Buying a home is an intense process, especially for first-timers. I ended up buying my first home in July 2013. It was a crazy experience, and since then I've gotten a lot of questions about how to buy a house (and even wrote a book once upon a time on the very topic of millennial homeownership!), so I've compiled all of my knowledge here.
What follows is the 30,000-foot view of the eight most simplistic steps of the home-buying process. My ultimate goal with this piece is to empower first-time buyers to ask questions and feel confident about the purchasing decisions they make. And now that I'm a licensed, full-time agent, I have even more knowledge to share. Here’s more about me as an agent. Let’s see if it is a fit and work together!
How to Buy a House
- Step 1 – Assess your readiness
- Three questions to ask
- Step 2 – Calculate your affordability
- How to calculate home affordability
- Step 3 – Check your credit
- Step 4 – Save up for the down payment
- How to save extra money for your down payment
- Step 5 – Get pre-qualified
- Step 6 – Shop for a home (And make an offer!)
- Find an agent
- Build your wishlist
- Do drive-bys
- Make an offer
- Step 7 – Due Diligence and Mortgage Underwriting
- Step 8 – Closing on your home (here's how long it takes to close on a home, generally)
How to buy a house: Step 1 – Assess your readiness
The first step to buying a home is evaluating if you are a) financially and b) emotionally ready to buy. Since this is a large purchase factoring in hundreds of thousands of dollars, you want to make sure you're fully prepared for what the commitment to homeownership really means. There are three questions I recommend home buyers ask when assessing if now is the right time to buy (And here are 16 more questions to ask if/when you want to buy a home)
Ask: Is it better financially to rent or buy?
Often, buying a home is the more fiscally sound option because you're building equity in a home you can cash in later. What many financial experts don't talk about is just how much value there is in being a renter, including:
- Flexibility – A 12-month lease is much easier to get out of than a 30-year mortgage, and you can be choosy about where you want to live. Plus, you’re able to move around whenever you want to or need to.
- Maintenance – If something breaks in the house or apartment, all you have to do is call the landlord. (This is great if you’re not that handy!)
- Smaller emergency fund – As a renter, you can have a smaller emergency fund because you’re not responsible for home maintenance and upkeep and there are fewer up-front costs to rent.
Figuring out how to buy a house is a big lifestyle change. Deciding if it is financially advantageous to buy will depend on where you live so you’ll have to run the numbers. Here’s a great rent vs. buying calculator I like.
Ask: Do I really know where I want to settle down?
If you've read the blog a long time, (think over a decade) you know my story. I moved off to New York at 23. After two years in the city, I wanted to move back home to Georgia, and not just for the interim. Having had the experience of living far away from home was an amazing thing because it taught me what I did and did not want. I knew that moving back south was (most likely) for the long haul, so I felt comfortable with the decision to put down some official “roots,” but for many, the '20s are a time of exploration.
Being unfettered by a mortgage means you can take that job in another state or move abroad if you so desire. Whatever your financial best life looks like, you can pursue it whole-heartedly, because you don't have any strings.
Making home ownership affordable and viable in your 20s really only works if you can commit to your home for at least five years (either living in it as your primary residence or renting it out.)
You should consider these things too when trying to decide where you'd like to lay down roots:
- City, Suburban, or Rural – Do you want to live in a bustling city, a suburb division, or a wide-open rural area? There are pros and cons to each, and each one will affect your mortgage loan terms, commute to work, utility payments, household maintenance, and personal sanity.
- Affordability – Is the area you’re looking at affordable? This goes beyond your mortgage loan amount and housing expenses. Look at the distances you’ll travel to work every day as well as the cost of gas and utilities in the area. What are the state and city taxes? How much is food and overall cost of living in the area?
- Employment Opportunities – Are there numerous employment opportunities in the area? You’ll be committing to living there for at least 5 years, if you lose your job, will you be able to pick up another job fairly quickly with your current skills and the job market in the area?
Real Estate Value – What are the current home prices and local housing trends for selling and renting? You can use online sources like Zillow.com to check out the area before you buy.
- Climate – How is the climate throughout the year? Is it too hot in the summer for you, or too cold in the winter? Believe it or not, things like this will affect your budget (and your sanity) by affecting utility prices, car maintenance, and consumables such as food and clothing.
- Distance from Relatives – Knowing how far you are from family will affect travel expenses and how often you may need (or want) to travel.
- Culture and Entertainment – If this is important to you, where are the libraries, theaters, restaurants, and museums located and how far are they from the house you’re looking at purchasing?
- Proximity to Important Resources – How far will you be to hospitals, police stations, and fire stations? Believe it or not, for some insurance companies it matters how far your home is to the nearest fire and/or police station and it will sometimes affect home insurance premiums.
- Local Crime Rates and Statistics – What are the local crime rate statistics in the area you’re thinking of purchasing?
Ask yourself: can I financially handle a home?
- Just because you can qualify for a home loan and it's cheaper than renting doesn't necessarily mean you're in the best place, financially speaking, to own a home. Because you have to buy the house and then there are a lot of other costs.
Generally, here are some indicators you could take on the fiscal responsibility of a mortgage.
You’re Debt Free or Almost There
Taking on a 15-30-year home loan while you still have other debts is just asking to be in debt for the rest of your life. Before taking on the largest debt you’ll ever have, it’s best to get rid of all other debt before taking on a mortgage.
You should plan on staying in your new home for at least 5 years, it just makes financial sense. So, it’s important to have stable employment that will be there for at least as long as you have your mortgage loan.
You Already Have Extra Money Set Aside
You should already have extra money set aside specifically for closing costs and down payment (This could be anywhere between 3%-5% of the home’s purchase price – possibly $2000-$10,000), extra cash for moving expenses, and a small emergency fund.
You Have Good Credit
If you know your credit score is decent and that your credit report doesn’t contain any errors then you’re ahead of the game. A good credit score to buy a house is at least 700-760 or greater.
Step 2 – Calculate affordability
The next step in getting prepared to buy a house is finding out how much you can afford. Affordability is critical because once you close on a house, you don’t want to drown in payments and become “house poor.” Did you know that when lenders look at your finances to approve you for a loan, they only look at your income vs. your debts?
They don’t take into consideration the other things you need to afford. Things like homeowner association fees (HOA) fees, savings for an emergency fund, retirement contributions, utilities, home maintenance fees, lifestyle and entertainment costs, grocery and gas expenses, etc.
This is how so many get qualified for way more than they can actually afford. And why it’s important to know what your household budget can afford when it comes to buying a house.
How to Calculate Home Affordability
The Quick Math
A quick and easy rule some financial experts use is to make sure that your monthly mortgage payment doesn’t exceed 28% of your take-home pay.
- For example, let’s say your monthly income is $4000 and your expenses and bills are $1000. Minus expenses from your monthly income and multiply that by 28%.
- $3000 x .28 = $840. In this example, monthly mortgage payments (including insurance and taxes) would be $840. You would make sure your monthly payments don’t go over $840 in this example.
- Based on your monthly income, this should ensure there would be enough money left over in your budget for other expenses.
Of course, mortgages and household budgets can get complicated, so here’s a set of mortgage calculators from Nerdwallet that offer a few more metrics.
Step 3 – Check your credit
The first step in getting financially prepared to buy a house is to check your credit – both your report and score. Typically, a higher FICO credit score will give you more home loan options, better loan rates, and lower down payment requirements.
People can qualify for a mortgage with scores as low as 500 but will be required to come up with a hefty down payment and have higher interest rates. On the other hand, if you have a FICO credit score higher than 760, you’ll have access to the best interest rates, better mortgage loan incentives, and lower down payment requirements. A lower score simply means you will need to have a larger down payment and a higher interest rate.
And if it is lower, you can either decide to wait to buy a home and work on improving your credit, or pull the trigger and pay the higher interest rate, but knowing your score (and what it gets you) should be one of the first things you do when contemplating buying a home.
How to Buy a House: Step #4 – Save for a Down Payment
Okay, so you know how much you can afford for a mortgage, but what about that down payment?
If you don't have a large nest egg or a gift from family members, it's time to start trimming the budget and start saving aggressively. Here are a few of my favorite ways to save more money and ways to make fast cash for larger financial goals such as saving for a down payment.
Automate Your Savings
Figure out how much you can reasonably save after expenses such as rent, utilities, groceries, and a bit of “fun money.” If you don’t know where to start, Elizabeth Warren’s 50-30-20 method is a great way to start.
Ask for a Raise
Is it time for your annual review at work? While nerve-wracking, asking (and receiving) an increase in pay is essential for financial well-being, and especially helpful when saving for a home. Just be sure to automate any increase into your savings account, so it doesn’t get spent each pay period. Even a small 3% cost of living adjustment would net $1,500.
Cut Out Unnecessary Bills
Conduct an audit of all your bills to identify areas of savings. Review every expense: every insurance payment, cell phone bill, and automatic subscription, and see where the areas of cost savings are. New services (such as Rocket Mortgage) even do the heavy lifting for you and can reportedly save consumers $250.00 a month.
Find Unique Ways to Earn More
Focus on ways to earn more instead of saving.
- Here's how to hustle $100-$5,000 bucks.
- Take on non-creepy side jobs on craigslist. Here's the guide.
- 8 ways to quickly build up savings.
- Create a better budget to make saving easier.
- The 5 easiest things to cut from your budget.
- Start your own business (or a small “side hustle.”) Here's the complete how-to.
- Start blogging (here's how I made over $160,000 with mine.)
- Qapital rounds up your purchases for you automatically! It really adds up!
- Make some quick cash by filling out surveys in your spare time. Here are the ones I like!
- Plus other ways to build passive income.
- Ask for a raise + other ways to earn more money at your 9-5
Additional Home Affordability Resources
- Low salary? No problem. Here's how I bought my first home making less than $40k a year.
- A great post on how to save up for your first home on a five year, two year, and one year timeline. Awesome tips by yours truly!
- Tips for buying a home without going broke (particularly in you are in your 20s!)
- Don't borrow money from Mom and Dad for your first home purchase (here's why!)
Step 5 – Get prequalified
After you hone in on where you want to lay down roots and take the time to improve your credit, it's time to roll up your sleeves and get pre-qualified for a mortgage. This is what you'll need in order to start seriously shopping with a real estate agent.
How do I buy a house with a mortgage?
- You can get pre-qualified for a loan through an online lender like LendingTree, Quicken Loans, or Rocket Mortgage.
- You can also get prequalified for mortgage loans through your regular bank or through other financial institutions like USAA, or Chase, or through local credit unions.
- You may also enlist help by hiring a mortgage broker. A broker will do all the leg work. He or she will find a lender for you, ensure all the paperwork is for the loan and title agency, and see everything from the start of the loan through closing.
- Find a local mortgage broker by doing a Google search or asking friends or your real estate agent.
- No matter who you use for your pre-qualification, always ask them if they will lock the rate so you can shop for a home without worrying about the rate going up.
It’s important for you to do your own research first since most real estate agents won't work with you until you've got the pre-qualification letter in hand from a lender.
Step 6 – Shop for a Home
Okay, so you've gotten prequalified and have your pre-qualification letter in hand. The next step is to find a great REALTOR® who can help you shop and make an offer on the home. It's crucial to check the professional license of the real estate agent you choose, as this is a testament to their knowledge and legitimacy in the field.
Below are a handful of some “house hunting to do's” that I like to recommend to clients to ensure they get something just right.
Build Your Wishlist
Everyone has a wish list for what they want in a home, whether you are currently looking, in a home already, or still renting and compiling a list of “must haves” for the future. I've been making a list in my head since I was ten.
Even though I own a home currently, I still think about what features I'd like to have in the future.
Here's a chart of what I had on my wish list back when I bought my first home in 2013 and how the home I bought stacked up.
Obviously, if you watch enough house hunters you'll know that wish lists don't line up with budgets most of the time, but . a wish list will also help an agent find homes best suited to your needs.
House hunting is exciting. Truly. It is also exhausting. Before you make an appointment to physically see a home, leverage the internet to do detective work. See if any photos are available online, look at the location on Google Maps to see what is nearby (if you're unfamiliar with the neighborhood/street.) Those two action items alone will go a long way to narrowing down your list.
Then, either before your showing appointment or after, do a drive-by of the home(s) you're interested in. Do one drive-by during the daytime, and then another at night for each house.
Neighborhoods can look a lot different during the day, or you may notice a few issues with the home during the drive-by that weren't noted/pictured on the internet listing.
Make an offer
Ask your realtor to research comparable properties in your area before you make a bid and let them advise you on what best makes sense for your real estate goals. That's what they are there for! Once your offer is accepted, you'll write a check for the earnest money and deliver that to your agent and work on scheduling your home inspection.
Step 7 – Due diligence and mortgage underwriting
Prepare for an Appraisal
I mentioned above the need for an appraisal. Since the housing crash of 2008, many banks have tightened their lending terms.
Lenders will no longer approve a mortgage on a home if it does not appraise for that value. It doesn't matter how much you're willing to pay for a home, or if the home falls under the amount you're pre-approved for.
This can frustrate many buyers who fall in love with a home but do not have the cash to cover the difference between the seller's asking price and the appraisal.
I remember being on pins and needles during the appraisal process for my current home, but thankfully the home (after renovations) appraised for the home value + the upgrades, so I was able to get the money I needed to renovate.
Get (And Attend!) an Inspection
Inspectors to do a walk-thru of the home and then prepare a written report of the findings. Because it comes with a report, I've known many homeowner friends who skipped the inspection. No! Bad! Wrong! Completely wrong.
The inspection is for you. In addition to finding out if anything is wrong with the home, this is your chance to learn where the breaker box is, the water main, and all appropriate shut-off valves.
Plus, having the potential buyer there guarantees a more thorough inspection. (People behave differently when they're being watched- it is proven.)
- Find a qualified inspector through friends (or Angie's List, like I did)
- Ask to see an example of the final report before you hire someone. You want it to be THOROUGH with pages (15+) of documentation and photos.
- Once you get a report with any potential damages, get estimates for the fixes. It will be up to the seller to either fix them or provide a credit at closing.
Keep your cool during the underwriting process
Underwriting is just a fancy word for “qualifying for a loan.” You know, you pre-qualify and then you have to actually prove you can pay back the loan you are asking for.
Here are a few of the “standard” documents you will be asked for during the underwriting process.
- Check stubs (usually for the past 30 days.
- W2's for the last two years.
- Any additional proof of income you may have like your stock portfolio, alimony/child support whatever.
- Bank statements, usually about three months' worth.
- A letter stating your employment and rental history for the past two years.
- A home buyers training seminar certificate.
- Tax returns and transcripts (which have to be ordered from the IRS.)
- Copies of all of my rent checks to my current landlord.
And if you have a side hustle, or freelance or work for yourself….
- Prepare to show copies of checks from clients in addition to your tax returns (I printed mine off of my bank's website.)
- Three months of PayPal statements if you earn money online.
If you are planning to buy a home and don't know where these are, I suggest you locate them immediately.
Step 8 – Attend closing
Finally, after alllllll of the above, the bank underwrites your loan and gives you the clear to close. Then you get to attend the closing, sign all the paperwork, and snag the keys to your first home. Here's what to know about closing:
- Typically, the closing date is set in the offer letter for 30 to 60 days after the offer acceptance. This can change depending on a variety of factors, including inspections and paperwork processing with the lender.
- At least three days before closing the closing attorney will mail the Settlement Statement, which includes information from your Loan Estimate and the Closing Disclosure. Both of these tools explain the loan terms, like interest rate and other costs associated with the loan (taxes, recording fees, etc.).
- Depending on the state you live in, the closing may take place at the closing attorney’s office or the title company.
- It’s the buyer’s right to choose the closing attorney.
- The closing attorney fees are included in the closing costs.
How to Buy a House: Frequently Asked Questions
How much does buying a home cost?
Generally, everyone accepts a few expenditures as part of the home buying process: the down payment, realtor commissions, homeowner's insurance, and the like.
But there are also lots of other fees that can be associated with buying a home. Particularly if you are buying a foreclosed home, getting an FHA loan, or lumping renovation costs in with a mortgage via a 203k loan.
Here's an example of fees:
- Earnest Money ($500-$1000)
- Home Inspection ($300-500)
- Home appraisal ($4-500),
- a HUD Consultant fee (only if doing a 203k renovation loan)
- $250 in document preparation fees to an attorney at closing
- $15 for a home buyer's education class
- $30 in cashier’s check fees and postage.
For more on fees related to buying a house, check out this lengthy post I wrote for Opendoor.
How can I save money when buying a home?
Look into Down Payment Assistance Programs
This is my favorite home-buying tip. Down payment assistance is how I saved money at closing and then used the extra cash towards renovating the house.
Finding assistance programs is as easy as googling “[state] down payment assistance” – so why wouldn’t you?
And much like scholarships for college, there are other avenues of assistance for just about everyone. Are you a single mother? A veteran? You could qualify for even more funds!
Improve your credit
Knowing your credit score is so important to potential homebuyers. This little number will be what mortgage brokers look at when determining how much you can borrow. Your credit score also determines what interest rate you’ll pay.
If you’re looking to buy a home but don’t have great credit, consider taking time to pay down your debts before you make a huge investment like a home.
Having good credit can open up your options as far as mortgage rates and even help you afford a down payment.
Put down the full 20% downpayment
Once you agree to borrow more than 80% of the home’s value, you’ll typically have to pay for private mortgage insurance (or PMI).
PMI is an extra monthly charge is a protection for the lender in the event you default on your loan.
To avoid taking on PMI, try to save up at least 20% of the total cost of the home.
How can I make affording a home a reality?
Option #1 – Familial contributions
Don't qualify for any programs or don't have any available in your area? Family members can contribute a tax-free gift (Up to $14k per person, so $28k for you and a spouse) to help cover the down payment or closing costs on your first home.
I recommend leveraging the money for closing and moving costs rather than factoring it into the financing of the home. This helps ensure you only buy a home you can reasonably afford.
Option #2 – Rate Shop
Perhaps you won't be able to swing an $1800 home purchase like I did. Perhaps you don't want to! The more you pay for a home, the more expensive it becomes, which is why if you want to keep costs low it's important to rate shop, from everything to the mortgage to the home insurance.
Getting the lowest interest rate on your mortgage is the #1 way to save money on your first home purchase.
Option #3 – Buy for Now, Not Later
The best way I was able to buy a home so cheaply is because I bought a cheap house – something small and in my budget that I could reasonably afford. Of course, this meant hard choices, and I know it is fairly obvious advice, but less is more.
How much money do I need to save up for a home?
The quick answer is the more money you can save, the better! But the deeper answer really depends on your particular home-buying situation.
Down Payment/Type of Loan
- The size of your down payment will depend on the size of your loan.
- Example: the loan you’re trying to qualify for is $250,000, and you need to have a 3.5% down payment. You’ll need $8750 as a down payment.
- Nerdwallet has a down payment calculator you can use to give you an idea of how much you may need.
- Closing costs vary but are usually 3-5% of the cost of the loan amount.
- Example: Let’s say the loan is $250,000, your closing costs (administrative fees) would be $7,500 to $12,500.
- On some loans, the closing costs roll into the mortgage loan amount, and for some, the seller pays some or all of the closing costs.
- Earnest money is usually 1-2% of the purchase price of the loan. This money conveys to the seller you're serious about purchasing their property!
- The buyer writes a check to the seller at the beginning of the contract. Then the broker or title company holds the money for the remainder of the sale.
- If all goes well, the money goes toward the closing costs or brokerage fees at closing.
- Some lenders may require buyers to hold enough money in checking to cover the mortgage payments for the first months of the loan.
- For example, your monthly mortgage payments are going to be $1000/month. At closing, lenders will expect to see $1000 – $6000 in the bank.
- Not all lenders will require this, so it’s important to ask upfront.
Full post on how much to save up for a home is here.
How much does home maintenance cost?
Home maintenance costs are the one factor that most people tend to forget when preparing to buy a house. Financial experts agree on saving 1-3% of the purchase price of your house annually, for starters. For example: You purchase your home for $185,000. This means you should be saving at least $1850 per year for maintenance ($155/month).
If you’re purchasing an older house with older appliances, you may need to save up more money before purchasing your home. If household appliances are 10+ years old at the time of purchase, expect to replace or repair them within the next 1-5 years. Especially big-ticket items like air conditioning, heating, roofing, refrigerators, electrical, plumbing, etc.
- This is why a thorough, detailed home inspection can give you an idea of how much work may need to go into the home before you buy.
- Check out how much I spent on the renovation of my first home – a 1940's fixer-upper – to get a ballpark of how much cosmetic upgrades can cost.
- Look into different financing options, such as a 203k loan which will integrate renovation costs into your mortgage.
How to Buy a House: The TL:DR
Financially speaking, if you live in an area where it is cheaper to rent, and you can afford both a mortgage and home maintenance (about 1% of the purchase price of your home each year, according to The Balance)…then buying is better.
But here's the thing – homeownership isn't a one-size-fits-all deal. And while I think owning a home (especially as an investment) can be great for your finances, if it doesn't jive with your values or lifestyle or your post-college plans, then what's the point?
Lauren Bowling is the creator of Financial Best Life. Writing about money since 2012 (formerly as L Bee and the Money Tree), Bowling is an award-winning blogger and money and real estate expert whose advice has been featured on CNBC, Forbes, CNNMoney, Elite Daily, Business Insider, Redbook, and Woman’s Day Magazine and more. After selling the site to a division of The Motley Fool in 2019, Bowling is now back as the owner and primary voice behind FBL and is excited to continue educating elder millennials everywhere about how to afford their best life.