What Are the Steps to Purchasing a Home?

Purchasing a home is an exciting experience! I’ve co-owned three condos – one I lived in, one I rented out, and one I helped flip – and am in the market to purchase and live in one on my own.

The thought of purchasing a home can be daunting. Having gone through the experience three times, I know it can get stressful.

Understanding the steps to purchasing a home can ease the process. The following guidelines can help.

Step 1: Evaluate Your Personal Finances and Credit Score

Your annual income and debt-to-income (DTI) ratio determine whether you’re financially prepared to purchase a home. These factors impact your ability to repay a loan.

Your DTI ratio measures your monthly debt payments against your monthly gross income. A high ratio indicates that you have more debt relative to income, increasing the difficulty of securing a mortgage.

You should have 3 to 6 months of living expenses saved before purchasing a home, more if you’re self-employed. You should also know your credit score from each of the three credit bureaus and correct any errors on your credit reports before applying for a mortgage.

Step 2: Determine How Much Home You Can Afford

Most lenders want your monthly housing expenses to be under 28% of your gross monthly income. This amount includes your monthly mortgage payments, homeowner’s insurance, property taxes, and any homeowner’s association fees. Limiting your housing expenses increases your ability to repay the lender.

Step 3: Save Your Down Payment

Although a 20% down payment on a home is ideal, it’s not required. However, you likely will pay private mortgage insurance (PMI) to protect the lender if you put down less than 20%, increasing the total cost of your mortgage. You can eliminate PMI when you have 20% equity in the home.

For instance, whereas a Federal Housing Administration (FHA) loan requires a 3.5% down payment, certain other government-sponsored loan programs require less. In contrast, a Veterans Assistance (VA) loan requires no down payment.

Step 4: Secure a Pre-Approval Letter

A pre-approval letter clarifies how much you can afford to spend on a home. This information verifies that a lender analyzed your financial position and qualified you as a serious buyer.

Keep in mind that a pre-approval letter does not secure an interest rate, which might change when you apply for a mortgage. The letter helps you make informed decisions throughout the home-buying process.

Step 5: Connect With a Real Estate Agent

A licensed real estate agent understands the market, is familiar with home prices, and knows which questions to ask the seller. These factors help you make the best decisions when purchasing a home.

These tips can help you find the right real estate agent:

• Meet with several real estate agents to find one that meets your needs.

• Search real estate listings in the area you want to live in to see which are selling homes similar in price and size to what you want.

• Choose a buyer’s agent who will represent your interests and is familiar with the area where you want to purchase.

Step 6: Start Home Shopping

Write down your desired geographic location, number of bedrooms and bathrooms, and other wants and needs for your home. Attend open houses to see what you like and dislike about the homes in the area where you want to live. Use these activities to find a home that closely matches what’s important to you.

Step 7: Shop for a Mortgage

The following actions can help you shop for a mortgage:

• Research the types of mortgages to determine which is right for you.

• If you’re a first-time homebuyer, look for state assistance with your down payment and/or closing costs.

• Gather your income verification, including pay stubs for the last 30 days and W-2s, and address records for the past 2 years.

• Have your last 2 months of bank statements ready to verify that you have the down payment.

• Speak with multiple lenders about your home loan.

• Find the lender with the best deal, which can save you thousands of dollars on your mortgage.

Step 8: Put in an Offer on a Home

Your real estate agent can guide you through negotiating an offer on the home you want, including the purchase price and contingencies. A contingency is a requirement that must be met for the sale to be completed.

Examples of contingencies include:

• Home inspection: A comprehensive examination of the purchase property performed by a licensed professional inspector.

• Appraisal: A professional estimate of a home's value, based on a detailed evaluation of the property's condition and features.    

• Title search: The process of reviewing public records and other relevant documents to verify the ownership history and status of a home.

• Financial contingency: A contract clause detailing the conditions under which the contract can be terminated if the buyer is unable to secure financing to purchase the property.

If your offer is accepted, the seller might require you to put down earnest money to demonstrate your commitment to buying the home. This deposit is typically credited toward your down payment when you close on the deal.

Step 9: Close on Your Home

The remainder of your down payment (minus the earnest money), closing costs, and proof of homeowner's insurance are required when closing on the home. After all parties have signed the documents, you own the home and are responsible for the mortgage payments.

Step 10: Move into Your Home

Receive the house keys, transfer the utilities into your name, and begin unpacking. Enjoy making memories in your new home!

*This information is for educational purposes only.

Are you in the market to purchase your first home? Let me know in the comments!