The Beginner’s Guide on How to Buy a House
Okay, you’re finally ready to buy a home—the last step before you’re officially “adulting.”
Take a deep breath. Buying your first home is a huge deal, but it should be exciting! We understand that as the largest financial investment you’ll likely make in your lifetime, the decision can feel daunting—but really it’s quite simple if you take it step by step.
To show you just how easy, we’ve outlined how to buy a house in just five easy steps. Read ahead to see how simple it can be to buy the home of your dreams.
Step 1. Should You Buy A House?
First things first: Are you prepared to own a home?
Evaluating this comes down to two main things: do you have consistent income (enough that you’re saving at least 30% of your paycheck after expenses), and do you think you’ll be in your location for the next five to seven years. Buying and selling homes incur a lot of expenses outside of the home themselves, so making sure you are committed to buying a home is an essential first step.
You’ll also want to envision what your life will look like during this time. Will you be married? Do you plan on having kids? These decisions will help you plan for how much space you’ll need.
Step 2. How Much House Can You Afford?
The main factors in determining what price home you can afford are:
Your net income (combined income if purchasing with a spouse)
How much down payment you can afford
Your credit score
Don’t whip out your calculator just yet––there are lots of good tools that do these calculations for you.
A couple rules of thumb: If you can get your credit score above 720, do so. You’ll likely see better rates from lenders. The credit industry works in increments, and a credit score differential of 100 points can add up to tens of thousands of dollars over the lifetime of a loan.
For income, financial advisors recommend maintaining a debt-to-income ratio of 35% or less. This means all your monthly debt (think credit cards, student debts, and now a mortgage) should be no more than a third of your income. A quick way to estimate how this translates to your potential home price is by multiplying your income by three to four times.
How much you need to save for your down payment has changed a lot in the last decade. While 20% down used to be the standard benchmark, many individuals are now putting 3-6% down (this is particularly true for first-time homebuyers). Determining what’s right requires some nuance so we recommend starting with a 10% down payment for your calculations.
Step 3. Get Pre-approved For A Mortgage
Once you can afford a home in the range of what you are looking for, you’ll want to get pre-approved for a mortgage. In a competitive housing market, getting pre-approved is an essential way of guaranteeing sellers that you’re able to buy the amount you are bidding for, and also gives you a concrete idea of who you’re borrowing from and for how much.
Getting pre-approved is actually quite easy, and generally requires a bank statement, credit report, and proof of income. Nowadays, you can quickly get approved online, and your letter of approval lasts 90 days.
Step 4. Find A Real Estate Agent
If you’ve made it this far, you’ve gotten through the bulk of the financial parts and can move on to the fun stuff: finding a home!
To get started, you’ll want a good real estate agent. Not only does a buyer’s agent find properties and negotiate on your behalf, but because they take their cut out of the seller’s side, they’re free for you!
Finding the right real estate agent is paramount. You’ll want a Realtor (with a capital “R”), which indicates they are a member of the National Association of Realtors and as such are bound by a code of ethics, and you’ll want one who knows your area well. Referrals are still the primary way people find their agents, however, online rating services like Zillow and Angie’s List are increasingly used to find agents.
We recommend interviewing at least three to five agents to get a sense of who’s out there, and what style is the right fit for you.
Step 5. Submit An Offer And Close
Once you and your agent have found the right house in your price range, it’s time to make and submit an offer. Here’s how to make it official:
- Draw up a contract. Your realtor will certify your contract complies with all state and local laws, and in addition will draft your opening bid (there will often be counteroffers and negotiations). Once accepted, your offer will often require a deposit, typically 1-3% of the purchase price.
- Have home inspection and appraisal. These are known as “contingencies,” and are included in your contract. Once your offer has been made, you reserve the right to inspect your potential home for its value and functionality to make sure nothing was hidden or misrepresented by the seller.
- Close on your house. Once both parties agree to an offer and contingencies are removed, it’s time to close. This means paying closing costs (think taxes and fees), buying homeowners insurance, and homeowners association fees (where applicable).
That’s it! Like we promised, not that hard. Between your mortgage lender and realtor, most of the heavy lifting of homebuying is handled by other people. Your biggest decision is choosing the home you want.
If you’re curious to learn more about the homebuying process or managing finances, we recommend checking out SimpliFi’s resources here.