What Do You Need To Buy A Home?
If you’re ready to stop paying rent and start building equity in your very own house, a great first step is to understand the home buying process. From mortgage application to closing, we’ll walk you through the must-knows for buying a home.
How To Buy A House
Buying a house involves applying for a mortgage, finding a home, getting approved for the mortgage and closing on the property. Let’s take a look at the steps in the home buying process.
1. Prepare Your Finances
You should work on preparing your finances before you apply to buy a home. Taking steps to improve your credit score and reduce your debt can pay off big when it comes to your mortgage. Better numbers mean better loan options with lower interest rates.
Let’s take a look at some of the specific factors you should work on while preparing your finances to buy a home.
Your credit score plays a huge role in what loans and interest rates you qualify for. Your credit score tells lenders how risky you are to lend money to.
Your credit score is based on the following information:
- Payment history
- Amount of money you owe
- The length of your credit history
- Types of credit you’ve used
- Your pursuit of new credit
So what score will you need to qualify for a home loan? Most lenders require a credit score of at least 580. However, a score of 620 will allow you to qualify for more options. A score above 720 will generally get you the very best loan terms.
Your lender won’t just want to see how much money you make; they’re going to want to see a history of your income to make sure your income source is stable and reliable.
When you’re preparing to get a mortgage, preparing your income is all about pulling the right documentation together to show steady employment. If you’re on payroll, you’ll likely just need to provide recent pay stubs and W-2s. If you’re self-employed, you’ll need to submit your tax returns as well as any other documents the lender requests.
Debt-to-income ratio (DTI) is another financial instrument lenders use to evaluate your loan application. DTI helps your lender see how much of your monthly income is already going to debt so they can evaluate the amount of mortgage debt you can take on.
DTI is calculated by dividing your monthly debt by your gross monthly income. For example, if your monthly debts (credit card minimum payments, loan payments, etc.) total $2,000 per month, and your gross monthly income is $6,000, your DTI is $2,000/$6,000, or 33%. Your lender will use the debts shown on your credit report to calculate your DTI.
It’s smart to review your DTI before you apply for a loan. In most cases, you’ll need a DTI of 50% or less to qualify for a mortgage, although this number varies based on your lender, loan type and other factors.
2. Save For A Down Payment And Closing Costs
In most cases, you won’t be able to get a loan for 100% of the purchase price of the home. That’s where your down payment comes into play. A down payment is a large cash payment you make when you buy your home. It represents your interest in the home.
A larger down payment typically means you have more mortgage options. Putting more down usually means a smaller monthly payment and a lower interest rate. If you’re getting a conventional loan, putting 20% of the loan value down means you can avoid paying private mortgage insurance, a monthly fee you pay to protect your lender in case you default on your mortgage.
A 20% down payment isn’t realistic for many first-time home buyers, so there are many options for buyers who can’t pay those upfront costs. You can get a conventional loan for as little as 3% down. FHA loans have a minimum down payment of 3.5%. VA loans and USDA loans even allow some borrowers to put 0% down.
You’ll also need to save money to cover closing costs – the fees you pay to get the loan. There are many variables that go into determining how much you’ll pay for closing costs, but it’s usually smart to save 3% to 5% of the home value.
There are many ways to save for your home purchase, including investments and savings accounts. If you have relatives who are willing to contribute money toward your new home, you can use gift money toward your down payment, in most cases.
3. Get Preapproved For A Mortgage
When you’re ready to start house hunting, it’s time to get preapproved for a mortgage. When you apply, your lender will give you a preapproval letter that states how much you’re approved for based on your credit, assets and income. You can show your preapproval letter to your real estate agent so they can find you homes within your budget.
To get preapproved, you need to apply with your lender. The preapproval process typically involves answering some questions about your income, your assets and the home you want to buy. It will also involve a credit check.
You can take this step online with Rocket Mortgage® by Quicken Loans®. Rocket Mortgage® gives you a Prequalified Approval, which tells you exactly what you can afford. You can use your Prequalified Approval Letter to shop for homes, or you can contact a Quicken Loans® Home Loan Expert to get a Verified ApprovalSM, which is an even stronger approval based on a thorough review of your income and assets. A Verified ApprovalSM is a great way to show sellers you won’t run into issues getting financed.1
4. Find A Real Estate Agent
Your real estate agent is your representative in the real estate transaction. Your real estate agent will look out for your best interests. They’ll find homes that meet your criteria, get you showings, and help you write offers and negotiate.
As a buyer, you can usually work with a real estate agent for free. In most cases, the seller will pay the buyer’s real estate agent’s commission. The commission is usually 3% of the purchase price. To find a great local real estate agent so you can start house hunting, check out our sister company Rocket HomesSM.
5. Find Your Perfect Home
Once you’re approved for your mortgage, you can start looking at homes with your real estate agent. Your real estate agent will probably send you listings to choose from, and you can also look online to find homes you’re interested in and learn about the market. Our sister company Rocket HomesSM lets you search and save home listings online.
6. Submit An Offer
Once you’ve found a home you love, it’s time to make an offer. Here’s how it works:
- Draw up an offer with your real estate agent’s help. Consider the asking price, the market conditions and the competition when deciding what that offer includes.
- The seller can accept, counter or decline. If they counter, you can accept their counteroffer or submit a new offer.
- Once the offer’s accepted, you and the seller sign a purchase agreement.
Once you have a purchase agreement for the home, it’s time to get final approval on your mortgage. During this stage, which is called underwriting, your lender will verify your income and assets, as well as all the property details.
Part of underwriting includes a home appraisal, which is a professional opinion of the value of the home. The appraisal is used to make sure your lender doesn’t lend you more than a home is worth; it also protects you from overpaying for the home.
Once your loan is fully approved, you’re ready for the closing. This is where you sign your mortgage documents and officially gain ownership of the property.
Before you close, you’ll be given the opportunity to do a final walk-through of the home. During the walk-through, you’ll simply need to make sure everything is in the condition it’s supposed to be in.
At closing, you’ll sign documents that finalize your mortgage and transfer the property to you. You’ll also pay your down payment and closing costs at this time.
Get approved to buy a home.
Rocket Mortgage® lets you get to house hunting sooner.
How Long Does It Take To Buy A House?
Buying a home takes anywhere from one to six months or more. How long it’ll take you to buy a home depends on a few things:
- How long you spend house hunting
- How competitive the market is and how many homes are on the market
- How long the underwriting process takes (which can be affected the availability and responsiveness of third parties like appraisers and title companies)
The mortgage process generally takes about a month, while the house hunting process can be as long or short as you want it to be.
The home buying process is a lot easier when you do your research ahead of time. Preparing yourself financially is the first step toward getting the home you want.
When you’re ready to get approved to buy a home, you can use Rocket Mortgage® by Quicken Loans®. Our online application lets you see exactly how much you can afford and get an instant online approval decision so you can start making offers.
1Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.
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