How To Buy A House In 8 Steps
Buying a home is one of the most exciting decisions you can make. Gaining a better understanding of the home buying process can help eliminate stress as you begin your search for the perfect house. Let’s take a closer look at the steps you’ll take to buy a home.
What Do I Need To Buy A House?
Buying a home is about more than just your monthly mortgage payment. Before you even think about buying a home, there are certain financial aspects you need to have in order.
A down payment is the large initial payment you make on your new mortgage at closing. Down payments are calculated as a percentage of your total home sale price.
Think you need a 20% down payment if you want to buy a home? Actually, you don’t. A 20% down payment is by no means a requirement for homeownership, and it’s even possible to get a loan with as little as 3% down.
You’ll also need to factor in closing costs when you save for a down payment. Closing costs are additional fees you pay to your lender in exchange for finalizing your loan that cover the services involved in buying your home. The specific closing costs you can expect to pay vary depending on your state, but they usually equal about 2 – 5% of your total home price.
There’s no set income amount you need to make every year to buy a home. However, you do need some form of steady income to get a mortgage – and your lender will want proof of your household income. If you’re on payroll, you’ll need to show your lender your most recent pay stub and W-2 to prove your income. On the other hand, if you’re self-employed, your lender will usually ask to see a copy of your full tax return and may require some additional documents.
When lenders look at your income, they consider whether you can pay back the loan you’re requesting. This is why it’s so important to know how much home you can really afford before you start shopping.
Proof Of Assets
When you apply for a loan, your lender will ask to see proof of your assets. Checking accounts, savings accounts and retirement accounts are all examples of assets. You may have to provide a few months’ worth of bank statements to verify your assets. This assures your lender that you’re not using a loan to cover your down payment and that your money is from legitimate sources.
Your debt-to-income ratio (DTI) is another way that mortgage lenders judge your ability to pay your bills. Your DTI ratio is a percentage that tells lenders how much money you spend versus how much money you make.
Calculating your DTI is easy. First, add up any regular recurring debts that you pay every month. Rent, student loan payments and minimum credit card payments all factor into your DTI – adjustable expenses like food costs, entertainment and clothing expenses don’t. Then, divide your expenses by your total monthly pretax household income.
For example, let’s say that you spend $800 a month on rent, you pay $200 on your student loans and you pay $100 on an auto loan. Your total household expenses would be $1,100. If your total monthly income was $3,000, your DTI ratio would be equal to $1,100/$3,000, or about 37%.
As a general rule, mortgage lenders look for borrowers who have DTI ratios of less than 50%. Paying down debt or increasing your household income are both ways you can lower your DTI ratio.
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Steps For Buying A House
Now that you know the numbers, it’s time to start home shopping. Let’s go through each of the eight major steps on the road to homeownership.
Step 1: Determine How Much Home You Can Afford
The first step in buying a home is figuring out how much you can afford to spend. When you think about budget, consider more than just your monthly payment. Remember that when you own your home, you’re responsible for covering repairs, maintenance and utility expenses. Also, remember to factor in your down payment and closing costs when you start saving.
As a general rule, you don’t want to pay more than 35% of your total monthly income in housing. Sit down and look at your finances to figure out a budget before you start considering homes.
Need some extra help figuring out how much you can afford to pay for a home? Use the Rocket Mortgage® mortgage calculator tool and give yourself a better idea of what you can expect to pay each month.
Step 2: Research Your Mortgage Options
Once you know how much you can afford to spend, it’s time to consider your loan options. There are several different types of mortgage loans. Knowing all of your options can help you make the right decision. Some of the most common types of mortgage loans include:
- Conventional loans: Conventional loans, sometimes called conforming loans, are loans that aren’t backed by the federal government. Conventional loans are a popular option for home buyers and you can get one with as little as 3% down.
- FHA loans: Backed by the Federal Housing Administration (FHA), FHA loans are less of a risk for lenders because the government insures them if you stop making payments. As a result, FHA loans have credit score requirements that aren’t as strict. You can get a FHA loan with a down payment as small as 3.5%.
- VA loans: VA loans are mortgage loans for active duty members and veterans of the Armed Forces. You can get a VA loan with 0% down if you meet service standards. VA loans are insured by the Department of Veterans Affairs.
- USDA loans: Another type of government-backed loan, USDA loans help people in rural and suburban areas buy homes. You can get a USDA loan with 0% down but your home must be in an acceptable rural area and you must meet income eligibility rules.
If you’d like to learn more about the different types of mortgages, check out the Rocket Mortgage®overview on the different types of loan choices.
Step 3: Start Saving For A Down Payment
A larger down payment allows you to avoid paying for private mortgage insurance and gives you access to a lower monthly payment. You may also have access to lower interest rates when you bring a larger down payment to closing.
It’s helpful to create a solid savings plan when you start building your down payment fund. Devote a certain dollar amount every month for your down payment fund from each check you receive. Hold the money in an account that’s separate from your checking account to help you avoid the temptation to dip into your down payment savings.
Read through the helpful Rocket Mortgage® guide on saving for a down payment.
Step 4: Get Preapproval
After you have your down payment and you know which type of loan you need, it’s time to get preapproved. When you request mortgage preapproval, the lender verifies your assets and decides how much of a loan you can take out. The lender then sends you a preapproval letter that tells you how much of a loan you qualify for. You can use this letter to work with real estate agents and sellers when shopping for a home.
A lender may offer you a prequalification instead of a preapproval. Prequalifications and preapprovals aren’t the same. In a prequalification, a lender doesn’t verify your assets – this means that the approval you get might be inaccurate. It’s a good idea to choose a lender that offers preapprovals because it gives you the most accurate picture of what you can afford.
Step 5: Hire A Real Estate Agent
Hiring a real estate agent is a good idea, especially if you’re shopping for your first home. Real estate agents know your local market and can help you limit your search by shopping within your budget. Real estate agents have many connections and may even be able to show you homes that you can’t see on standard sales databases. Real estate agents also tell sellers you’re serious about buying a home, which can give you access to more opportunities and room for negotiation.
Rocket HomesSM can help you research local agents in your area and choose one so you can begin shopping.
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Step 6: Search For Your Property
Your real estate agent will help you begin looking at properties within your budget. It’s a good idea to make a list of your top priorities. Some of the things you might want to consider include:
- Square footage
- Home condition and possible need for repairs
- Access to public transportation
- Number of bedrooms
- Backyard/swimming pool
- Local entertainment options
- Local school district rankings
- Property value trends
Rank your priorities from most important to least important and show this list to your agent. Your agent will then show you homes that fit your criteria. You may need to spend some time searching for the perfect home, so don’t get discouraged if your hunt takes longer than you expected.
Step 8: Closing
The final step in the home buying process is closing. During closing, your lender orders an appraisal and any other state-required inspections. Your lender is then required to give you a document called a Closing Disclosure 3 days before closing, which tells you exactly what you need to pay at closing and summarizes your loan details. Read through your Closing Disclosure and make sure the numbers don’t vary too much from your Loan Estimate, which you would have received 3 days after your initial application.
Once you’ve reviewed your Closing Disclosure, it’s time to attend your closing meeting. Bring your ID, a copy of your Closing Disclosure and proof of funds for your closing costs.
You’ll sign a settlement statement, which lists all costs related to the home sale. You’ll also sign the mortgage note, which states that you promise to repay the loan. Finally, you’ll sign the mortgage or deed of trust to secure the mortgage note.
After closing finishes, you’re officially a homeowner.
You’ll need to consider more than just your monthly mortgage payment when you buy a home. There are multiple types of mortgages, including conventional, FHA, USDA and VA loans, and it can take some time to research all your options.
Once you know how much you can afford to pay for a home and which type of loan fits your needs, you’ll need to save for a down payment. Once you have your down payment, you can apply for preapproval from a mortgage lender of your choice. Preapprovals make house hunting easier because they give you a more accurate estimate of how much you can afford to borrow. Connect with a real estate agent and begin searching for the perfect property.
Once you’ve found a home you love, your agent will help you submit an offer. After the seller accepts your offer, all you have to do is wait for your mortgage lender to finish inspections. Finally, you’ll sign your loan at closing and you’re officially a homeowner.
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