Buying a home is probably one of the biggest financial commitments many people make in their life, and so it stands to reason that the process can be complex and lengthy. From figuring out how much you can afford to learning how mortgages work to getting preapproved to determining where exactly to live…it’s a lot!
But by learning about the usual flow before you begin hitting the open houses, you can be well-prepared to dive into homeownership. Below, the eight steps to follow that will help make purchasing a home a smooth process.
Key Points
• Check your credit score and strengthen it to help secure a mortgage with favorable terms.
• Save for a down payment to influence monthly mortgage payments and attract sellers in a competitive market.
• Decide on a budget to understand how much you can afford, covering down payment, closing costs, and ongoing expenses.
• Shop for a mortgage lender and compare interest rates, terms, and closing costs.
• Find a real estate agent to assist in the house-hunting process and provide expertise in the local market.
8 Steps to Prepare for a Home Purchase
Here are the moves that will help you get ready to buy your dream property:
1. Determining Credit Score
A homebuyer’s credit score can impact their ability to secure a mortgage loan with a desirable rate. It can also affect how much they’ll be required to pay as a down payment when it’s time to close.
Credit score can be influenced by a variety of factors, from payment history to amount of debt (aka credit utilization ratio) to age of credit accounts, mix of credit accounts, and new credit inquiries.
Payment history is the main factor that affects a person’s credit score, accounting for 35% of an overall FICO® score. Missing a payment on any credit account — from unpaid student loans to credit cards, auto loans, and mortgages — can negatively impact a person’s credit score.
On the other hand, positive habits can include making on-time payments, limiting the number of new inquiries on their credit file, and working to pay down outstanding balances.
Is There a Credit Score “Sweet Spot?”
Many buyers wonder whether there’s a desired credit score range or “sweet spot” to obtain a mortgage. Typically, a credit score of 740 or higher will get the best deals (meaning lowest rates).
Credit scores can also affect the amount of the down payment itself. Some mortgage lenders require at least 20% of the house’s sale price be put down, but might offer more flexibility if the buyer’s credit score is in the higher range. A lower credit score, on the other hand, could call for a larger down payment.
Whether homebuyers have debt or not, checking credit reports is still a recommended first step to applying for a mortgage. Understanding the information on credit reports can be invaluable in knowing where you stand when qualifying for a mortgage loan rate.
2. Deciding How Much to Spend
Deciding how much to pay for a new home can be based on a variety of factors including expected and unexpected housing costs, upfront payments and closing costs, and how it all fits into the buyer’s overall budget.
Calculating Housing Costs
There are several housing costs for home purchasers to consider that might affect how much they can afford to offer for the house itself. The costs of ongoing fees like property taxes, homeowner’s insurance, and interest — if the loan isn’t a fixed-rate mortgage — can all lead to an increase in the monthly mortgage payment.
Closing costs are fees associated with the final real estate transaction that go above and beyond the price of the property itself. These costs might include an origination fee paid to the bank or lender for its services in creating the loan, real estate attorney fees, escrow fees, title insurance fees, home inspection and appraisal fees and recording fees, to name a few.
Typically, closing costs are between 2% and 5% of the loan’s amount. To get an idea on how this can impact your budget, use this home affordability calculator to estimate total purchase cost.
In addition to closing costs, expenses that potential homebuyers might want to consider are repairs and updates they might want to make to a home, new furniture, moving costs, or even commuting costs. If you are considering buying in a community with a homeowners association, factor those costs in as well.
Finally, unforeseen costs of a major life event like a layoff or the birth of a new child might not be the first expenses that come to mind. However, some buyers could find themselves making a potential home-buying mistake by not getting their finances in order to prepare for the unexpected.
Making a list of these estimated expenses can help homebuyers calculate how much they can feasibly afford. It can also help them create a budget that could help them avoid being overextended on housing costs, especially if they might be paying other debt or saving for other financial goals.
3. Saving for a Down Payment
Saving money for a house is one of life’s biggest financial goals. And how much they’re able to offer as a down payment can significantly impact the amount of their monthly mortgage payment.
A larger down payment can also be convincing to sellers who see it as evidence of solid finances, sometimes beating out other offers in a competitive housing market.
The typical down payment on a house varies depending on the type of buyer, loan, location, and housing prices. Most recently, the median down payment was 18%, although it was 9% for first-time buyers.
For first-time homebuyers, 18% or even 9% of the price of the home can seem like a daunting figure. Many buyers find that cutting spending on luxury or non-essential items and entertainment can help them save up the funds.
Other tactics could include getting gifts and loans from family members, applying for low down-payment mortgages, withdrawing funds from a retirement account, or receiving assistance from state and local agencies.
For buyers who are also sellers, proceeds from another property could also fund the down payment.
4. Shopping for a Mortgage Lender
There are many mortgage lenders competing for the business of homebuyers who finance their home purchases. These lenders offer a variety of mortgages to apply for, with a few of the most common being conventional/fixed rate, adjustable rate, FHA loans, and VA loans.
Buyers might not realize they can — and should — shop around for a lender before selecting one to work with. Different lenders offer different variations in interest rates, terms, and closing costs, so it can be helpful to conduct adequate research before landing on a particular lender.
Mortgage lenders must provide a home mortgage loan estimate within three business days of receiving a mortgage application. The form is standard — all lenders are required to use the same form, which makes it easier for the applicant to compare information from different lenders and make sure they are getting the best loan for their financial situation.
When comparing loan offers, don’t just look at the interest rate. Examine the annual percentage rate (APR), which factors in costs.
5. Getting Preapproved for a Loan
While it might seem like a bit of a nuance, getting prequalified for a loan vs. preapproved for a loan are two different things.
When a buyer is prequalified for a loan, their mortgage lender estimates the loan amount they are qualified for, based on financial information they provided.
When a buyer is preapproved, the lender conducts a thorough investigation into their finances that includes income verification, assets, and credit rating. Preapproval is not a guarantee but tells a buyer that a lender is likely to approve them for a certain amount, as long as they clear the underwriting process.
Having a preapproval letter in hand can help some buyers get ahead in a competitive home market. It shows the would-be owner’s intent to purchase and a lender’s guarantee to back that purchase up.
6. Finding the Right Real Estate Agent
While the internet and popular real estate search websites have made it easier for homebuyers to hunt for a house online, most buyers still solicit the help of a real estate agent to find the right home and negotiate the price and purchase.
Also, many realtors are experts in their particular housing market, so for buyers who are searching in a specific location, a real estate agent may be able to offer valuable insights that might not be revealed online.
7. Exploring Different Neighborhoods
By researching neighborhoods where they might want to purchase a property (both in-person and online), homebuyers can get a better sense of what living in their future community could look like.
Many real estate websites provide comparable listings to help determine a reasonable offer amount in a given neighborhood.
Check out housing market
trends, hot neighborhoods,
and demographics by city.
They may also highlight nearby school ratings, price and tax history, commute times, and neighborhood stats like home value fluctuations or predictions, and walkability ratings.
All of this information can help paint a picture of life in the area a homebuyer chooses to settle in. Doing a deep dive into a desired neighborhood can help inform a more realistic decision on where to buy a house.
8. Kicking off the House Hunt
Once the neighborhoods are whittled down, the loan is preapproved, the real estate agent has been signed, and the savings are set aside, the official house hunt can begin.
With the help of a trusted real estate agent and a housing market with adequate inventory, most homebuyers can begin to book showings, attend open houses, and formally put down an offer on a house they like.
In particularly “hot” markets, houses could receive several offers, so homebuyers might want to be prepared to go through the bidding process with a few properties before they get to that glorious final sale.
Are You Ready to Buy a Home Quiz
The Takeaway
A home may well be the biggest purchase you make and the biggest asset you ever own, so it makes sense to spend some time on the home-buying process. From checking out different mortgage options to getting preapproved for a loan to attending open houses, the process is a valuable one that brings you closer to your dream home.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
What is the 20% rule when buying a house?
The 20% rule typically refers to the idea that a homebuyer should make a 20% down payment. This percentage allows the buyer to avoid paying for private mortgage insurance (PMI) as part of their monthly mortgage payment. It’s hard to come up with that much cash upfront, especially for first-time buyers, and it’s not unusual to see buyers put down less. In fact, eligible first-time homebuyers can purchase with as little as 3% down with some lenders. And some government-backed loans require no down payment at all.
How large a down payment do I need for a $350,000 house?
If you want to put down 20% and avoid paying for private mortgage insurance, you will need to come up with a down payment of $70,000. This may be difficult for some buyers, and it is certainly possible to put down less. Eligible buyers may be able to put down just 3.5%, which on a $350,000 house would be $12,250. And if you buy with a government loan, you may be able to avoid a down payment altogether.
What do I do now if I want to buy a house next year?
Preparing to buy a house one year from now is primarily about strengthening your financial situation. Check your credit score and practice good credit hygiene: Pay your bills on time and clear up any blemishes on your credit report. Try to pay down debt and also to save some money for a down payment and the expenses that come with a home purchase. If you have a particular neighborhood or city in mind, begin to follow listings and local news in the area.
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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.
†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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