The Process of Buying a House – Step by Step

The home buying process can be a lengthy one, and there are many steps along the way. Additionally, the process varies from one buyer to another, based on many factors.

But with that being said, the process of buying a house is also pretty straightforward. And understanding how it all works is the first step to success. So in this article, I’ll give you a step-by-step guide to the house buying process, as it usually unfolds.

Step 1 – Examine Your Finances

If you’re like most people, you’ll need to take out a mortgage loan to pay for your house. You can rest assured that a mortgage lender will put your finances under the microscope. They will examine every aspect of your financial history, your current income, your debt and more. This is part of the standard qualification process a borrower must go through. You can expedite your real estate transaction and eliminate surprises by conducting a financial self-examination of your own.

This should be one of the first steps in the process of buying a house, because you might need the extra lead time to make any necessary changes. For example, if you find out that your credit score is lower than average, you’ll need to focus your effort on improving that. The same goes for your debt. If you find that your debt-to-income ratio is less than ideal, you’ll want to pay your debt down as much as possible before applying for a loan. That’s why you need to examine your financial situation early on in the house buying process — it could take time to improve it.

Here are some of the things you should focus on during this process:

• Obtain your credit reports and scores from all three reporting bureaus (Experian, TransUnion and Equifax).
• Make sure there are not errors in your credit reports. This can lower your credit score.
• If your score is below 700 or so, you should improve it as much as possible before moving forward.
• Use a debt-to-income ratio to see if your overall debt is too high compare to your income (more than 20%).
• Start saving cash. The more the better. You’ll need it for a down payment, and also for closing costs.
• Determine your home buying budget. Use online mortgage calculators to help with this process.

For best results, you should take these actions as soon as possible. If you get further into the house buying process and find that your credit score needs works (other some other unpleasant surprise), you’ll end up delaying the process even more.

Step 2 – Get Pre-Qualified for a Mortgage Loan

Don’t mistake this for being pre-approved, as many home buyers do. Though they are similar, pre-qualification and pre-approval are two different things. Getting pre-qualified for a mortgage loan is optional, but it’s worth your time. Through this process, a mortgage lender will take a look at your basic finances and give you a ballpark figure they might qualify you for, later on. It’s not as thorough as the pre-approval process, in which the lender puts your finances under the microscope, but pre-qualification still gives you a general idea of how much you can borrow.

I’d also like to stress that a mortgage lender cannot tell you what you can afford. All they can do is tell you what they’re willing to loan you. It’s up to you to determine your home buying budget and your affordability range — it’s not up to the lender.

Step 3 – Hire a Real Estate Agent

This step is also optional. Some people to choose to buy a home without the help of a real estate agent. But if you’re new to the process of buying a house, or if you’re buying in a new area you’re not familiar with, I recommend getting professional help with the process. An agent can help you in many ways during the process — finding a home, evaluating the price, making an offer, negotiating with sellers, etc.

Step 4 – Start House Hunting

For most people, this is the most exciting part of the house buying process, and also the most fun. This is when you start visiting homes to see how they stack up against your needs and wants. The Internet can save you a lot of time and energy during the house hunting process. Your agent will also help you a lot in this process.

At the time this article was published (March 2009), it was a buyer’s market in most U.S. cities. There’s a lot of inventory right now, but a shortage of qualified home buyers. So you should have plenty of choices in terms of housing.

Step 5 – Make an Offer

If you go through the steps outlined above, you’ll eventually have your eye on a home that falls within your budget. Next, you need to evaluate the seller’s asking price and make a reasonable offer. Remember, it’s called an “asking price” for a reason. It’s not necessarily a realistic price. So you need to evaluate the price against recent sales in the area. This is another area where your agent will help you.

Step 6 – Home Inspections

Once the seller accepts your offer, and you’ve put down your earnest money deposit and signed the contract, you have entered the escrow process. Now it’s time to have the house inspected by a licensed home inspector. This is a critical part of the house buying process, because it lets you know the overall condition of the home / investment you’re about to make. For this reason, you should also make the purchase agreement contingent upon a successful home inspection. If the inspector uncovers something you’re unwilling to accept (like serious foundation damage), you need a contingency to help you get out of the contract.

Step 7 – Closing / Settlement

This process goes by different names, depending on the state where you reside. It can be referred to as closing or settlement, but the process is the same. This is the part of the house buying process where all the paperwork is signed, and all of the various fees are paid. This is also when the keys are handed from the seller to the buyer.

We will be expanding on all of these topics in the coming weeks. As we do, the bolded headers above will turn into hyperlinks. You’ll be able to click on each link for an in-depth explanation. In the meantime, if you’d like to learn more about the process of buying a house, we recommend visiting the Home Buying Institute.