Home Buying Process: Ten Major Steps to Buying a House

Step 1: Save for a down payment

For most Americans, buying a home starts with saving for a down payment. The down payment is a percentage of the home’s total market value. It is paid as a lump sum when you close on the home. If you plan on applying for a mortgage loan, you will need to pay a portion of the home’s purchase price up front. The mortgage will cover the rest of the purchase price and any other costs associated with the transaction, including closing costs and the loan origination fee. The size of the down payment varies based on the location of the home, the purchase price and the lender’s requirements.

FHA loans require a down payment of just 3.5%. However, if your down payment represents less than 20% of the home’s purchase price, you will need to pay for private mortgage insurance, which will increase the cost of your monthly payment.

The more you put towards the down payment, the less you will need to borrow to purchase the home, which means taking on less debt. This reduces the total amount of the mortgage loan, so you don’t have to pay as much in interest over the life of the loan.

You’ll need a down payment of at least 3.5% when using an FHA loan. For example, if the purchase price of the home is $350,000, the down payment must be at least $12,250.

Figure out how much you can afford to spend on a home based on the size of the required monthly payment and the estimated monthly payment. Consider holding off until you have more money in savings to reduce your borrowing costs.

Step 2: Choose the right time to buy a house

Be strategic in terms of when you decide to buy a home to save money over the long term. The housing market can be unpredictable with home prices rising and falling based on supply and demand. If real estate prices in your area are increasing, you may want to buy a home sooner rather than later.

Interest rates will also rise and fall based on inflation and economic conditions. The Federal Reserve will increase interest rates when inflation is high to reduce demand for products and services. Consider adjusting your timing based on the average interest rate for different types of mortgage loans. You may want to strike when interest rates are low or hold off on purchasing a home when rates are high to reduce the size of your monthly payment.

If you decide to buy a home when interest rates are high, you can refinance the mortgage when they go down in the future.

Step 3: Get pre-approved for a loan

When you are buying a home, it’s tempting to start looking at houses first. However, unless you have enough cash on hand to pay for the home outright, you will need to determine if you can qualify for a home loan by getting pre-approved for a loan, which is the last step to take before starting the process of looking for a new home. A lender will be able to help you determine the price range you qualify for, required down payment and monthly payments. Note: You can estimate your payment by using our Mortgage Payment Calculator.

Keep in mind that to get pre-approved, you will need to provide important and sensitive information, such as your social security number(s), past tax returns, employment status, pay stubs, bank statements, income details and monthly expenses. Depending on the type of loan program, there may be other items required.

Additionally, the lender will run your credit report using your social security number and will review your credit score. Your credit score will play a factor in your ability to qualify, as well as the interest rate you will be offered. You can learn more about credit scores in our "What is a Good Credit Score?" article.

A debt-to-income ratio is also used to determine your ability to qualify, which is a calculation of your monthly debt payments divided by your monthly income. Therefore, be sure to provide to your lender any additional income or expenses that may not appear obvious, such as child support. Also, you should avoid making any large purchases during the home-buying process. Financing a new car or getting a new credit card can negatively affect your ability to qualify.

Your lender will give you a prequalification letter that will be used when you make an offer on a house. It indicates that you have spoken with a lender and that you pre-qualify for a home loan, based on the information provided. This letter is typically required before making any offers, so you should be prequalified for a loan before you start looking at houses. However, this letter does not guarantee full loan approval, and that further documentation and other factors are considered before being fully approved.

Step 4: Hire a buyer’s agent

This step is one you might take before getting pre-qualified or shortly after. When purchasing a home, a buyer’s agent can guide you through the entire process. For example, a buyer’s agent can help ensure that the paperwork, including the purchase contract and necessary addendums, is completed properly. Also, a buyer’s agent can make sure that everything included in the paperwork represents your best interests and will negotiate on your behalf. Therefore, you won’t have to worry that you might have missed an important step in the process and can feel more confident in the agreed upon purchase price.

The buyer’s agent will also coordinate with the other professionals involved in the transaction, such as the seller’s agent, home inspector and title company, to name a few. In the majority of home purchases, buyer’s agents’ commissions are paid for by the sellers. It is in your best interest to hire a buyer’s agent since the seller is paying for you to be represented with your own.

Step 5: Hire the right real estate agent

It’s typically best to hire a real estate agent when navigating the home buying process. This person will interact with the seller on your behalf and advocate for your needs every step of the way. Buying a home can be time consuming and confusing for many consumers. It also usually requires a lot of back and forth with the seller and their real estate agent. 

The agent will handle the correspondence, so you can focus on the move and getting your financial information in order. They will walk you through every step of the process to increase your chances of closing on the home. Real estate agents are also unbiased. They will give you an honest opinion in terms of the value of the home based on local properties values, so you don’t get taken for a ride.

Step 6: View homes that meet your criteria

One of the biggest factors when considering homes to view—other than the price range—is the location. You will need to determine what neighborhoods fit your family’s needs.

Before looking at homes, you should create a list of “musts” and “wants” for your new home. “Musts” are things that you absolutely must have in your new home. For example, you may need a certain number of bedrooms or bathrooms or require a three-car garage. Your list of “wants” is different. Those are the things you would like but are not considered deal breakers, such as window coverings or a certain type of countertop. Bring both of these lists with you when you view homes for your reference.

If you are working with a buyer’s agent, he or she will most likely use the Multiple Listing Service (MLS) to search and filter available homes based on your criteria. The MLS provides agents with access to almost all the homes that are listed for sale by other licensed agents. Even if you are not working with a buyer’s agent, there are plenty of platforms you can use to identify homes that meet your criteria, such as Redfin and Realtor.com.

Step 7: Make an offer

Once you have viewed homes and identified the one that is best for you, it’s time to make an offer. The amount offered is typically based not only on the sales price but also on comparable sales in the area. There might be other terms you want to include in your offer, and you will need to determine a closing date. If you are getting a home loan, it will take about 30 to 60 days to complete the loan process, so you must take this timeframe into account when choosing the close of escrow date. Keep in mind that the seller might counter your offer, so there could be some further negotiating before you have an accepted contract. Sometimes you will find a multiple offer situation, which your agent will help guide you through.

After your offer is accepted, escrow will be opened by a title company, which is a neutral third party responsible for handling all monies involved in the transaction, such as earnest money, down payments, and funds required to close on the home. Earnest money is a good faith deposit that shows your intent to purchase the home. The amount you will deposit is based on the terms of the purchase contract. The title company will start the closing process, including ordering loan payoffs, tax information, homeowner fees and other documentation that will be needed to complete the transaction.

Step 8: Get an inspection & appraisal

Obtaining a home inspection is recommended in the home buying process because it will identify issues related to the property that might need attention. For example, a home inspector might identify structural problems, a damaged roof, a non-working air conditioner or previous water damage, to name a few issues. If problems are discovered, you have a few options. You can choose to cancel the contract, request that the seller repairs the problems or ask for a credit towards the repairs, which will be subject to your lender’s approval. Of course, you can always choose to accept the home as is.

If you are getting a loan to buy the home, you must get an appraisal of the property. An appraisal is a written report that justifies the value of the property and will be used by the lender to ensure the purchase price is not more than the value needed to secure financing. The lender will not loan you more money than the home is worth. To determine the value, the appraiser will visit the home and also analyze other comparable properties in the area that have sold.

Step 9: Get final approval on your loan & sign documents

As your loan moves from pre-qualification to final approval, be prepared to provide paperwork to support your income, assets, debts and employment. Typically, you will be required to show recent pay stubs and bank statements, as well as tax returns. The lender may also verify your employment. Don’t be surprised if you are asked for other documentation along the way.

Your application and paperwork will be reviewed by an underwriter who works for the lender. The underwriter may require you to provide additional paperwork before giving the loan a final approval. Your lender may run another credit check and verify your employment prior to your closing. It’s important to not make any major changes to your financial situation before closing, such as buying a car or increasing credit card debt, as it can disqualify you for the home loan.

Once the underwriter signs off on the loan, the final loan documents will be prepared for you to sign at closing. At this time, you will be required to pay your closing cost fees and down payment, which can typically be wired to the escrow agent or paid via cashier’s check. The seller will also be required to sign documents to close escrows.

Step 10: Close on your new home

Within a few days of closing, you will be given the opportunity to do a final walk-through of the property. This walk-through is your chance to make sure everything is working properly and that any repairs required of the seller have been completed. Don’t forgo the final walk-through. You don’t want to take ownership of your new home only to discover that there has been fire damage or vandalism before the close of escrow. In other words, ensure the property is as it was when you put in your offer to purchase.

After all closing documents have been signed and the funds have been given to close, the only thing left is to wait for the loan to fund and record. As soon as this is done, you should be able to get the keys to your new home. Congratulations because you are now a new homeowner!