THE BROKEN WALLET

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How to buy a house in 2023 (10 things you absolutely need to know)

Buying a home is an exciting milestone—and for many, it’s the ultimate goal. 

But if you walk into a home purchase with zero home buying experience, and no clue on what to expect, the process can be intimidating (to say the least). 

Knowledge is your best weapon to prepare, remove fears, and feel more confident about buying a home. 

So whether you’re thinking about purchasing a home this year—or in a few years—here’s a look at 10 steps to buying a home.

1. Research the Local Real Estate Market

Home prices vary from state to state and even city to city, so it’s important to have a general understanding of your local market. 

In other words: What can you expect to pay for a house in a particular city?

Some people underestimate the price of homes in their area. In their minds, they can get a starter home for $100,000. But in reality, homes in their area haven’t been priced this low for more than a decade (or longer). 

Researching the market, however, provides insight on what you can realistically expect to spend on different types of properties—single-family homes, condos, townhouses, etc. 

Finding this information is relatively simple, too. The easiest approach is to check prices on Zillow or a similar website. You can find prices for homes currently for sale and for recently sold homes in a particular neighborhood.

2. Check Your Credit

Sadly, some homebuyers don’t give their credit any thought until it’s time to apply for a mortgage loan. But it’s important to know where you stand credit-wise BEFORE applying for a loan. 

Errors or other unknown issues with your credit history (such as a low credit score) can delay or prevent a home purchase. The truth is, your credit score might not be as high as you think. 

Do you know that you typically need a minimum credit score of 620 for a conventional loan, and a minimum credit score of 580 for most FHA home loans?

Additionally, do you know that most mortgage programs rely heavily on your past 12 months of payment history? If you have more than one late payment within the last 12 months, you might not qualify for a loan. 

Always, always, always check your own credit before applying for a mortgage, preferably 6 to 12 months in advance. Checking your own credit doesn’t hurt your score, and you can get your free reports from AnnualCreditReport.com. 

3. Use a Mortgage Calculator

Even though a mortgage calculator can’t determine your exact qualifying amount (only a lender can do that), it can help you gauge whether you’re likely to afford a specific purchase price.

Some mortgage calculators are more sophisticated than others, so I recommend finding a calculator that factors in purchase price, term, interest rate, down payment, homeowners insurance, property taxes, and mortgage insurance. This information provides a better estimation of affordability.

For example, after inputting a few details a mortgage calculator might estimate a monthly payment of $1,300 on a purchase price of $230,000. If you can’t afford this monthly payment, you’ll likely need to consider cheaper homes.

But again, these calculators aren’t an exact science. They only provide clues regarding affordability.

4. Learn About Mortgage Programs

Yes, your loan officer will provide mortgage options. But don’t rely on your loan officer to educate you on every aspect of each mortgage program. Do your own homework, too. 

If you’re somewhat familiar with different programs and their minimum requirements BEFORE meeting with a loan officer, you’re in a better position to choose the right mortgage for your situation.

5. Save Your Money

Buying a home is expensive—no question about it. 

Most mortgage programs require minimum down payments ranging from 3% to 5% of the sale price. Plus, you’re responsible for paying closing costs, which can range another 2% to 5% of the loan amount. So the more available cash you have, the better. 

Using a mortgage calculator early in the process is also beneficial with regard to saving money. Since these calculators estimate how much you’re likely to afford, you can use them to gauge how much you need to save.

6. Maintain Your Credit

It isn’t enough to check your credit history before applying for a mortgage. You also need to maintain your credit score. 

If your future plans include buying a home, hold off on financing new purchases like a car or furniture. You should also avoid new credit card debt. 

If you use a credit card, pay off your balance in full every month. Too much debt increases your debt-to-income ratio, which is the percentage of your monthly gross income that goes toward debt repayment. 

A high ratio can reduce your purchasing power. Plus, too much credit card debt can lower your credit score, resulting in a higher mortgage rate.

7. Get Pre-Approved for a Mortgage

Once you’re ready to purchase, contact a mortgage lender to get pre-approved for a home loan. This way, you know what you can afford before starting the home search. 

A pre-approval involves submitting income statements to the bank, authorizing a credit check, and providing the bank with supporting documentation. 

The lender reviews this information and then determines how much you can spend on a home purchase. From here, you can start shopping for a property. 

Understand, though, a pre-approval doesn’t guarantee closing. Significant negative changes to your credit or income AFTER getting pre-approved can jeopardize the mortgage. So once you’re pre-approved, don’t quit your job, and please, don’t add new debt.

As a rule of thumb, get mortgage quotes from at least three different lenders to compare rates and terms. Ideally, you should rate shop within a 14-day window.

8. Find a Real Estate Agent

There’s no rule that says you must use a real estate agent when buying a home. However, using an agent only serves to your advantage. 

You need someone on your side to negotiate the sale. 

Don’t rely on the seller’s agent to offer help. Sure, they might answer some of your questions. But at the end of the day, they’re here to serve the best interest of their client—not you. 

Hire your own agent—someone who’s experienced, competent, and professional. Get recommendations from friends or family, and check out online reviews.

9. Make an Offer

Once you find a property, the next step is to submit an offer. Your agent can help write up the purchase agreement. 

Here, you’ll state how much you’re willing to pay for the home, and you can also include contingencies. These are conditions that must be met in order to finalize the sale. 

Making a home purchase contingent on a satisfactory home inspection is common and expected. You can add other contingencies to your offer, too. Just know that “too many” contingencies might turn off the seller, so be reasonable. 

If you’re working with a motivated seller and you’re the only offer, they might accept a long list of contingencies. But if the seller receives other offers—some without contingencies—they’re likely to select another buyer.

10. Closing

It takes about 30 to 60 days to close on a mortgage, and a lot occurs between getting your offer accepted and closing. You’ll likely have a home inspection, your lender will schedule an appraisal, and other stuff happens behind the scenes to complete the transfer of property.

You’re not at the finish line yet, so again, don’t make any changes to your income or credit. Your lender will re-check your credit about 1 to 2 days before closing. 

If the home appraisal comes back on target, your credit history and income remains the same, and you don’t encounter any other property issues, the final step is closing. This is where you’ll sign the mortgage loan documents and get the keys to your home.