How to buy a house: A step-by-step guide to home buying

The process of buying a house can seem complicated, especially if it's your first time. With so many factors to consider — credit scores, down payments, mortgage rates, closing costs and property taxes — it's not surprising that many people find home buying and figuring out how to pay for it to be stressful and confusing.

But getting a mortgage doesn’t have to be stressful. Start your journey off on the right foot and familiarize yourself with the process with this step-by-step guide for preparing to buy a house.

1. Set your mortgage payment budget

Your monthly mortgage payment should be an amount that leaves plenty of income for other expenses. With that in mind, a good guideline is to keep your monthly mortgage payment — taxes and insurance included — and other monthly debt obligations below 43% of your gross monthly income.

Your gross monthly income includes all of the money you make each month before taxes. For example, if you and your spouse make a combined $10,000 per month before taxes, it's best to keep monthly payments for your mortgage, auto loan, credit card and other debt expenses below $4,300.

But don't use that metric as an excuse to buy a home that pushes your lending limit. You might be better off having a lower monthly mortgage payment with money available for other costs. Sure, you want to buy a nice home, but you also need to afford life's other expenses.

2. Decide how much money to put down

There are benefits to putting down 20% of a home's purchase price upfront. You won't have to purchase private mortgage insurance (PMI), for example. But a 20% down payment isn't realistic for everyone. You may have the option of putting down less, so talk to your lender about what will work best for you.

If you can't comfortably afford to put down 20%, then only put down the minimum amount required. You'll want to keep some of your savings for other expenses after buying your new home, like new furniture and making repairs or improvements.

Let's say you're interested in a $300,000 home and have $25,000 in savings, and your lender requires a down payment of at least 3% or $9,000. In this situation, you may want to put down the minimum of $9,000 and holding on to your remaining $16,000 for furnishings, savings and upkeep.

3. Check your credit score

All those loud commercials have likely drilled into your head that it's important to know your credit score before making major purchases. That's because your credit score is one of the first factors lenders review when determining your eligibility for a home loan. So, it's crucial to make sure that all-important score is in a good place before applying for a mortgage.

Most lenders look for a credit score of 670 or higher. If yours isn’t in that range, there may be affordable mortgage programs available that may better suit your current situation. Be sure to check with your lender to explore your options.

4. Get pre-approved

Going shopping for a home with a mortgage pre-approval letter in hand may put you ahead of the game. It shows sellers that you're serious about buying a home, and it also gives you an estimate of how much house you can afford. Beyond giving you an edge over other potential home buyers, some real estate agents consider a pre-approval letter a must before you can put in an offer.

When you apply for pre-approval, a hard credit check will be done. You'll also need to provide documentation to verify your income, assets and employment. A mortgage pre-approval letter is usually good for 60 to 90 days. If you need more time, you may need to get pre-approved again to get another letter.

5. Go house hunting

Ideally, you will want to look at as many houses as possible that meet your criteria before making an offer. Buying a home is a big decision, and you want to make sure you get it right. If you need to move quickly, however, it may limit the number of homes you can view.

It's important to keep in mind that you may not find a home that is perfect in every way. Instead of looking for the perfect home, consider homes that meet your major requirements and be open to the idea of making small changes to suit your preferences.

How to choose a real estate agent

The real estate agent you select will be an important team member who helps you navigate the home-buying process. Before choosing an agent, be sure to read online reviews to help get an idea about other people's experiences with them.

It's also important to talk to several real estate agents before making a selection. This allows you to ask questions and assess their knowledge of the local market. It also helps you get a sense of if you will feel comfortable working with them.

After making a selection, you can then give your agent a list of things to look for in a house. Your list may include:

• Proximity to work, schools and shopping
• Condition of the property
• Home type, size and layout
• Amenities and features
• Your budget
• Neighborhood qualities

6. Make an offer

When you find your dream home, it's time to make an offer. Depending on the situation, you can match the asking price, bid lower or offer more if there are several bids on the home. Your agent will help you with this process. If the seller expects multiple offers, then putting in yours as soon as possible is a must. If you wait, you might miss out.

Your offer may stand out more if you put down a strong earnest money deposit. It shows the seller that you are serious about buying the home. Earnest money deposits are usually 1% to 3% of the list price but can be higher. They are held in escrow accounts until the closing.

Writing a personal letter to the seller is another way to improve your chances of buying a home. With a personal letter, you will be more than just a name on an offer. It gives you a chance to connect with the seller and express why the home is perfect for you. It's a personal touch that may help you stand out from the crowd.

7. Schedule a home inspection

Now it's time to hire a qualified professional home inspector to evaluate the house. It's important to pay close attention to the report, especially if you're buying an older home. Here's what your inspector will be checking:

• Structure. The skeleton of the house, its foundation and framing
• Exterior. Walkways, driveway, siding, drainage system, gutters, doors and windows
• Roofing. Roof coverings, drainage, flashings, skylights and chimneys
• Plumbing. Water supply drainage system, water heater and fuel storage system
• Electrical. Service entrance wires, breakers, fuses and disconnects
• Heating. Heating systems, vents, flues, chimneys and heating energy source
• Air conditioning. Home cooling system, including central and through-wall cooling equipment
• Interior. Walls, ceilings and floors, checking for water stains or mold
• Ventilation. Adequate insulation and mechanical ventilation systems
• Fireplaces. Proper installation, chimney and flue safety as well as proper drafting

8. Formally apply for a mortgage

The mortgage lender will process your application and send you initial disclosures to review and acknowledge. Then they'll order an appraisal of the home to ensure that the purchase price doesn't exceed the fair market value of the property. Finally, an underwriter will review your application before issuing a decision on your home loan.

The type of mortgage loan you apply for will affect the required down payment, interest rate and other things. Common mortgage types include:

• Conventional loans. These may have fixed or variable interest rates and are not backed by the government.
• Federal Housing Administration (FHA) loans. These are popular with first-time homebuyers. Properties have to meet certain standards to qualify.
• U.S. Department of Agriculture (USDA) loans. These are intended for low- to moderate-income families living in rural areas. No down payment is required.
• U.S. Department of Veterans Affairs (VA) loans. These are intended to help veterans, active-duty service members and certain surviving spouses of veterans become homeowners. No down payment is required.

Schedule a home appraisal

While your mortgage is being processed, your lender will do a home appraisal to determine the fair market value and make sure the loan amount is in line with the value of the home. Because your home will serve as collateral for the loan, your lender needs to make sure that they can recover the money they loan you if you default.

Buy home insurance

Because homeowner's insurance is often required by lenders, you should start shopping for coverage immediately after your offer is accepted to prevent delays. Proof of insurance is typically required before a mortgage is finalized.

9. Close the deal

Congratulations! Before the closing date, make sure you review all documents carefully and know what your closing costs will be. Once you sign, you'll officially own the home. You'll get together with the seller, your broker and your lawyer to walk through all of the paperwork.

Buying a house FAQs

Is now a good time to buy a house?

The best time to buy a house depends on your needs and budget. It will be different for each person. Buying now may make sense if you plan on staying in a home long-term. It allows you to build equity.

How much money do I need to buy a house?

Depending on the type of mortgage you choose, you will need a down payment of 0% to 20%. You will also need funds to cover additional expenses, such as a home inspection and moving costs.

Can I use my 401(k) to buy a house?

You can make an early withdrawal from your 401(k) to help you buy a first house. You may also be able to take out a 401(k) loan if your employer allows it. Keep in mind that if you do this, your retirement savings will be reduced and you’ll miss out on any earnings the money might have made. (please consult with a financial advisor)

How much should I offer on a house?

Your offer should reflect the current market conditions. If a home has multiple offers, your offer may need to be higher. If the local real estate market is not competitive, then you might make an offer for less than the asking price.

Does earnest money go toward the down payment?

Earnest money deposits can go towards either the down payment or closing costs.

Learn more about the mortgage options available to you.

Connect with a Citizens loan officer