From saving for a down payment, getting pre-approved for a mortgage and negotiating with the seller, there are a ton of hurdles you need to overcome before you find and own that dream home.

Thankfully, a few practical tips can help you figure out how to buy a house without losing any sleep over it.

Let’s break the process down step-by-step!

1. Cover Your Basic Homeownership Goals

Before you burden yourself with financial details, focus on your homeownership goals.

To do that, ask yourself what you’re looking for in a property, then wrap it up in a sort of checklist.

Here are some factors that you can use to define your dream house:

• Layout and building type
• Lot size
• View
• Parking space
• Nearby facilities
• Extra features (pool, backyard, etc.)

Not everyone will be lucky enough to find a home that checks every single box on their initial wish list.

There might be compromises, but we’ll get to that in a minute. For now, just dream big and have fun listing the details of your ideal home!

2. Lay Down a Financial Plan

If you’re already contemplating buying a house, we have to assume you’re doing financially well.

Still, it’s crucial to ask yourself: how much can you actually afford to spend?

We know answering this question can be overwhelming, so we’ve compiled the key aspects that you’ll need to go over:

• Review your bank statements. From your spending patterns over the past couple of years, try to estimate your gross income and monthly living expenses.
• Check your savings account. If you don’t have a surplus of 3-6 months’ living expenses, getting a house might not be a smart move!
• Look at your credit score. You can still make things work with 580, but 680+ is the sweet spot.
• See if you can get an IRA withdrawal. It’s one way to get up to $10,000 free of taxes and penalties!

If you don’t have enough funds to cover the full purchase price in cash, start browsing mortgage options.

But first, use the 28/36 rule to see the right payment plan for you.

Ideally, you want your mortgage to be 28% of your gross monthly income. No matter what, your total debt payments should be under 36% of what you bring home each month.

This is called the debt to income ratio (DTI). 36% is the ideal ratio but many home loan programs will allow borrowers to go up to a 50% DTI, depending on the credit score.

There are several mortgage options available for first time home buyers.

To make things easier: talk to a mortgage loan officer about your options.

A loan officer will be able to advise you on what programs you’ll be able to qualify for based on your current financial situation.

Also, a loan officer can provide guidance on which loan option may be the best fit for you.

For example, the FHA loan is a great loan for first time home buyers BUT a Conventional loan may be a better option if you have the funds needed for the down payment.

Differences between Conventional Vs. FHA Loan

Keep in mind that the average down payment is 20%, but there are many mortgage options available with lower down payment requirements, including some with $0 down payment.

Live Below Your Means

If you qualify to buy a house for $600,000, that is awesome but we recommend living below your means.

So although you can qualify for a house of $600,000, think about what other expenses you may have to maintain a $600,000 house, and what other debts you have.

Do not over extend yourself. Make sure you can afford the monthly payment plus all your other expenses.

3. Consider Getting an Early Mortgage Pre-approval

Wondering how much you can qualify for and what the mortgage payment would be, or the down payment?

Going through the mortgage pre-approval process will help answer all those questions.

It’s wise to get pre-approved before you start looking at homes.

• You’ll know exactly what you can qualify for
• You’ll know how much money you’ll need to close on a house (i.e: down payment, closing costs, appraisal)
• If you don’t qualify now, you’ll understand why and can work on correcting those items. (i.e: if credit score is too low, or maybe you just need to pay down some debt)

If you do get pre-approved, you’ll receive a “pre-approval letter.”

Having this letter with you can boost your odds with the home seller once you’re ready to make an offer.

What documents are needed for pre-approval?

The application differs from one lender to the other, but you’ll most likely need the following documents:

• Proof of employment (pay stubs)
• Income tax returns (two years)
• Bank statements
• W-2 wage statement
• Proof of assets
• Personal documentation (Social Security number, ID, etc.)

If you don’t get pre-approved, the lender should explain where your application fell short and what you can do to improve it.

Thankfully, some loans have easier-to-meet requirements.

For instance, if your main struggle is credit, you can apply for an FHA with a 500 FICO score, provided that you have 10% for a down payment.

A 580 score is even better and drops your down payment to 3.5%!

If you stick with conventional mortgages, you can always opt for a 30-year term if your current income doesn’t support a 15-year term.

VA loans don’t have a down payment requirement, have high debt-to-income ratio qualifying factors, and can be used to purchase a manufactured home, condo, single family residence, townhome, and so on.

4. Set a Timeline

Don’t lose all hope if you can’t get approved for a mortgage now or you don’t have enough for a down payment; it’s still possible to save up.

To keep hold of that homeowner dream, start a savings plan and set a timeline.

With a smart budgeting plan, saving for a down payment can take anywhere between 2.5 – 5 years, depending on the metro area.

On the plus side, this step will come in handy if you’re currently tied to a long-term lease.

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More info:

• Using a Gift for a Down Payment
• Best Ways to Save for a Down Payment

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5. Fine-Tune Your Checklist

By now, you should have a set budget and timeline.

So, it’s time to grab that “dream list” from step number one and get a bit realistic.

Go over the checklist and mark the items that you’re willing to compromise on or let go of completely.

For instance, you might not be ready to get a house with an underground pool. But hey, maybe the backyard is big enough to accommodate an above-ground setup!

Alternatively, you can look for fixer-uppers instead of move-in-ready houses.

This way, you can find a house that could potentially meet all the items on your checklist after renovations and repairs.

6. Pick the Right Neighborhood (Or Is an HOA the Way to Go?)

Before diving into the housing market, it’s better to narrow down your options to 2-3 neighborhoods.

If you’ve completed step #3 and have gotten pre-approved, right now would be a good time to hire a realtor.

A realtor will help with your home search and can provide guidance on areas that meet your requirements.

While property value is a key deciding factor, there are other aspects that you’ll have to consider, including:

• Crime rates
• School districts
• Traffic conditions
• Walkability
• Property taxes
• Street-level noise

We’d also recommend checking local zoning laws. Knowing your way around permits will come in handy if you ever need to do some renovation projects around the property.

That takes us to yet another vital point: homeowner’s associations (HOAs).

HOAs aren’t the ideal choice for everyone; they’ll limit your control over the property and add an additional monthly cost.

However, they can still pay off well in terms of safety and property value.

So, take a moment to think about the pros and cons.

7. Scan the For-Sale Options

Now things are about to get more fun as you start looking for houses on the market!

If you haven’t hired a real estate agent yet, we’d recommend dipping your toes by browsing online listings.

This way, you’ll gauge the average prices in the area before you dive all in with an agency.

You can go with newspaper ads if you’re old-school. It’s also possible to drive around the chosen neighborhoods to hunt for open houses or those for-sale signs!

Ultimately, you can get in touch with a real estate agent and share your fine-tuned checklist and budget.

Hiring a realtor will make your home buying journey alot easier!

Remember: The real estate agent gets paid when the home closes, and is usually paid by the seller.

8. Compare, Compare, and Compare!

On average, the house-hunting process takes around 4.5 months. So, don’t rush and close the deal before you’ve seen your fair share of for-sale houses.

Some sellers already provide an online gallery of the property. If that’s not the case, ask the agent if you can take pictures and videos to compare your options later.

It’s also a good idea to take the family along with you so that each can give their input.

You can also ask your real estate agent to come up with a comparative market analysis (CMA).

Without digging too much into the jargon, the CMA should help you put all the “similar” houses in a head-to-head comparison. This way, you can be sure you’re getting a decent deal.

9. Go Over the Numbers Once Again

We know the financial aspect of it all is frustrating.

However, once you find a house you like, it’ll be time to go over your budget again.

This time around, make sure to factor in all the extra expenses that add up along the way, including the following:

• Property tax
• Home insurance
• Inspection costs
• Renovation costs
• Real estate agent commission (depending on the contract, you might not have to pay anything!)
• Moving expenses
• Closing costs (usually 3-6% of the purchase price)

In most cases, you won’t finalize inspection, insurance, or moving costs until later, but it’s good to have a rough idea.

10. Make Your Offer

After reviewing the budget, you’ll be ready to make an offer. Don’t worry; your realtor will help you with all the details.

Of course, the process rarely goes as straightforward as making an offer and getting accepted.

More often than not, there will be back and forth with counteroffers.

Here’s where your real estate agent’s skills should shine. Agents have insights that you might not have.

For one, they might hear from somewhere that the seller is in a rush to close because they’ve already set travel plans.

Plus, this is the time to bring up the work that needs to be done around the house. This can knock some bucks off the asking price if you play your cards right!

By the end of this step, you’ll either bounce and keep looking for a house that matches your budget, or you’ll reach an agreement with the seller and drop a good-faith deposit.

Hopefully, it’s the second scenario.

In this case, you’ll have a tight deadline before the closing date to tackle some critical details (insurance, appraisals, and inspections).

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More info:

• What is the process of a home appraisal?
• What happens if the appraisal comes in low?
• Difference between an appraisal and an inspection.

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