. Consider factors like commute times, school districts, and neighborhood amenities.
You can also search on Zillow, Trulia, or Realtor.com. If you have specific criteria in mind, your real estate agent can use those search criteria on the multiple listing service or MLS. An MLS is a database used by real estate brokers to share information about properties for sale, allowing them to cooperate in finding buyers.
10. Make an offer
When you find a house that meets your criteria and you are ready to make an offer, your real estate agent can help you prepare and submit an offer. This typically includes an earnest money deposit, which demonstrates your good faith in the transaction. If your offer is accepted, you’ll enter into a contract with the seller, and the process of securing your mortgage and completing the necessary inspections and appraisals begins. The offer and contract process can differ slightly depending on your location.
11. Get a mortgage
With a signed contract in hand, you’ll need to complete the mortgage application process with your chosen lender. Remember to compare lenders and rates before choosing which lender offers the best APR and terms.
Then, you need to provide additional documentation, such as tax returns, pay stubs, and bank statements. Your lender pulls your credit report and an appraisal of the property to finalize the mortgage approval.
12. Buy homeowners insurance
Most lenders require homeowners insurance before closing on your new home. Homeowners insurance protects your investment and covers you in case of damage, theft, or liability claims. Shop around and compare policies from different providers to find the best coverage and rates for your area and any specific risks, such as flooding or earthquakes.
13. Schedule a home inspection
A professional home inspection, although not required, is very helpful to identify potential issues or defects with the property. Problems with major home systems, such as the roof, foundation, or HVAC systems, can be costly to repair. A professional inspection can help you negotiate repairs or credits with the seller or back out of the deal if significant problems are discovered.
Depending on the property, you might need a chimney inspection, pool inspection, asbestos inspection, mold inspection, or lead inspection. These inspections are often to be requested at your discretion. Your real estate agent can recommend reputable home inspectors in your area.
14. Get a home appraisal
Your lender will order a home appraisal to assess the property’s value and ensure that it’s worth the agreed-upon purchase price. If the appraisal comes in lower than the purchase price, you may need to renegotiate with the seller or increase your down payment to make up the difference.
Lenders use the loan-to-value (LTV) ratio or the ratio of a loan to the value of an asset purchased. As a rule of thumb, a good LTV ratio should be no greater than 80%. If you have an LTV of 80% or more, you may face higher borrowing costs, require private mortgage insurance, or be denied a loan.
15. Negotiate possible repairs or credits
If the home inspection uncovers issues that need to be addressed, your real estate agent can help you negotiate with the seller to have the repairs completed or to receive credits at closing to cover the cost of future repairs. For example, if the inspection shows that the roof needs to be replaced, you could negotiate for lower closing costs or for the sellers to replace the roof.
16. Do a final walk-through
Once inspections are complete, the appraisal is done, and you’ve finalized the mortgage approval, you’re ready to close. Before closing on your new home, schedule a final walk-through to ensure that any agreed-upon repairs, if any, have been completed and that the property is in the same condition as when you made your offer. This is typically a quick step that can be completed the day of or the day before closing.
17. Close on your new home
By the time you’ve made it to the closing table, you’re nearly done. On closing day, you’ll need to sign the relevant paperwork and transfer funds to complete the purchase. Your lender will provide you with a closing disclosure that outlines all the costs and fees associated with the transaction. Once everything is signed and the funds have been transferred, closing is complete. You’ll receive the keys to your new home!
Unlock Your Dream Home
Buying a house is a significant financial and emotional investment, but with careful planning and preparation, you can make the process smoother and easier. By following the steps above, you’ll be better equipped to navigate the complexities of home buying and find the perfect property that meets your needs and fits your budget.
FAQ
How much money should you have before buying a house?
It’s recommended to have enough saved for a down payment, closing costs, and a few months’ worth of mortgage payments as a cash reserve for unexpected expenses. You’ll typically need 3% to 20% of the home’s purchase price plus 3% to 6% for closing costs.
What is a good credit score to buy a house?
Most lenders prefer a credit score of 620 or higher for conventional loans, although some government-backed programs like FHA loans may accept lower scores of 580, or 500 with a higher down payment. However, the higher your credit score, the better interest rates and terms you’ll qualify for, helping you to save more long-term.
How much should I put down on a house?
The standard down payment for a conventional loan is 20% of the home’s purchase price. However, some government-backed loans like FHA and VA loans allow lower down payments. For example, FHA loans require as little as 3.5% down.
How much house can I afford based on my salary?
A general rule of thumb is that your monthly mortgage payment including principal, interest, taxes, and insurance should not exceed 28% of your gross monthly income. However, this can vary based on your overall debt, credit score, and financial circumstances, and some lenders accept a debt-to-income ratio of up to 43%.
Is it hard to buy a house by yourself?
Buying a house by yourself can be challenging, but it’s possible with proper planning and preparation. The main hurdles are saving up for the down payment and closing costs and qualifying for a mortgage on a single income. Having a solid credit score, a low DTI ratio, and a stable employment history will help with securing a mortgage.
