It's a seller's market right now, so if you're shopping for a home, you have to be ready to act fast. The process of buying a house has many moving pieces – and missing any of them could derail your purchase.
So here's a guide to help you keep all your ducks in a row. Take a look at our home buying process checklist to make sure you’re on track to get your dream home.
1. Determine if you’re ready to buy a home
See if buying a house is really the right move. Go over your finances and ask yourself:
- Are my job and income secure? You may be rolling in the dough right now, but you need to be at least fairly confident that you can maintain that level of income so you can pay your mortgage and other bills.
- How is my credit? Check your credit report for items that you need to dispute and get fixed. A good credit score typically gives you more options with lenders.
- Do I have debt to pay down? Mortgage lenders calculate your debt-to-income ratio (DTI), which is all of your monthly debt payments divided by your gross monthly income, to see if it meets their requirements. The less debt you have, the better off you’ll be.
Finally, assess your liquid assets.You need to make a down payment, which may mean using your savings, selling assets, and maybe even accessing some of your retirement plan.
2. Calculate how much house you can afford
How much house you can afford is really determined by how much you can pay toward your mortgage every month. This isn’t an arbitrary number. In fact, it’s your DTI. Depending on the lender and the type of mortgage you qualify for, you want a maximum of DTI of 43 percent. That’s why paying debt down is so important.
Lenders call this the back-end ratio. While it includes your mortgage and other housing expenses, it also looks at other debts like credit card bills, car payments, or child support. For the portion that’s dedicated to housing, called the front-end ratio, lenders prefer a DTI below 28 percent. That’s $280 for every $1,000 you make.
The ultimate decision of how much house you can afford depends on your lender, but you can get a sense by running the numbers on your own or using an online mortgage calculator. Plugging your information into a mortgage calculator gives you an estimate of what you’ll pay per month based on current interest rates and the total cost of the home.
3. Save money for your down payment and closing costs
The price of the home you want is just the start of expenses in the process of buying a home. You also need money for closing costs, including a down payment on the home. There are a few loan programs out there that require zero down payment, but most require at least a three percent down payment. Many conventional lenders expect 20 percent down.
The down payment is only one closing cost. At closing, you may also have to pay:
- Appraisal fees.
- Loan origination fees.
- Title insurance.
- Property taxes.
- Homeowners insurance.
Closing costs can run between two and five percent of the total purchase price of the home. While you can roll some of these costs into the loan itself, you need to plan for them.
4. Get pre-approved for a mortgage
While there’s nothing to stop you from shopping for a home without pre-approval, you may be setting yourself up for heartache. More than one buyer has been disappointed when they learned they couldn’t get a loan for a house they fell in love with. Your better option is to get a lender to look at your financial situation, underwrite the loan, and send you a pre-approval letter so you know exactly how much money you have to work with.
The pre-approval letter will list the amount you qualify for at a predetermined interest rate. However, it’s only good for a certain period and subject to change based on income changes, interest rate changes, and debt considerations. If your personal situation takes a dramatic turn, you could lose your pre-approval.
5. Choose the right realtor for you
The realtor’s job is to balance your biggest wants with your actual needs. Few people can afford a home that checks every box, but a good realtor helps you prioritize what your home must have and find you something within your budget.
You want a realtor who specializes in the buyer’s side of the transaction, as opposed to someone who works both sides of the deal. This ensures your realtor has your best interests at heart and that they can assist you through every step of the purchase and escrow. Remember, when you finally find a house and open escrow, the realtor must help you meet deadlines to avoid costly mistakes. Bottom line? Hire a pro.
6. Go house hunting
You’ve reviewed your finances, gotten pre-approved for a mortgage, and contacted a realtor. Now it’s time for the fun stuff: house hunting! Your realtor will likely take you on a tour of available houses. Not only does this help them understand your likes and dislikes, it also gives you a clearer picture of what matters most to you.
Attending open houses and searching online housing sites such as Zillow or Redfin help with this, too. Just remember to focus on homes that fit your budget and meet your highest priorities so you know how one affects the other. For example, say you want five bedrooms so you and your three children can each have their own rooms while still having space for guests. Your search may reveal that’s unrealistic for your budget.
For more tips, check out "22 Questions to Ask When Buying a House."
7. Make an offer
This is the point in the process of buying a house where your realtor can really shine because they understand the market and how to negotiate for the best price. For slow markets, you might be able to make an offer at the asking price or even less. When there aren’t a lot of buyers for a property, you have more control. On the flip side, you might need to offer more than the asking price to compete with other offers if the housing market is hot.
Whatever your offer is, you have to submit it to the seller in an offer letter. Key components of your offer letter are:
- Your name and current address.
- The price you’re willing to pay for the house.
- A deadline for the seller to respond.
Offer letters usually include earnest money to show your serious about buying the house. Your realtor can help you decide how much earnest money to put down, but one to two percent of the purchase price is typical.
It’s a good idea to decide what your max offer is so you know when to walk away from a property. Because negotiations may not go your way, hold off on planning any renovations until you are certain you have the house at the close of escrow.
8. Get a home inspection
Once your offer is accepted, you have the right to schedule an inspection of the house. You want to do this as soon as possible because you usually have limited number days based on the escrow contract.
The inspector will evaluate:
- All the home systems.
- The home’s structural components.
- Appliances.
Once the inspector has assessed the home, they will give you a report with the findings. The report will include current problems, but the inspector might also list situations that could cause costly problems for you in the future. For major issues, like problems with the plumbing or foundation, people often get a secondary inspection.
9. Ask for repairs and credits
If the inspection reveals any major issues, you can ask the seller for repairs or credits. When you request repairs, you’re asking the homeowner to fix something before the sale is complete. For example, if the inspector found a leak in the bathroom tub, you can ask the seller to hire a plumber to fix it.
Asking for credits means you want the seller to reduce the purchase price so you can afford to fix the problem on your own. For example, the owner may not be able to repair the roof during escrow, so they give you a $1,000 credit so you can fix it after the purchase is complete. The credit reduces the cost of the house.
The seller may not accept your request, which means you’ll have to decide how to proceed. You should be able to walk away from the sale if you have an inspection contingency in your offer letter.
10. Get an appraisal
If you have a loan, you’ll definitely need to have the property appraised. An appraisal tells you the current market value of the home. If it shows a value that’s less than the loan, the lender could deny you or ask you to come up with additional cash to make up the difference.
This also means you may need to renegotiate the price with the seller. You have the right to walk away from the property if the appraisal is not satisfactory.
11. Have a final walkthrough
Once all inspections and the appraisal are complete, you’re near the end of escrow and the home is almost yours. This is the time to schedule a final walkthrough of the property to make sure that the owner has left it in the expected sale condition. Go through the house room by room to see if:
- It’s clean.
- Repairs have been made.
- The seller has cleared out the property.
- There are no new issues.
If something isn’t right, be sure to have your realtor bring it to the seller’s attention immediately. Don’t close escrow until every detail has been addressed. For example, don’t assume that the seller will be out of the house on the day you get the keys if their furniture is still in the house at the final walkthrough. You want a clean canvas to look at during the final walkthrough so you don’t have any surprises once you take ownership.
12. Close escrow and get the keys
Congratulations! The day has finally come, and you’re a homeowner! All you have to do is:
- Sign the final paperwork.
- Pay the closing costs if needed.
- Get the keys to your new home.
This definitely sounds like the simplest step in the process of buying a home, but give yourself at least an hour to sign all the paperwork. There is a lot of it, and you don’t want to feel rushed when making the biggest purchase of your life.
13. Set your move-in date
Now that you have the keys, you can move in at any time. But you may want to get some home repairs or renovations done while your home is empty. Painting or redoing a bathroom is easier before all your stuff is in the house. Once you have things in order, you can move in!
