Buying a Home in 2023: Your step-by-step guide
Purchasing a new home is one of life’s most fulfilling accomplishments. It’s kind of the American dream. But, it’s also a major financial commitment and needs careful preparation and planning.
That’s the purpose of this guide. We’re going to carefully walk you through step-by-step how to purchase the right home at the right price, with a mortgage you can live with.
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Here we go!
We’re going to dig into each of these 10 steps to purchasing a home so you move through each of these phases like a pro and buy with confidence.
- Get your personal finances ready for buying a home
- Determine how much home you can afford
- Save for your down payment and closing costs
- Get preapproved for your mortgage
- Begin searching for your perfect home
- Make an offer on a home
- Get a home inspection and appraisal
- Ask for repairs or price concessions
- Do your final walkthrough
- Close on your new home
- Enjoy! (and maintain)
Before you start looking for dream homes we need to do a little preparation.
1. Get your personal finances ready for buying a home
Buying a house is a major financial commitment. We at Homefinity want to ensure that you’re prepared to comfortably support that commitment over the next many years of homeownership. To that end, we need to take a look at some documents to evaluate your ability to pay the monthly mortgage payment associated with your home purchase.
In preparation for that evaluation, you should gather a few documents around these specific areas of your personal finances.
Our goal, as it relates to your ability to repay your mortgage, is to see and document a steady history of employment and income. In order to fulfill this qualification requirement, you should gather recent pay stubs (the last couple of months, typically) and your W-2s if you work for a company and are on payroll. If you are a contractor or self-employed we will need to see your tax returns for the last few years.
Next, we want to make sure that you’re not already supporting too much debt. To evaluate that we’re going to calculate a debt-to-income ratio. This is a quick way to determine how much of your income is already going to other debt payments and how much mortgage debt you can realistically take on.
Debt-to-income, sometimes called DTI, is calculated by dividing your monthly debt by your gross monthly income.
Let’s look at an example. If your monthly debts include:
- a minimum monthly credit card payment of $500 on one card,
- a minimum monthly credit card payment of $200 on a second,
- a minimum monthly credit card payment of $300 on a third,
- a minimum monthly car loan payment of $300, and
- a minimum monthly car lease payment of $250
This comes to a total monthly debt obligation of $1,550. If your gross monthly income is $6,000, then your DTI is $1,550/$6,000, or 25.8%.
We’ll use your credit report to determine these monthly debt obligations and calculate your DTI.
Although the qualifying DTI will vary by mortgage loan products and underwriting qualification, generally we want to see a DTI below 50% at a minimum.
There are two common misconceptions about how much money you need to buy a home.
One is the idea that you can buy a home with no money down. Although such an option might exist from time to time, most homeowners need to have some cash for a down payment.
The other misconception, and probably the more unfortunate, is the belief that you need a 20% down payment. The fact of the matter is that few people actually put 20% down on a new home. You can actually buy a home with as little as 3% down.
The idea that you need a 20% down payment is probably the result of the requirement for a 20% down payment to avoid having to pay private mortgage insurance (PMI), insurance that protects the lender if you default on your mortgage loan. Even if you can’t put 20% down at the time of purchase, you can cancel PMI in the future once you have 20% equity in your home.
A larger down payment can also lower your monthly payment because you have a lower loan amount.
One other consideration in determining the amount of savings you need to have to buy your home is the closing costs - a variety of fees required to create your loan. The specific amount of closing costs will vary depending on where you buy your home and the type of loan that you get, but saving between 3-6% of your home’s value is a good rule of thumb.
Your credit score, and the credit score of any co-borrower(s), will be a critical factor in determining the loan programs and interest rates you qualify for.
Your credit score is a number that gives lenders an indicator of the amount of risk they’re taking by lending you money. The higher your score, statistically, the less likely you are to default on your mortgage loan.
This score is determined by a handful of factors that represent how you have historically handled your personal finances. Some of these factors include:
- Your payment history
- The total amount of money you currently owe
- The length of your credit history
- The types of credit you have and use
- Your behavior in pursuing new credit
What credit score do you need to qualify for a mortgage loan?
This can vary widely, depending on economic conditions, mortgage loan market conditions, and your lender’s current risk tolerance. Most lenders require a minimum score of at least 580. If your credit score is at least 620, more options are available. And, if you can get your credit score over 720 you’re not only going to have the most options, but also the best loan terms.
2. Determine how much home you can afford
Now that you’ve surveyed your personal finances, it’s time to start planning your actual home purchase and mortgage. The best place to start in this determination is you calculate your debt-to-income ratio (DTI), as we discussed above.
Your DTI ratio is a relatively simple representation of how much debt you can comfortably support with your income and how much money you have to spend on a mortgage each month.
The simplest way to calculate your home buying price range is with our Home Affordability Calculator.
3. Save for your down payment and closing costs
Once you have determined the amount of monthly mortgage payment you can afford, it’s essential to begin saving for a down payment and closing costs.
Most mortgage loan programs require some amount of down payment - a large cash payment that goes towards the home price and reduces the amount of your home purchase that needs to be financed with a mortgage loan.
The general rule of thumb is that the larger your down payment the more loan options you will have and typically lowers your monthly payments and lowers your interest rate.
One of the most common home buyer misconceptions is that you need a 20% down payment to buy a home. This misunderstanding most likely arises from the fact that if you’re getting a conventional loan, putting a 20% down payment will allow you to avoid PMI. The good news is that most conventional loan programs only require a 3% down payment and FHA loans have a minimum down payment of 3.5%.
In addition to a downpayment you will also need to save for closing costs - these are fees for getting your mortgage. There are a variety of factors and services that determine what you will pay in closing costs - title insurance and fees, appraisal, credit report, etc.
Typically, these costs will be somewhere between 3-6% of the value of the home you're purchasing. So, for example, if you’re buying a home worth $300,000, you need to save between $9,000 - $18,000 for closing costs.
4. Get preapproved for your mortgage
Before you start house hunting, it’s wise to get pre-approved for your mortgage.
This is a relatively easy process of completing a mortgage loan application. We’ll then evaluate your credit, assets, and income. This will allow you and Homefinity to determine the amount of house you can afford.
Homefinity will then give you a preapproval letter that states the mortgage loan amount that you are approved for and help you to find homes within your budget. This gives you peace of mind and a stronger negotiating position when you submit an offer on a home you want to buy.
5. Begin searching for your perfect home
As you begin looking for a home, your real estate agent will be your representative and expert in the home buying transaction. Your agent will help search and identify homes that meet your criteria, get you showings, write offers, negotiate, and generally watch after your home buying interests and preferences.
It’s possible to buy a home without a real estate agent, but it’s not recommended. These experts will help you to navigate a relatively complex real estate market, submit legally viable offers, and avoid overpaying for a home.
As you can see, finding an experienced real estate agent is essential to the home buying process. So, if you don’t have an agent make sure and ask your mortgage loan officer for a referral to a real estate expert.
6. Make an offer on a home
Once you’ve found that ideal home, you need to work with your real estate agent to make an offer. This offer will be presented in the form of a formal letter and include details on yourself, the price you’re willing to pay, and a deadline for the seller to respond to your offer.
Your offer generally includes a small earnest money deposit. This is typically 1-2% of the offer price. This earnest money deposit will go towards your down payment and closing costs if you buy the property, so it isn’t necessarily an additional expense.
In response to your offer, the homeowner may accept, reject, or counteroffer. This typically kicks off the negotiations process, which is not unusual and another area where your real estate agent becomes invaluable.
7. Get an appraisal and home inspection
An appraisal is an assessment of how much a home is worth. You must have an appraisal done with a mortgage loan because a lender can’t lend more than the home is worth. Therefore, it’s important to have your home appraised for at or slightly more than what you offered. This is another reason that using an experienced real estate agent is important.
Inspections are different from appraisals in that they are designed to identify any specific problems in the home. They will inspect the foundation, electrical systems, roof, appliances, and a variety of other areas to ensure there are no surprises after you close on your home.
8. Ask for repairs or price concessions
If, after your inspection, there are any significant issues you can ask for the seller to correct or compensate you for the necessary repairs. This can be accomplished by having the seller fix the problems before you close on the home or by discounting the price of the house or paying some of your closing costs.
Again, this is a point for negotiations.
9. Do your final walkthrough
Always do one final walk-through of the home before you close. This is your opportunity to ensure that your new home is still in good condition and that any repairs that you have requested have been completed to your satisfaction.
10. Close on your new home
At this point, you’re almost a new homeowner. The final few steps in the process are to review your Closing Disclosure 3 days before closing. This document will tell you exactly what you need to pay at closing and summarize all of your loan details. Your Homefinity loan officer will walk through this document with you.
The final step in buying a home is the closing.
You’ll need to bring your ID, a copy of your Closing Disclosure, and proof of funds for your closing costs. During this meeting, you will sign a settlement statement, your mortgage note, the mortgage or deed or trust, and pay your down payment and closing costs.
Now, you’re a homeowner!
11. Enjoy! (and maintain)
As a new homeowner, it’s important to enjoy all the benefits of owning your own home, but it’s also important to protect your investment. This is as simple as making your monthly mortgage payments on time and keeping up with regular updates and maintenance of your home.
If you do this, your house is sure to be filled with incredible memories and grow in value for many years to come!
That’s all there is to it. But, I’m sure you have some questions about your personal situation and buying a new home. This is where a professional mortgage loan officer can be invaluable. We’re always happy to answer questions and share the mortgage options that are available to you personally.
Fill out our brief online application and then we’ll set up an appointment that is convenient for you and we’ll talk through some possibilities.