12 things to know before buying a house

The homebuying process can be complex. Over the course of a few months, you’ve got to find a property, apply for a home loan and take several important steps in between. But arming yourself with information can help you save time and stress while you’re going through the process.

Read on to learn about what you need to know before buying a home.

Key takeaways

• The homebuying process is lengthy and includes many steps.

• You’ll need to prepare your finances, choose the right home loan, figure out the type of home you want to buy, and then submit an offer and close on the loan.

• Doing your research can help you make your financial goal of homeownership a reality.

Homeownership comes with a lot of responsibility, so you’ll want to consider whether you’re ready for it. If you have reliable income, savings and strong credit, you might be financially ready to buy a home.

But there are other factors to consider too. For instance, what’s your main reason for buying a home, and does it fit into your financial goals? And will you stay in the area for the next few years, or do you think you’ll move at some point?

You may decide to discuss plans with your family before getting started.

When you apply for a home loan, you’ll need to meet a few requirements to qualify. Many of the eligibility factors depend on the mortgage program and lender’s criteria, but here’s a general rundown of what you’ll need: 

• A qualifying credit score: You may qualify for a home loan with a credit score of around 580 or 620, but a higher score may improve your chances of getting the mortgage and receiving a low interest rate.

• A low debt-to-income (DTI) ratio: Lenders typically look for a DTI ratio of under 43%, which includes your new mortgage payment. A low DTI ratio ensures that you can afford the new home loan. 

• Proof of income: You’ll need to show how you earn or receive income on a regular basis. Lenders verify this detail to ensure that you can make mortgage payments based on the home you’re buying.

• A down payment: You’ll often need to put down at least 3% to 3.5% of the home’s purchase price at closing, although some mortgages don’t require a down payment.

Figuring out how much house you can afford can help you set a budget before you look at properties.

Some experts say your mortgage payment should be no more than 30% of your monthly gross income. So if you earn $6,000 a month, for example, then your entire house payment shouldn’t exceed $1,800. You can use a mortgage calculator to estimate your monthly payment based on the home price, your down payment and the interest rate.

The monthly payment includes your principal and interest along with some other potential costs. These may include:

Homeowners typically pay property taxes to their local government on a quarterly or semiannual basis. To ensure timely payments, your lender may roll the cost of your property taxes into your monthly mortgage bill. Then, your lender pays the tax on your behalf. Nationwide, the typical household spends about $177 per month on property taxes. But this expense can range widely.

If your new home is in a community that’s governed by a homeowners association, you’ll likely pay HOA fees. These payments go toward any maintenance needed for the common areas of the community, such as the pool, clubhouse and parking lots. The average HOA fee costs about $191 a month, but they vary with each community.

Mortgage insurance is a type of policy that financially protects lenders against default.

You may have to pay for private mortgage insurance if you take out a conventional loan with a down payment of less than 20%. For every $100,000 borrowed on a conventional loan, PMI typically costs between $30 and $70 per month.

On an FHA loan, a borrower pays a mortgage insurance premium of 1.75% of the home’s purchase price upfront. They’ll also pay an annual premium that’s calculated as 0.45% to 1.05% of the current loan amount.

Homeowners insurance financially protects you against physical damage to your home, as well as liability for injuries and damage caused on your property. This type of insurance is typically required when you take out a mortgage. For a policy with $250,000 in dwelling coverage, the average cost is $1,428 per year or $119 a month.

If you’re taking out a mortgage, you may need to save for the down payment and closing costs. You also might decide to build up your emergency fund. The total amount you’ll need to save depends on factors like the type of mortgage you’re getting, the purchase price of the home and how much you choose to keep in cash reserves.

Here’s how to estimate what you need:

When you take out a home loan, your lender typically asks you to pay a portion of the loan upfront. Lenders see this down payment as your investment in the property, and the minimum requirement varies with each mortgage program.

The smallest down payment you can make on an FHA loan is 3.5% of the home’s purchase price, and you may be able to get a conventional loan with 3% down. VA loans and USDA loans don’t require a down payment, but you can choose to make one.

Closing costs are fees the lender charges for processing the loan. These fees cover the costs of the appraisal, tax provider services, title insurance and more. You may also need to cover prepaid expenses, such as property taxes and homeowners insurance for the first month.

Your lender will give you a list of these costs before closing day. For planning purposes, you may need to save about 2% to 5% of the home’s purchase price to pay closing costs.

An emergency fund is money you set aside to cover unplanned expenses, such as home maintenance or mortgage payments during a financial emergency. Financial experts recommend keeping three to six months’ worth of expenses on hand. So if you typically spend $5,000 a month on basic living expenses, you’d aim to save between $15,000 and $30,000.

When it comes to paying for the home, 78% of buyers finance the purchase using a mortgage. Every lender has a different menu of options and may offer their own customized home loans. But the main mortgage types typically include the following:

An FHA loan is a mortgage that’s insured by the Federal Housing Administration, and you’ll go to a private lender to apply for the loan.

Your down payment can be as low as 3.5% as long as you have a credit score of at least 580. With a score between 500 and 579, you’ll need a down payment of at least 10%. You’ll also need to stay below a certain loan limit. In 2023, FHA loans can go up to $472,030 in most areas of the U.S. The limit increases to $1,089,300 in high-cost areas and $1,633,950 in Hawaii and Alaska.

VA loans are mortgages insured by the U.S. Department of Veterans Affairs and are available through private lenders.

To qualify for one of these loans, you’ll need to be a veteran, current military service member or a surviving spouse. Eligible borrowers won’t have to pay for a down payment or mortgage insurance, and closing costs are limited. But you’ll need to budget for an upfront funding fee that ranges between 1.25% and 3.3%.

USDA loans are backed by the U.S. Department of Agriculture and designed to help low- to moderate-income people buy homes in rural areas. Some of these loans are funded through the USDA itself, but most are available through private lenders. To qualify, you’ll need to meet income limits and buy a home in a USDA-approved area. No down payments are required.

Conventional mortgages aren’t insured by a government agency, and they’re the most popular type of home loan. To qualify, you’ll typically need a credit score of at least 620 and a down payment of 3% or more. If the loan is “conforming,” it will have a borrowing limit. In 2023, conforming conventional loans can go up to $726,200 in most parts of the country and up to $1,089,300 in high-cost areas.

A mortgage pre-approval is a letter from a lender that shows how much you can borrow. It’s a good idea to get one of these before you start shopping for homes because they help you set a budget.

To get a pre-approval letter, you can contact any lender and ask for one. They’ll start by looking through your W-2 forms, tax returns and recent pay stubs to verify your income. They’ll also run a hard credit check to review your credit scores and any outstanding debts.

Start thinking about what type of home you want and what’s important to you. This checklist can help you figure out your preferences: 

• Condition of the home: How much time and money do you want to put into your new home? A fixer-upper may be cheaper but will require maintenance and repairs, while a new build is generally more expensive but totally customizable. A move-in-ready home won’t need much work and may be cheaper than a new build. 

• Size of the home: How much space do you need? Generally, a larger family may require more bedrooms and a higher square footage. 

• Type of home: How much privacy and customization do you want? Single-family homes are more private and customizable. With a condo, you’ll share walls and common areas with your neighbors. You likely can’t make extensive renovations, but condos usually include maintenance and amenities.

• Location: What do you need in the immediate area? Some people look for schools, restaurants and a generally safe neighborhood.

A real estate agent can help you navigate the process of searching for a home, submitting an offer and closing on the mortgage. They also negotiate on your behalf, which can help you save time and money. Ask people in your network—such as friends, family and coworkers—if they have any recommendations for a good real estate agent.

The overall economy can influence the housing market, which can affect housing inventory and home prices.

If your area is experiencing a buyer’s market, the supply of available homes exceeds the demand from potential buyers. It will be easier to find a home and potentially negotiate a low price. A seller’s market is the opposite. You may have to compete with other buyers, offer a higher price and potentially make concessions.

Once you find a home you love, you and your real estate agent can submit a purchase offer to the seller. The purchase offer is a document that outlines the price you’re willing to pay and any terms and conditions you want to include.

For example, you can make the purchase contingent on a satisfactory home inspection and your ability to secure a home loan. The seller can either accept the offer, negotiate the details or reject it.

A home inspection can help you determine the condition of the home you want to buy, while the home appraisal establishes the home’s market value. Both are important parts of the homebuying process.

A home inspection is a professional evaluation of a home’s physical structure and interior systems, and you can schedule one by contacting a home inspection company. They typically take two to four hours to complete and cost $200 to $500 on average, depending on factors like the property’s size, condition, location and age.

A home appraisal is a professional opinion on the value of the home you’re buying. Your lender orders an appraisal to ensure the property is worth its purchase price. They also want to make sure the home could be sold to cover losses if you default on the home loan. An appraisal usually costs around $313 to $422 on average, and your lender will likely pay for it and roll the expense into your closing costs.

Closing day is the final part of the homebuying process. Your lender will schedule a meeting for the closing once you’re approved for the loan. Depending on your specific purchase or the state where you’re buying the property, your closing may include your real estate agent, title insurance company, escrow company, your attorney and the seller’s attorney.

On closing day, you’ll start by doing a walkthrough of the property you’re buying. This allows you and your real estate agent to check the condition of the home and make sure the seller handled any repairs addressed in the purchase agreement. After the walkthrough, you’ll sign the paperwork to buy the property and close on the loan.

Buying a home is exciting, but it’s a lengthy process that includes many steps. You’ll need to prepare your finances, choose the right home loan, figure out the type of home you want to buy and then submit an offer and close on the loan. By doing your research and asking the right questions, you can make your financial goal of homeownership a reality.