Many people dream of owning a home one day. In fact, a 2018 survey by the National Association of Realtors found that 71% of millennials perceived homeownership to be a part of the American Dream.
Unfortunately, a home is also the largest purchase most people will make in their lives, and it can take years to save for it. Once you’ve saved enough to buy a home, the process can still be a challenging one, from finding your dream home to getting approved for a loan.
The home buying process, like many things, is less intimidating when you know what you’re up against. We’ve put together a home buying checklist to help you purchase your first (or next) home.
1. Determine How Much You Can Afford
The very first step of the home buying process is determining just how much house you can afford. Your home budget will set the tone for everything else, including the size down payment you’ll need, the size of the loan you’ll need preapproval for, and the price of homes to shop for.
One of the most important factors in determining your home budget is your debt-to-income ratio (DTI). Your front-end DTI is the percentage of your gross monthly income that’s spent on housing costs. Lenders generally require that your front-end DTI be no more than 28% of your gross income.
Your back-end DTI is the percentage of your gross monthly income that goes to all debt payments, including your mortgage, credit card payments, and other loan payments. Lenders generally require a back-end DTI of no more than 36%.
These ratios certainly aren’t the only factor to consider when deciding how much home you can afford. You might choose to leave more wiggle room in your budget and save for a home that’s cheaper than what your DTI says you can afford. Doing so would allow you to prioritize other financial goals in your budget.
2. Save For a Down Payment
Most mortgages require a down payment that you pay when you close on the home. The down payment ensures you have some skin in the game and reduces the risk for the lender.
Many people consider 20% to be the standard down payment. In reality, data from the National Association of Realtors indicates that the average down payment is 7% for first-home homebuyers.
Many lenders allow down payments as low as 5% on conventional mortgages. Keep in mind that the lower your down payment, the higher your interest rate may be. Additionally, if you put down less than 20%, you’ll have to pay private mortgage insurance (PMI) until you build up 20% equity in your home.
There are several loan programs that allow you to put down lower down payments or none at all. FHA loans require down payments of just 3.5% if you meet certain credit score requirements. VA loans and USDA loans don’t require down payments at all.
Not sure how to reach your savings goal? Divide the amount you’d like to save by the number of months until you hope to buy a home. That will tell you how much you should save per month to reach your goal on time.
3. Find a Real Estate Agent
When you’ve saved your down payment and are ready to start the homebuying process, it’s time to find a real estate agent. Your agent will represent you and guide you throughout the homebuying process. And as a homebuyer, there’s no reason not to hire a real estate agent. The seller generally pays the commission for both the buyer’s and seller’s agent, so hiring an agent is free for you.
A real estate agent helps you through each step of the buying process. First, they’ll help you shop for homes and likely have more information about what’s on the market. Additionally, because real estate agents have more knowledge about recent comparable home sales, they can help you craft an offer that’s not too low and not too high. Finally, they’ll be by your side through the negotiation, inspection, appraisal, and closing to answer questions and offer advice.
4. Get a Mortgage Pre-Approval & Choose a Lender
Before you start looking at homes, it’s wise to start shopping for lenders and get preapproved for a mortgage. Preapproval is a process where lenders look at your financial information and tell you the size loan they’ll approve you for. Then, when you put an offer in on a home, your preapproval letter assures the sellers that you’re actually prepared to go through with the purchase.
Preapproval isn’t necessarily a guarantee that you’ll get the loan. During the preapproval process, lenders don’t dig into each aspect of your finances. As a result, there could be some disqualifying factors that don’t come up but will cause them to deny you the loan later on. Because of this, it’s best to do your own homework and ensure there’s nothing in your budget or credit report that would prevent you from getting a home loan.
During the pre-approval process, you can shop around and get rates from a variety of lenders to make sure you’re getting the best deal. Mortgage preapproval does result in a hard inquiry on your credit report, but multiple inquiries in a span of 14-45 days appear on your credit report as just one, meaning there’s no greater impact from getting rates from multiple lenders.
5. Find Your Perfect Home
At this point, you’ve determined how much house you can afford, saved your down payment, hired your real estate agent, and gotten preapproved for your loan. Now all that’s left is to start shopping for your next home.
Throughout the process, your real estate agent can help you find homes and set up viewings. Make sure you limit yourself to looking only at houses within your budget. The last thing you want is to find your dream home outside your budget and then not be able to go through with the deal.
It’s also important to be critical as you’re shopping. Go prepared with your list of must-haves to make sure the home fits all of your needs. Finally, try not to get attached to any homes too early in the process. You never know what bumps in the road could come up and cause you not to buy that home.
6. Make an Offer & Negotiate
Once you’ve found the home you want to buy, it’s time to make your offer. Depending on the current housing market, you may decide to offer more or less than the asking price. Throughout 2020 and 2021, the housing market has been friendly to sellers, and many homes have sold for more than the asking price. But that’s not always the case, and the market when you’re shopping for a home might be friendlier to buyers. In that case, you may be able to bid below the asking price.
As you’re crafting your offer, you should consider what other stipulations you want to include. Some buyers ask the sellers to cover part of their closing costs or the cost of certain repairs. You may also wish to include contingencies for the inspection and appraisal that allow you to walk away if they don’t come back as expected.
Finally, be prepared to negotiate. Your initial offer may not be the one that sticks, and the seller may counter-offer by negotiating the price or some of the other terms of the contract. You may go back and forth with the seller several times. On the other hand, they might accept or reject your offer right away. The process looks a bit different for each home.
7. Finalize Your Loan Financing
Now that you know what home you’re planning to buy, you can go back to your lender and finalize your financing. First, you’ll provide the address of the home and the agreed-upon purchase price.
Next, you’ll hand over any documents your lender needs to finalize the loan. These will include recent pay stubs, two years of tax returns, bank statements, proof of funds for your down payment, proof of cash reserves, and more. You’ll have to provide even more documents if you’re self-employed since the lender will want to ensure your business is financially stable and can provide you with a reliable income.
8. Hire an Attorney (If Needed)
Often an attorney isn’t necessary for the homebuying process, but there are certainly exceptions. First, some states require a real estate attorney to represent the buyer. In other states, it’s not necessary but is advisable.
A real estate lawyer might also be a good idea if there are extenuating circumstances with the home, such as tenants, tax liens, and more. An attorney might also be advisable if you or the seller are representing yourselves rather than having a real estate agent represent you. That way, there’s a professional available to prepare and look over the contract.
9. Schedule a Home Inspection
An inspection is necessary to ensure the home is in good condition before you close. During a home inspection, the inspector will look closely at each part of the house, including the foundation, appliances, roof, and electrical.
The inspector will let you know if there are any major or minor repairs needed on the home and may estimate how much they’ll cost to fix. Assuming you have an inspection contingency in your contract, you can take the results of the inspection back to the seller and re-negotiate.
In some cases, you might ask the seller to take care of some of the repairs before the closing. In other cases, you might negotiate a lower price so you can do the repairs after the closing. In the case of minor repairs, you might leave the contract as-is to ensure the deal doesn’t fall through.
Inspections aren’t generally required, except in the case of government-backed loans. In any case, they’re strongly recommended to protect yourself. The last thing you want is to buy a home that seems to be in good condition, only to find out later that it’s a money pit.
10. Get an Appraisal
One of the last steps of the home buying process is the appraisal. While appraisal can be useful for the buyer and seller as well, they’re really a way for the lender to protect its investment.
Lenders are only willing to lend up to a certain percentage of the value of the home. This prevents a situation where someone buys a home and owes more on the loan than the house is even worth.
The amount of loan you’re allowed will ultimately depend on the results of the appraisal. If the house appraises for less than the asking price, you may have to re-negotiate the deal with the sellers to get to a more reasonable amount. If the seller refuses to negotiate further, you may be responsible for coming up with the difference between the appraised value and the purchase price. Finally, you could simply decide to walk away if the seller won’t negotiate and you can’t afford to (or don’t want to) pay the difference.
11. Close On the House
Once the appraisal and inspection are done, and your financing has been approved, there’s nothing left to do but close on your home. At the closing, you, the seller, and both real estate agents will sit down and sign the paperwork to transfer ownership of the home. You’ll need to bring your identification and proof of home insurance, as well as a payment method — such as a cashier’s check or scheduled wire transfer — for your closing costs. By the time you leave the closing, you’ll have the keys to your new home.
The Bottom Line
The home buying process doesn’t always go smoothly. In fact, sometimes, it can be downright frustrating. But by knowing what to expect ahead of time, you can be prepared to deal with any bumps in the road and stay patient until you finally close on your new home.
Looking for more insights into the homebuying process? Get our free guide to buying a home. When you download the guide, you unlock access to Personal Capital’s free and secure online financial tools. Millions of U.S. households use this technology to:
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Personal Capital compensates Erin Gobler (“Author”) for providing the content contained in this blog post. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.