If you’ve never bought a home, buying a home can be a daunting process.
At least it was for me.
How expensive of a house should I buy? What are my “must haves”? Do I need a real estate agent? Who should I hire as my real estate agent? What’s the process? How long is the process? When do I get the keys?
Those were the questions floating through my mind.
I’ll outline my home buying experience, but please keep in mind everybody’s is different. I am by no means an expert in buying a home. In fact, I wouldn’t even call myself a novice.
I’ve bought one house. I know people who have bought 10+ houses.
With that in mind, reading other people’s stories can be comforting and helpful.
Learn from my experience. Figure out what you like and what you would change. Make it your own.
Below are the steps I followed.
How to Buy a House
Step 1: Determine how much house you can afford
Please note that step 1 is how much house you can afford (i.e. how much you should spend) – it is not how much the bank is willing to lend.
In general, lenders won’t allow your mortgage payment to exceed 28% of your gross income or your total debt payments to exceed 36% of your gross income.
For example, if you made $50,000 per year, your annual mortgage payment could be $14,000 or about $1,167 per month.
Others say a comfortable level is borrowing up to 2.5 times your gross annual income. For example, if you make $50,000 a year, you could borrow $125,000.
Please keep in mind when a bank decides to lend money to people, their calculations take into account some people will not make payments.
You don’t want to be that person.
This is why many people suggest keeping your mortgage payment under 28% of gross income. By not borrowing the maximum, you provide yourself a cushion and flexibility should something happen in the future.
As you think through the monthly payment, you’ll need to determine how much you need to save for a down payment. There are ways to buy a home with less than 20% down, but I am going to focus on 20% down payments because you avoid private mortgage insurance (PMI) and have equity in the home that provides a cushion in case your home declines in value. For example, if you want to buy a home for $500,000, you want $125,000 available for a down payment.
In reality, you probably want closer to $150,000 to pay for mortgage closing costs, prepaying homeowners insurance, and property taxes.
Nobody says you have to put 20% down. You can put more down.
For example, if you are above 28% of your gross income, you could put more as a down payment to lower the mortgage payment below 28%.
You can also put more down to lower the monthly payment. For some people, a low monthly mortgage payment provides peace of mind. And that is perfectly okay.
It’s really important to figure out the finances before looking at homes. Don’t fall in a love with a home and then figure out how to make the finances work.
You want a realistic expectation of what you can afford in advance.
Step 2: Get preapproved
Some people will do step 3 before step 2 and that is okay. Personally, I like to get a preapproval letter before meeting with a real estate agent.
I’ve seen people start hunting for home with a real estate agent, their dream home comes on the market, and they can’t put in an offer because they don’t have their preapproval letter.
Spare yourself the potential heartache.
The preapproval will usually be good for a few months. If you don’t find a home in that time, you may need to get another.
Depending on the real estate market, a prequalification letter might work, but a preapproval letter holds more weight. You can learn more about the differences here.
Essentially, prequalification is where you provide data and the lender estimates how much you can borrow. Preapproval is where you’ll go through an application process, submit financial statements, and the lender will do a credit check. The preapproval process is more comprehensive and will help you get organized.
Before the preapproval process, you should run your credit history.
You do not need to ultimately get a mortgage from the company who preapproves you. The reason I mention this is because sometimes the lenders with the lowest rates will not do a preapproval letter.
However, ultimately getting a mortgage from the company who preapproved you will save you time because they will already have many of your documents requested through the preapproval process. If you go with a new company, you need to do their application, upload documents, and answer their questions.
During this stage, you should talk to many different lenders to know the different rates being offered. I can’t stress this enough – different lenders will have wildly different rates, meaning it is really important to shop around.
While 3% vs. 3.25% sounds small, over the life of a 30 year fixed loan, that can be a huge sum of money. For example, a $500,000 30 year fixed mortgage at 3% equates to a $2,108 monthly payment. At 3.25%, it’s $2,176.
Is it worth it spending a few hours shopping around to pay $68 a month less for 30 years?
Don’t give in to mortgage shopping fatigue.
Spending a little extra time finding the lender with the lowest rate can save you money.
Now you move on to step 3. Or, if you started with step 3 and your real estate agent has lenders they like, you can contact them as you go back to step 2.
Step 3: Find a real estate agent you trust
I was worried about finding a good real estate agent. I spoke with friends and family members.
Nobody I spoke with was energetic and positive about their real estate agent.
The most positive responses were “They were okay.” The worst responses were “I have no idea why they get paid. They didn’t do anything.”
If you have someone in your life you trust who loved their real estate agent, they should probably move to the top of your list.
I didn’t have that, so I started scouring the internet for reviews. I found two I liked and interviewed them both.
After meeting with one, I was not impressed.
After meeting with the second, I was impressed.
They were a team of agents and though I had not met the other team members, it was clearly going to be a good fit. They had a process (and I love processes!).
My partner, Molly, came with me to see the process. When we arrived, the real estate agent started by asking us questions. Who were we as people? What was important to us? What did we do? Did we have a neighborhood in mind? Were we open to exploring other neighborhoods? What was the budget? What did we want in a home? What were our must haves? What could we live without?
He gave us his background. While neither of us work in tech, they worked a lot with tech folks, which told me they know what it’s like working with younger people. They helped buy and sell many homes each year and lived all over Seattle, so they knew the ins and outs of neighborhoods and styles of homes.
We thought we knew which neighborhoods we wanted to explore, but we were open to exploring different neighborhoods.
I’ll talk about it below, but the reason our agent earned every penny of the commission is because they helped guide me while taking into account my feedback and did not let me buy a home that was not 100% what I wanted. It checked most boxes, but not every one.
Thankfully, I listened because they found an even better house I would have never found on my own.
If you find a good real estate agent, let them guide you.
Step 4: Figure out what you want
As I mentioned in my previous rent vs. buy post, I had a good idea of what I wanted. As I lived in different rental properties, I made note of what I loved and hated.
For me, I wanted 2+ bedrooms, 2+ baths, over 1,300 sq. ft., parking spot, small outdoor area, plenty of natural light, and an open kitchen into the living room.
If you don’t know what you want, go on home tours. You’ll very quickly discover what you want.
As I mentioned above, I was open to exploring different neighborhoods. They took us on neighborhood tours, showing us a few homes in each neighborhood. These were exhausting half days. We spent around 4 hours driving around Seattle to get a feel for the neighborhoods and home styles. We did this twice, and it was invaluable.
I started to finalize what I wanted. I crossed some neighborhoods off the list.
By seeing many places, I could then look at listing photos to determine if it was something I wanted to see in person. When I started, I had to see everything because I had no idea whether I would have liked it.
After seeing 15+ homes, I was discouraged. Nothing came close to what I wanted.
Our agents continued to encourage me, keeping me optimistic that something I loved would come on the market.
Finally, I found something I loved!
Except, in the backyard there were huge power lines. These weren’t normal power lines. They were extra large.
But, I loved everything else about the home. It checked all the other boxes: small outdoor space, garage, enough bedrooms, open kitchen format, and even had a little bay window Molly loved.
I was tempted to put an offer on the house. I was the most excited I had been in months of searching.
I asked our agent what he thought. He talked us through how the power lines were a huge detractor for resale and if I didn’t like them now, I wouldn’t like them later.
He said I could put an offer on it, but that he would recommend waiting for another home. He was confident something would come on the market that checked all the boxes without power lines.
I slept on it. I didn’t put an offer on it.
I was really hoping I would not regret the decision.
Step 5: Find the home and make an offer
I am very grateful I heeded the advice of my real estate agent.
The real estate agents emailed us a listing in a better neighborhood that was slightly below our square footage requirements by about 70 square feet.
However, the house had a different layout than most, which made it feel bigger than some places we saw that were 200 square feet bigger.
Finally, a house I loved. And I never would have found it without the real estate agents.
Now that we found a home, it was time to make an offer.
My agent sent me the joint maintenance agreement/HOA agreement. It basically said, take care of your property and agree with your neighbor about fixing anything shared. There were no rental caps, which meant I could rent it any time.
It was clean and simple.
You’ll want to understand if your community has a HOA and what restrictions it has.
Unlike a few years prior, homes were not selling within three days with all contingencies waived and tens of thousands over the asking price.
I decided to offer the asking price with a $5,000 escalation clause, standard contingencies (appraisal, home inspection, and financing), a slightly above average amount of earnest money, and a typical closing date of about 30 days.
The escalation clause helps if someone else offers the asking price. It meant I would pay up to $5,000 more than the asking price if someone went slightly over the asking price. I put it in there just in case someone was only willing to pay the asking price. I wanted the standard contingencies in case the home inspection revealed issues. I offered slightly more earnest money to show them I was very serious about the property.
Earnest money is a deposit you put down that becomes part of the down payment if your offer is accepted. If you back out and it’s not because of one of the contingencies, you lose it. If you back out because of one of the contingencies, you get it back. It usually is 1-2% of the purchase price, but you can do more if you are in a hot housing market.
I asked a ton of questions around the earnest money and in what scenarios I could get it back. I recommend asking questions to understand how you can back out of the deal if needed.
Don’t forget you’ll likely need 2-5% of the purchase price for closing costs, which is in addition to your offer amount.
Your agent and lender will help you stay on top of dates, but pay special attention to their instructions. For example, I had to acknowledge the HUD document by a certain date to close on time.
Once your offer is accepted, you are sprinting for 30 days.
Step 6: Submit your mortgage application
In my case, I told my loan officer the offer may be accepted, and I finished uploading the remaining documents.
If you don’t want to go with the same lender, you can reach out to the people you previously contacted to shop for the lowest rate. You’ll need to move quickly, particularly if you selected a shorter closing date.
Although you can wait, I started downloading my financial statements, past two years of tax returns, and recent pay stubs in advance. This made it easier to upload and keep the process moving.
If you are receiving a gift from a family member, be aware you’ll likely need them to sign a gift letter. The underwriters will ask about every small transaction out of the ordinary.
For example, my underwriter asked for a letter explaining a $350 deposit in my bank account, which was my dad paying me back for groceries I bought him.
I’m not sure how lenders feel about it, but during this process, I checked in with my loan officer regularly. It seems as though they are always running behind. I wanted to make sure it was moving along.
You’ll also want to line up your homeowners insurance with your existing insurance agent or shop around during this stage.
Step 7: Home inspection
My agents had a list of three home inspectors they trust. During busy times, your inspector may not be available, so you may need a back up. They lined up the home inspection for me.
Being present for the home inspection was valuable. She walked me through the issues, what is easy to fix, and what were bigger problems.
I received a report of her findings, which we used to negotiate with the sellers. The sellers did not want to fix anything, so we asked for a credit on closing.
My only regret was not asking for enough. The credit I received was not enough to fix everything in the report.
I also had a sewer inspection. It was normal, but it provided peace of mind. I know people who have spent $10,000+ on sewer repairs. If there is an issue, you want to know about it before buying the home.
If something is in the inspection you and the sellers can’t come to an agreement on, you may need to pull your offer. Otherwise, you’ll move to closing.
Step 8: Close and get the keys
If everything goes according to plan, you’ll close on time.
The title company arranges a time for you to sign the closing paperwork. Most people skim the paperwork, but I encourage you to carefully review and ensure everything is correct.
You also wire your down payment before the closing date. Wire fraud is on the rise. It’s important to call the title office to verbally confirm wiring instructions.
Once your funds are received and the papers signed, everything will go to the county for recording. It may get recorded the same day or after.
Once it’s recorded, you receive the keys!
It’s yours to do with as you want. Even though I didn’t mention it above, you may want to think about what you want to modify prior to moving in and line up the work in advance.
For example, I knew I wanted to paint, finish the floors, install new carpet, and change the kitchen counter top prior to moving. I didn’t want to live in it while the repairs were being made because I’ve heard how inconvenient it can be. Plus, I knew people who waited years to change their home only to move shortly after, so they never enjoyed the changes for themselves.
I lined up the work with the help of my real estate agent and a few weeks later, moved into what felt like a brand new home.
Others may suggest living in your home for a few months before deciding what to change. I like this thinking for larger modifications, but for things like painting, carpet, and floors, it’s easier to do it in advance.
Although it can be a whirlwind of a process, having a team behind you helps ensure your experience is a good one.
Good luck in your home buying experience!