Step 1. Apply for Down Payment Assistance
Programs for first-time homebuyers may be available to homebuyers by their state or county governments. These programs are not always restricted to first-time homebuyers, if you have not owned a property within the last three years you could be eligible for financial assistance of up to $15,000 to be used toward your new home purchase. Click on the state you plan on buying property in below for every program available in your state.
Step 2. Check Your Credit
You’ll need at least a 620 credit score to qualify for most types of mortgages. However, FHA loans require just a 580 credit score with a 3.5% down payment.
Minimum Credit Requirements by loan Type
Min Credit Score
HomeReady / Home Possible Loan
5% - 20%
FHA 203k Rehab Loan
Conventional 97 Loan
20% - 30%
Step 3. Funds for the Upfront Costs
There are more upfront costs involved in buying a home than just the down payment. You must have money saved for the down payment, closing costs, and home appraisal.
- Closing Costs – Closing costs are fees charged by lenders for issuing the loan. On average, the cost is between 2% and 5% of the loan amount. The seller can pay closing costs for the buyer if negotiated into the purchase agreement.
- Home Appraisal – Lenders require a home appraisal to determine the market value of a property. You will pay for the appraisal before closing; the average cost is $300-$500.
- Moving Expenses – Unless you plan on moving your stuff on your own, you’ll need to hire a moving company. Pricing depends on the number of rooms and the amount of stuff you own. On average you can expect to pay around $1,000 for a licensed moving company.
The Down Payment
The funds for the down payment must come from your savings, 401k, or investment account. You cannot use a loan for your down payment. You will also need to have additional cash reserves in the bank, usually 1-3 months’ worth of mortgage payments.
Most mortgage loans allow the down payment to be a gift from a friend or relative.
If you’re a first-time homebuyer, you may qualify for certain programs such as downpayment assistance programs and grants for qualifying homebuyers.
Down Payment Requirement by Loan Type
3.5% - 10%
No down payment
No down payment
5% - 20%
Conventional 97 Loan
Home Possible Loan
10% - 20%
Step 4. Know How Much House You Can Afford
Your debt-to-income ratio (DTI) is what lenders use to determine the loan amount you qualify for. The maximum DTI ratio for a mortgage is 43%, some loan programs allow for DTI ratios of up to 50%.
There are many expenses involving owning your own home besides just the mortgage payment. Property taxes and homeowners insurance are required. You need to have private mortgage insurance unless you have a 20% down payment. If your community has a homeowners association, there will be an annual HOA fee due.
Use Our Home Affordability Calculator to See How Much House You Can Afford.
Step 5. Get Pre-Approved
You need to get pre-approved for a home loan before you can start house hunting. Most real estate agents will not even show you a home until you have a mortgage pre-approval letter.
A mortgage Pre-qualification is not sufficient for most homeowners. A mortgage pre-approval not only means that a lender pulled your credit history, it means they actually verified your income and financial documents.
Documents Needed to Get Pre-Approved
Documents Needed for Pre-Approval
• Last two years of W2's from all employers
• Last two years of tax returns
• 30 days worth of paystubs
• Three months of bank statements
• Profit and loss statements if self-employed
• Driver's License
Remember, just because you are pre-approved with a lender does not mean you need to use them. In fact, we highly recommend comparing loan quotes from at least 3 different lenders.
Step 6: Figure Out the Type of Mortgage You Need
There are many types of home loan programs available; which one is right for you depends on your situation.
FHA loans are very popular with first-time homebuyers because they require just a 580 credit score with a 3.5% down payment making them easier to qualify for.
Veterans of the U.S. military are eligible for a VA loan, which requires no down payment or mortgage insurance.
USDA loans are for low-to-median income homebuyers in rural parts of the country. The biggest benefits are that they don't require a down payment and have the lowest mortgage insurance rate of any home loan of just .35%.
FHA 203k Loans
FHA 203k loans are a rehab loan where borrowers can finance the purchase of the property plus the funds for make renovations or repairs to the home with one loan.
A conventional mortgage is not backed by the Government and meets the requirements of Fannie Mae and Freddie Mac, the two largest buyers of home loans. A 5-20% down payment is needed with a minimum 620 credit score.
Conventional 97 Loans
Fannie Mae and Freddie Mac created the Conventional 97 loan program, which requires just a 3% down payment. They are more difficult to qualify for, requiring a 680 credit score.
HomeReady / Home Possible Loans
A piggyback loan allows you avoid PMI with less than 20% down on a conventional loan. You will get two loans, one for the purchase of the home, and another for a portion of the 20% down payment.
Mortgages come in different types of loan terms. Fixed-rate loans are the most common mortgage term with a term of 15 years or 30 years. An adjustable-rate mortgage (ARM) may be another great option for a borrower who is not planning on staying in the property for a period of at least 5 years.
Step 7. Make a List of Features You Want
Before going out house hunting, you should make a list of features you want in a home. These are important questions you need to know the answer to. Really think about the things that you want and things that are deal-breakers.
Here are just some of the features you need to consider
- Number of bedrooms and bathrooms
- Home office
- Media room
- Formal dining room
- Covered patio
- one or two-story
- Square footage
Open layouts are great, but if you have kids and the game room is right above the living room with no walls separating the two, the noise could be unbearable.
What is the view? If the view is a sore sight or right behind a fire station, that’s something you have to think about. This is not temporary. You will see the same view as long as you’re in the home.
Step 8. Work With an Experienced Real Estate Agent
The real estate agent is sometimes an overlooked part of the home buying process. A good realtor can not only save you money but makes sure you close on time and without any issues.
Realtors know what to look out for and what the seller should pay for; they are really on your side throughout the process.
You do not pay the realtor’s fee. Realtor commissions are built into the price of the home. The seller always assumes they will be paying 3% of the sales price to the buyer’s agent. We can refer you to a local agent if you aren’t currently working with one.
Step 9. Make an Offer
Your agent will help you prepare the home offer once you have found the right home. Knowing what to offer takes experience and that’s why you have an agent. They can look at sales prices for comparable homes in the area to get an idea of what you should offer. Once you enter into a real estate contract, you will begin the mortgage process.
- Disclosures: The seller disclosures will disclose any issues the property may have
- Contingencies – A contingency is an agreement between the buyer and seller about conditions that need to be met.
- Earnest Money – When you make a home offer, you will include a small sum of money to show you’re serious. The amount of earnest money needed varies, but on average, it is $1,000 – $2,000 and is applied to the home’s purchase at closing.
- Closing Costs – If you want the seller to pay for a portion or all of your closing costs you must include it in the agreement.
Step 10. Get a Home Inspection
You should get a home inspection before closing, which typically runs between $300-$500. While some lenders don’t require you have the home inspected before completing the loan process, it’s an absolute necessity.
A home inspection will reveal any potential issues that may need to be repaired before the final walk-through. You can use the inspection to help you negotiate these repairs on the home be made at the sellers’ expense.
Step 11. Prepare for Closing Day
The big day. Closing day is held at the title company where everything will be finalized. Your lender will provide all of the final paperwork including the cash to close.
You’ll need to bring a cashier’s check to closing to pay the outstanding charges. Once the contract is signed and the funds are transferred you are handed the keys. It is a long process and you can expect some hiccups along the way. But it’s well worth it.
Frequently Asked Questions
How long does it take to close on a house?
According to a report from Fannie Mae the average time it takes to close on a house from the time the offer is accepted is 45 days. Expect the process of buying a house to take 30-45 days.
What is the best month to buy a home?
October – December. There are fewer buyers in the last few months of the calendar year. Sellers whose homes didn’t sell during the summer months will be motivated to sell and reductions in home prices are common.
What should I do before buying a house?
If you know you’ll be in the market for a new home in the coming months you should work on improving your credit score. Your score is the most important factor in determining your eligibility and interest rate.
What not to do before buying a home?
Before buying a house you should not apply for new lines of credit or loans, which can lower your credit score and affect your debt-to-income ratio.
The Bottom Line
The home buying process will run smoothly as long as you follow the steps to buying a home in this article.
Check your credit score and make sure you have enough money in savings for the upfront costs associated with getting a mortgage. Find out how much you can afford and make sure you like the homes in your area and price range.
Compare loan offers and get a pre-approval letter. Make a list of everything you need in a new home. Hire an agent and start looking for your dream home!
Are you ready to buy a home?