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How to Buy a House


Buying a house can be challenging under the best of circumstances, never mind when you have to navigate a competitive real estate market. Taking time to prepare will lessen the stress and make the home buying process smoother.

Whether you’re a first-time homebuyer or a seasoned pro, these steps will help you prepare.

1. Decide if homeownership is right for you

Take a good look at your goals, finances and job outlook before jumping into a home purchase.

Is it time to stop renting and buy?

Owning your home can provide long-term stability but is also a long-term commitment. So, how can you decide if you would be better off owning a home than renting?

  • Homeownership can provide housing security

One advantage of owning over renting is predictability. With a fixed-rate mortgage neither your interest rate nor monthly payments will change.

Renting, on the other hand, means that you are subject to any rent increases your landlord may impose. However, renting provides flexibility, and you generally aren’t responsible for repairs and maintenance.

  • Buying may be less expensive than renting

On a monthly basis, owning will be cheaper than renting for many people. The median monthly rent on a two bedroom property was $2,003 at the end of 2021, according to Realtor.com. Meanwhile, the monthly principal and interest payment on an average-sized mortgage is $1,454, according to data provider Black Knight.

However, also consider the up-front costs of buying. If you buy a $300,000 home with a 20% down payment and 4% closing costs, you’ll need $72,000 in cash at closing.

The easiest way to calculate how long it will take you to breakeven is with a rent vs. buy calculator such as this one from Realtor.com.

  • Homeownership is a way of building generational wealth

Owning real estate is a means of building wealth not only for yourself but for your descendants. Home values have historically appreciated between 2% and 4% in value every year, slowly increasing homeowner equity.

Some years, the gains will be larger. Thanks to rising home prices, homeowner equity increased by an aggregate of $10 trillion last year — a 35% increase, according to Black Knight.

Assess your finances

Getting ready to buy a home means taking an in-depth look at your finances and identifying areas that need work to increase your chance of getting approved for a mortgage at a low rate.

What’s your credit score?

Mortgage lenders use credit scores to determine how likely borrowers are to repay the loan. In general, you need at least a 620 to qualify for most loans and the higher your credit score, the lower your mortgage rate. You’ll generally qualify for the best rates with a 740 or above.

Your credit score is based on the information in your credit report. In addition to checking your score through your credit card provider or a site like Credit Karma, request a free copy of your credit report from each of the credit bureaus at annualcreditreport.com. Verify that the information is correct and report any errors to the credit bureaus.

If your credit score is legitimately low, take steps to improve your score before applying for a mortgage.

What’s your debt-to-income ratio?

Your debt-to-income ratio is the share of your gross monthly income that goes toward paying debts. Ideally, no more than 36% of your income will be spent on debt (including your new mortgage), although some lenders will accept DTI’s as high as 50%. If your DTI is on the higher end of the scale, lower it by paying down your credit cards and personal, auto or student loans.

Mortgage lenders also like to see that you have enough money to cover at least six months of living expenses.

What’s your income and employment status?

You’ll need to provide proof of employment for the two years prior to your loan application. You’ll also be asked to provide your most recent pay stubs and W-2’s to verify your income. If you’re self-employed, lenders will ask for at least two years of income tax returns.

If your income or employment may be at risk, it might be best to wait until your financial situation has stabilized before buying a home.

Do you have cash to cover a down payment and closing costs?

While a mortgage will provide the bulk of the money to buy a house, you generally still need to cover a down payment and closing costs.

While a 20% down payment will allow you to start with meaningful equity in the home and to avoid paying for private mortgage insurance — a policy that protects the lender, not the borrower — you can put as little as 3% down on many loans.

If you don’t have enough, there are first-time homebuyer programs that provide different forms of down payment assistance. You may qualify for these programs even if you’ve owned a home before. Most consider anyone who hasn’t owned property during the three years ending on the date of closing a first-time buyer.

Meanwhile, closing costs include attorney and title fees, lender fees, home appraisal costs and title search fees, among others. These costs will typically run between 3% and 6% of the mortgage amount. Some lenders will allow you to roll these costs into the loan. You can sometimes negotiate with the home seller to cover part of these costs.

Lenders like to see money that has been ‘seasoned’ — placed in a bank account for at least 60 days prior to applying for a mortgage. If you’re counting on the sale of an asset or a gift, obtain the money before applying for a loan.

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2. Shop for a house

It helps if you start your search with a clear idea of what you want and what you can actually afford, especially in a housing market as competitive as todays.

How much house can you afford?

The first step in your home search is figuring out how much house you can afford. Lenders use the 28/36 rule to determine how much money they are willing to lend you.

The 28/36 rule means that a maximum of 28% of your gross monthly income should be paying your housing expenses. The second part of the equation means that no more than 36% of your gross monthly income should go towards paying all your monthly debts including your mortgage.

Once you have a ballpark figure of how much you can comfortably afford, you can narrow your search area to neighborhoods with homes in your price range.

Get a mortgage pre-approval

Getting pre-approved means submitting to a full financial review so a lender can approve up to a certain amount for a home purchase. A pre-approval letter can help you compete, since it signals to the seller that the purchase is unlikely to fall through because of a lack of funding.

Pre-approval letters are usually valid for 60 to 90 days. You’ll want to get pre-approved before touring homes so you can act…


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