Buying a Home: The Process

When you’re ready to make a move, the home purchase process that includes finding a place can be daunting. And, purchasing a place is far more involved than renting. By first understanding the steps of home buying, you can break it down into smaller, more manageable tasks.

Buying a house can be summed up in a few phases. You’ll first find out how much of a home you can afford. If you’re paying cash, you already know that, but if you’re taking a loan, you can get preapproved by a lender to know the exact price range for your search.

In addition to a mortgage lender, a real estate agent is valuable for your search. You can look on your own, but a real estate agent will usually know about listings you can’t find yourself. The agent will also handle putting in an offer, negotiating and representing your interests during the closing process.

The first thing you’ll do if you’re buying a house is make sure you can afford the monthly mortgage payment. Even if you’re borrowing the funds, there are some expenses you’ll have to pay yourself. You’ll need to make a payment when you put an offer on the house, known as earnest money, as well as paying closing costs and fees for a home inspection.

The biggest expense associated with a house, though, is the down payment. There are some ways you can cut down on that expense, but if you don’t put ​20 percent​ down, you’ll have an extra expense on your mortgage called private mortgage insurance. It’s important to have a full tally of the costs before you start your home buying journey.

One of the most important financial steps you’ll take in looking for a house is choosing a real estate agent. If you’re selling a home, you’ll either need an agent who can both handle the sale and purchase or two separate agents. The seller’s agent is called a listing agent, while the agent representing a home buyer is called a buyers agent.

Many home buyers rely on referrals for an agent, but it’s important to make sure you’re getting the best professional for your area. You can usually pull up a real estate agent’s broker website to see information like their past experience, sales history and current listings. An agent who has quite a few listings in your area and price range is likely to also know plenty of homes for sale and buyers in that price range who are looking.

Before you start shopping, you’ll first need to know how much of a home you can afford by exploring pre-qualification. Savvy home buyers get a preapproval from a reputable lender. You can look around online and compare interest rates and terms to find the one that’s likely to give you the best deal.

Once you’ve found a lender, ask for a preapproval letter. You can take this letter to your real estate agent to show that have pre-qualified and your financing has been lined up. This will show an agent that once you do find a house you like, you can get the financing necessary to buy it. It can sometimes help a buyer beat out other offers, too, as a seller is more likely to go with a deal with a low likelihood of falling through.

​Read More:​ Can I Make an Offer on a House If I Don't Have My Mortgage Approval?

Lenders set their own credit score and income requirements. Generally speaking, though, you’ll need a FICO Score of at least ​620​ to qualify for a conventional loan. You’ll also need a debt-to-income ratio of no more than ​43 percent​. That means your monthly bills must take up less than ​44 percent​ of your gross monthly income.

First-time homebuyers may qualify for an FHA loan with a credit score as low as ​500​, but you’ll need a down payment of at least ​10 percent​. If you have a score of ​580​ or above, you can get into a house with a down payment as low as ​3.5 percent​.

​Read More:​ Low- and No-Down-Payment Mortgages: The Best Lenders in 2020

Shopping for a home is one of the best parts of the homebuying process. You’ll give your real estate agent a price range and some criteria, and that agent will send you listings that might interest you. You can also look at houses on your own, using real estate sites like Zillow and Trulia.

If you want a new home, you may also look into new subdivisions being built near you. Sometimes you can choose a lot and pick from a small number of exterior and interior design options. With a new home, be aware that sometimes you’ll have to wait.

Another popular listing technique for real estate agents is the open house. Open houses are typically held on weekends during a very specific timeframe. During this time, you can walk around in the house and ask the listing agent any questions. You don’t need your own agent to be present, but if you’re interested, you will need to loop your agent in.

The goal is to find your dream home during your search. When you do, it’s time to put an offer on the home. First, your real estate agent will draw up a formal offer for the seller’s agent to present to the homeowner. This is where the negotiation starts.

The homeowner will either accept the offer, reject it or make a counteroffer that you can either accept or reject. If you accept it, you won’t yet own the house. The listing will be marked as “pending” and a date for closing will be set.

To finalize your offer, you’ll need to put down something called earnest money. Your real estate agent will require a “good faith” deposit that shows the seller that you’re serious about buying the property. This amount can vary, but it’s typically between ​1 and 5 percent​ of the purchase price of the home.

It's important to note that if you don’t follow through on the purchase, you could lose your earnest money. But otherwise, the money will go into an escrow account managed either by the title company or the seller’s real estate agent. At closing, this earnest money will either be applied to closing costs or down payment, or you’ll be given information on when you can expect to receive it back.

If you were preapproved, you already have a lender. But you still can shop around or go with a lender your real estate agent recommends. Look for the lowest interest rate, as well as down payment and closing cost requirements. Once you’ve signed, you’ll lock in an interest rate that will remain valid until closing.

It’s important during this time to avoid making any moves that can affect your credit score. Your lender will combine that with your debt-to-income ratio to decide whether to approve you for a loan. Your approval will be contingent on your financial situation not changing dramatically between approval and closing.

When you take out a loan, the lender will charge you interest on the money you borrow, which is how it makes money on the deal. Mortgage rates are based on the performance of the U.S. economy and can change from one day to another. It can be tough to predict where interest rates might go during the weeks and months you’re looking for your dream home.

One of the most important things you can do in your home buying journey is to get a low interest rate. Even the smallest savings can pay off over the course of a ​15-​ or ​30-year loan​. When you’re preapproved for your loan, you’ll be quoted an interest rate, but that rate is subject to change between the time you’re preapproved and you make an offer.

When you place an offer and finalize your loan application, the lender will lock in your rate. This rate lock is good for a fixed period – typically ​30 days​ – and guarantees that this will be the rate you’ll pay as long as you close before the time is up.

In the days leading up to closing, you’ll be busy. You’ll need to answer any questions your mortgage lender might have, providing documentation where requested. Your real estate agent will give you a final date for closing, coordinating it with the seller’s agent, and you’ll need to begin making plans to move.

During this timeframe, you’ll also have both a home inspection and property appraisal done. The appraisal ensures the lender that the property is worth the amount you’re borrowing, and the inspection pinpoints any issues that the seller needs to fix before you can close. If you’re selling a home, you’ll also have to repair any issues the buyer finds on your home.

At closing, you’ll need to pay a down payment, either by wiring the funds or by bringing a cashier’s check for the amount to closing. Your lender will give you the percent you’ll need to put down, but it can go as low as ​3 percent​. With FHA loans, you’ll have to put at least ​3.5 percent​ down.

If your down payment is lower than ​20 percent​, your mortgage lender will add something called private mortgage insurance to your monthly payment. This protects the lender in case you default on the loan at some point. If you go this route, make sure you watch your loan and when you’ve paid off ​20 percent​ of the principal, ask your lender to remove PMI.

There are costs associated with processing a mortgage. Those fees are called “closing costs,” and your lender will list them in advance of the closing date. You can ask for the fees in advance if you want to make sure you have enough time to gather the funds.

You have two options with closing costs: you can pay them at closing or, if the lender allows, you can wrap them into your mortgage. If you choose the latter, you’ll be paying interest on them throughout the life of the loan. Closing costs include the following.

• Real estate agent’s commission: Real estate agents charge a commission on the sale to compensate for their time. The real estate commission is typically between ​5 and 6 percent​ of the home’s purchase price. This amount usually will come out of the sale itself, which means the seller technically pays it.
• Title cost: There’s a cost to check for issues with the title that could cause you or the lender issues down the line. It can also include the cost of title insurance.
• Recording cost: If the government charges a fee for recording the transfer of the deed from the seller to the buyer, this cost will likely be passed on to you.
• Other fees: Some miscellaneous administrative fees may sometimes apply. These include the survey fee and home warranties. Your inspection and appraisal fees are typically paid directly to the professional handling these services at the time they take place.

Once you’ve moved in, you’ll start paying off your mortgage loan. Your payment consists of the amount you borrowed, divided into monthly amounts, plus interest. But those aren’t the only two things you’ll see on the bill.

Built into your home are the fees for homeowners insurance and property taxes. These are put in an escrow account and paid when the bill comes due. At the end of the year, you’ll either get a bill for any shortage or a refund if the amount you paid went over what was due.

In the early months of your mortgage, the majority of your payment will go toward interest. This will naturally shrink over the years as your balance decreases, which means more of your payment will shift toward principal. If you stay in the home long enough, you’ll find that if you sell your house, you’ll have a nice payout that you can put toward a new house.

​Read More:​ How to Calculate Mortgage Interest

Home buying is a huge financial commitment but knowing your budget and working with a good real estate agent can make it easier. A house can be one of the best investments you ever make, provided you stay in the home and make payments until you owe less than it’s worth. The money you make on the sale will give you a headstart on your future housing purchases.