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

In a nutshell

If you're gearing up to purchase a home in 2024, you may be in good company. The National Association of Realtors (NAR) estimates that 4.71 million homes will be sold this year (higher than the 4.1 million home sales they predicted in 2023).

• There are myriad steps involved in the home-buying process, including assessing your financial readiness, checking your credit, deciding on the type of home loan you want, and choosing a realtor.
• You'll also want to make sure you are preapproved with a lender to purchase a home. You can do this by working with a lender in person or applying for a home loan online.
• If you're not quite ready to buy a home yet — but want to prepare for the future — you can focus on boosting your credit score, saving up a down payment, and paying down other debts you have.

How to purchase a home in 15 steps

The following process can help you become a homeowner. It may not be necessary for you to follow all of these steps, however, and you don’t have to follow them in this order.

Step 1: Assess your full financial picture

Before you dive into the process of buying a home, you should have a general idea of your financial picture. Here's a rundown of all the factors you'll want to consider as you take this step:

• Household income: How much money you earn will play a major role in how much house you can afford. If you are buying a home with someone else, you’ll also want to consider their income.
• Employment status: Lenders also prefer buyers with a solid work history and a stable income. Being employed in the same industry for at least two years can help you get approved for a home loan, even if you switched jobs over that time.
• Debt-to-income ratio: Your debt-to-income ratio (DTI) is another factor lenders consider, and having a DTI that's too high can prevent you from purchasing a home. Most lenders want to see a DTI of 43% or below (including the new housing payment).
• Credit score: Your credit score will also impact whether or not you can get approved for a mortgage and the interest rate you'll pay. Keep in mind, there are steps you can take to improve your credit score.
• Liquid assets: Having ample savings in the bank can also help you get into a home. After all, you'll need to have cash for a down payment, closing costs, furniture, and other expenses involved in a home purchase.
• Timing: Finally, consider if it's the right time to purchase a home. Becoming a homeowner this year may be ideal if you're tired of renting and ready to start building equity in your own property. It may not be the right time if you are unsure of where you want to live or if your finances are shaky.

Step 2: Decide how much you can put down

If you decide to move forward, your next step is to take stock of your liquid assets and investments and determine how much you can afford to put down for a home purchase. While a down payment of 20% of the purchase price of a home (or more) can help you avoid private mortgage insurance (PMI) on a conventional home loan, you may be able to qualify for a loan with a smaller down payment.

If you plan to purchase a home with the help of a government-backed mortgage, your required down payment can be lower. For example, Federal Housing Administration (FHA) home loans require a down payment of 3.5% (or more) if you have a credit score of 580 or higher; VA loans through the U.S. Department of Veteran Affairs and U.S. Department of Agriculture (USDA) loans let you purchase a home without a down payment.

While putting down as little as possible is an option, you should also consider how your down payment will impact your monthly housing payment and total borrowing costs. The more you put down, the lower your new mortgage payment and total interest charges will be.

Step 3: Determine how much you can spend

You'll also need to figure out a general price range you can afford before you start shopping for a home. A home affordability calculator can help if you're not sure where to start.

Several important factors must go into this calculation, including:

• Current mortgage interest rates.
• Household income.
• Down payment amount.
• Property taxes.
• Homeowners insurance.
• Term for a new home loan.
• Other debts you have.

Plenty of additional factors can also play a role in how much house you can afford, and you must also consider your tolerance for debt. Generally speaking, your housing expenses shouldn't exceed 28% of your pre-tax household income, and you should strive to keep your total debt payments at or below 36% of your total income.

If you have a household income of $120,000 per year according to this guidance, your monthly housing payment should be at $2,800 (or below), including principal and interest, property taxes, and homeowners insurance.

Most lenders want to see a DTI of 43% or below (including the new housing payment).

Step 4: Check your credit score

Your credit score is another important factor that can either help or hurt the homebuying process. You won't have much to worry about if you have a FICO score of 670 or above. However, things can get murky when you have fair credit (FICO score of 580 to 669) or poor credit (FICO score of 579 or below).

Here's an overview of the credit score you need for different types of home loans:

• Conventional mortgage: Most lenders want to see a credit score of 620 or higher.
• FHA loan: You'll need a credit score of at least 580 if you can put down 3.5%. With a credit score of 500 to 579, you'll need a 10% down payment.
• VA loan: There's no industry standard, but many lenders want to see a score of 620 or higher.
• USDA loan: There's no industry standard, but many lenders want to see a score of 620 or higher.

The credit score requirements for a mortgage listed above are just the starting point. You may have an easier time getting a mortgage if your credit score is higher than these minimums, and you may even qualify for lower interest rates and better loan terms.

There are also steps you can take to improve your credit while you prepare to buy a home. Consider these tips to improve your credit score while you wait:

• Pay all your bills early or on time.
• Pay down revolving debt to lower your credit utilization ratio.
• Refrain from closing old accounts — even if you're not using them.
• Avoid signing up for new credit accounts until after your home purchase.
• Check your credit reports for errors and dispute them if you find any.

Step 5: Plan for closing costs

Saving up a down payment for a home is crucial, but you'll also need to save up the money to cover closing costs. A new study from Assurance showed that the average closing costs for a home purchase in the U.S. was $4,243 in 2023.

On average, closing costs amounted to 1.87% of the median home value across the United States. This means that, for a $300,000 home loan, closing costs were approximately $5,610 in 2023.

Step 6: Decide on the type of home loan you need

You'll also need to decide on the type of home loan you want and the type of mortgage you can qualify for. Your options include:

• Conventional loans: These home loans are not backed by the federal government. Most meet conforming loan requirements put in place by the Federal Housing Finance Agency (FHFA).
• Jumbo loans: These are home loans for properties that exceed conforming loan limits, so they are for more expensive properties.
• FHA loans: These loans are for first-time home buyers, and they offer easy credit requirements and down payment requirements as low as 3.5%.
• VA loans: These home loans are for military veterans, active duty military members, eligible National Guard members, and eligible spouses.
• USDA loans: USDA loans are for rural properties that are located in eligible parts of each state nationwide.

Step 7: Get preapproved for a home loan

Once your finances and credit score are where you want them to be, you'll want to reach out to a lender to get pre-approved for a mortgage. This step will show home sellers that you are financially ready to purchase a home when you make an offer.

Getting pre-approved can also help you figure out how much you can afford to borrow based on your income, your down payment amount, and other factors.

Step 8: Select a real estate professional

Next up, you'll want to begin searching for homes with the help of a real estate agent. You can begin searching online using your state's Multiple Listing Service (MLS) or websites like Realtor.com. Your real estate agent can also help you find homes that work for you based on how much you can afford, location, size, and other factors.

Note that, as a home buyer you can work with a real estate agent to find the perfect home for free. That's because the vast majority of the time home sellers cover any real estate commissions.

Step 9: Begin visiting properties

Once you find homes you're interested in, your real estate agent can set up showings for you to see them in person. Factors to consider once you begin house hunting include:

• Asking price.
• Number of bedrooms and bathrooms.
• Square footage.
• Condition of home.
• Property taxes.
• School district.
• Location.
• Proximity to your place of employment.
• Access to grocery stores, shopping, and entertainment.

You may need to visit multiple properties to find the right home, or you may wind up visiting only a few. Once you find a home you want to call your own, it's time to write an offer and buy it.

Step 10: Make an offer on a home

You'll work with your real estate professional to create a written offer for the home you want to buy. Your offer will include the price you hope to pay for the home, your preapproval letter, and a deadline for the seller's response.

You may also be required to put down some earnest money with your offer. Earnest money is typically 1% to 3% of the offer price. Earnest money shows the seller you're serious about the purchase; it goes toward the down payment or closing costs of the home if you reach a deal with the seller.

After you make an offer, the seller of the property can:

• Accept your offer as-is.
• Ignore or reject your offer.
• Make a counteroffer.

If the seller makes a counteroffer, you can accept it or counteroffer with new terms. Negotiations may happen quickly, but you can also counter back and forth for a while before an agreement is reached.

Step 11: Get a home inspection

Reaching a deal with a seller can be exciting, but you'll also want to pay for a thorough home inspection before you move forward. A home inspection conducted by a qualified professional can help you uncover repairs and prevent you from purchasing a home with major problems, such as foundation issues or toxic mold.

After the home inspection is complete, the professional home inspector will create an official inspection report about the property.

Step 12: Get a home appraisal

Your lender will also order a home appraisal for the property you're trying to buy. The appraisal provides the lender and other parties with a professional opinion on the market value of the home.

The appraisal is important because your mortgage lender wants to know the asset (in this case the home) used to secure your loan is valuable enough to justify the amount of the loan. After all, lenders don't want to end up in a situation where they are lending more than a home is worth.

If the appraisal comes in at the amount expected or higher, this is good news for both the buyer and the seller. If the appraised value of a home is lower than expected, buyers and sellers may have to negotiate new terms. For example, you may have to increase your down payment, or the seller may have to drop their purchase price (or both).

Step 13: Negotiate for credits or repairs

Once the home inspection and home appraisal are complete, you can negotiate with the sellers for credits or repairs. You can also ask for a combination of repairs to get the property in move-in condition and discounts off the purchase price so you can make needed upgrades after you move in.

This is another part of the homebuying process that can require some back-and-forth negotiation. Your real estate agent will help you decide what needs to be fixed and what you can live with. Then they’ll write an inspection response to ask for the credits and repairs.

Step 14: Do a final walkthrough of the home

Once requested repairs have been made, you'll do a final walkthrough of the property. This gives you the chance to make sure repairs have been completed to your satisfaction, and you can also make sure nothing has broken or stopped working in the home.

Essentially, you'll want to make sure everything is in working order before you close on the home.

Step 15: Close on your new home

Once the final walk-through is complete, you'll attend the closing for the home purchase. You’ll receive a copy of your closing disclosure at least three business days before closing. Receipt of this form three days before closing is required by law.

At your home closing appointment, you will:

• Submit final documentation for the loan.
• Prove your identity with a government-issued ID.
• Provide proof of homeowners insurance.
• Submit your down payment for the home.
• Bring funds for any closing costs that are due.
• Review all closing documents.
• Sign loan documents.

At the end of the closing process, you'll get keys to your new home. Congratulations! You're now a homeowner.

The AP Buyline roundup: Start preparing to become a homeowner right away

You may be several months (or even years) away from buying your first home, but there are steps you can take starting today to make the process easier. Increasing your credit score, building up funds for a down payment, and paying down other debts are three of the most important steps.

It’s also important to figure out where you want to live and the type of property you hope to buy. Driving around through different neighborhoods can also give you an idea of what you're looking for.

Frequently asked questions (FAQs)

What is a good credit score to buy a house?

You'll need a credit score of 620 or higher for a conventional mortgage in most cases. However, the minimum credit score for FHA loans can be as low as 500 or 580.

What is the first thing you do to buy a house?

Before you purchase a home, you need to make sure you're financially prepared. This means taking stock of your current income, credit score, liquid assets, employment status, and other debts.

How long does it take to buy a house from start to finish?

The homebuying process can take several months to complete. It all depends on the financial readiness of the buyer, how quickly they find a home, how long financing takes to get approved, and the closing timeline negotiated by the buyer and the seller.

How much should you put down on a house?

Putting down at least 20% of the purchase price of a home can help you avoid paying for private mortgage insurance (PMI). However, in the time that it takes you to save up that much money, home prices can go up, leading to higher costs overall.