The process of buying a home can feel intimidating, whether it’s your first real estate purchase or your third. The housing market we’ve experienced over the past several years doesn’t help either, as buyers struggle with unaffordable home prices, higher mortgage rates and limited inventory.
The key to making it less scary is to know what’s ahead and surround yourself with knowledgeable professionals who can help guide you. Here’s a step-by-step checklist for buying a house:
The housing market has been extremely volatile over the last several years. If you’re looking to buy a house, the current housing market is a major factor in your ability to make a successful offer. Before you start home shopping, take your time to learn more about what’s happening in your local market.
Jason Sorens, an economist who concentrates on real estate at the American Institute for Economic Research, sees mortgage rates falling next year, but says we could see home prices going up in some markets.
“Mortgage rates will likely go down in 2024 if inflation continues to fall, even if it takes the Fed a little while to cut interest rates,” Sorens says. “In highly regulated markets with strong demand, that’s just going to cause prices to start going up again, though.”
Some markets that built a lot of housing could see flat or declining total cost of ownership, which is the cost to purchase the property plus ongoing expenses, such as a mortgage payment, homeowners insurance, property taxes, homeowners association (HOA) fees, utilities and basic maintenance, says Sorens. These markets include Phoenix, Denver, Dallas, Houston, Atlanta and most of Florida.
An increase in housing inventory would help offset buyer demand and ease upward pressure on home prices. A lower home price decreases the total upfront cost, and it could mean a lower mortgage payment as well.
To help you narrow down your search, make a list of your wants and needs in a house and the neighborhood you prefer to live in. Visit sites like Zillow, Trulia, Redfin and Realtor.com to get an idea of the houses for sale that meet your criteria. Take a look at how much these homes cost, and consider whether it fits within your budget. If not, you may need to make some compromises or adjust your search area.
Buying a house is one of the biggest financial commitments you’ll ever make, so you’ll want to make sure your finances are solid before looking at homes.
“Navigating the current real estate market calls for a strategic financial approach,” says Matt Dunbar, senior vice president of the southeast and gulf regions with national lender Churchill Mortgage. “Homebuyers should aim to strengthen their credit profiles and ensure they have ample savings, not only for the down payment and closing costs but also with flexibility to address potential counteroffers or increase their down payment in a competitive, multiple-offer scenario.”
Understand where you stand financially. Mortgage lenders will look at your cash reserves and compare your income and debts to determine whether you can afford to make monthly mortgage payments. Lenders will also pull your credit report. Most lenders require a FICO score of 620 or higher to approve a conventional loan.
“You always want to have your finances in order,” says Dottie Herman, vice chair emerita and former CEO for Douglas Elliman Real Estate. “Check your credit and make sure all of your credit cards are paid off if you can.”
You can check your credit report for free from each of the three major credit reporting bureaus – Equifax, TransUnion and Experian – once per week at AnnualCreditReport.com. It’s a good idea to request a report from each agency and review it carefully, as there could be inconsistent or inaccurate information.
“I would encourage first-time buyers to look into the programs that may be available to them,” Herman says. “There are also FHA and veterans programs, which can cut down or eliminate your down payment.”
Reach out to local real estate agents and set up initial meetings or calls. It’s a good idea to interview a few and select the agent who fits your personality and communication style and is knowledgeable about the area where you’re looking to buy. The right agent will help educate you on the homebuying process, point out when price and expectations don’t match and offer insights that you hadn’t thought of before.
Lindsey Harn, a California-based real estate agent at Christie’s International Real Estate, recommends finding an agent who specializes in the neighborhoods where you’re looking and who can help you find properties before they hit the open market.
Contact potential lenders to get preapproved for a mortgage. “Don’t just get prequalified, get fully approved so you are a more competitive buyer,” Harn says. This is also the first opportunity to tap your real estate agent for advice and guidance on which lenders may have loan programs that will benefit you.
Prequalification is more like a rough estimate of what you can borrow, but a mortgage preapproval is an in-depth process where a lender will verify financial information – W-2s, tax returns, pay stubs, assets, credit – to determine what loans you could be approved for, the amount you can borrow and what your interest rate could be. This can help youfigure out what you can afford and gives sellers the idea that you’re serious about the financial commitment.
A strong credit history and financial profile is especially important in times of economic uncertainty because lenders aren’t as willing to take on borrowers with a higher risk of defaulting on the loan.
Your real estate agent will likely present you with listings that meet your budget and needs, and also encourage you to look online for other homes you may be interested in. Most buyers prefer in-person tours, but you can also get a virtual tour if you can’t or don’t want to visit the property.
The real estate market typically slows down at the end of the year and picks back up again in the spring, but Herman says don’t wait.
“Get out and start looking early, ahead of the competition,” Herman says. “When prices start to drop, more buyers will start to come out. When you are out in the cold in January or February looking at houses, your competition will be at home drinking hot chocolate in front of the fireplace.”
Once you’ve found the house you’d like to call home, it’s time to have a conversation with your agent about making an offer.
“Prospective buyers should be ready to make compelling offers that reflect both the market value and their personal valuation of the property,” Dunbar says. “This approach increases the likelihood of their offer standing out in a bidding war.”
Review the sale price of similar homes in the area that sold recently to help you determine how much you feel the home is worth. Your agent can put together a list of real estate comparables, or comps, which shows how much buyers paid for similar, recently sold properties in the same area. This can give you a better idea of how much you should offer.
When you submit your offer, the seller has three options: accept, reject or counter the offer. During the pandemic, sellers had the upper hand, and buyers couldn’t afford to negotiate. But today, the market is a little more balanced.
“Buyers currently hold more bargaining power compared to the intense conditions of the COVID market,” says Joseph Castillo, a team member of The Barnett-Bittencourt Team in New York City. “How effectively you can negotiate depends on the seller’s motivation to sell.”
Buyers have more room to negotiate to make the most out of their budget, but Castillo says the outcome depends on the pricing of the listings, particularly those that are overpriced.
Harn has also seen more buyer negotiations lately, but this could change if rates go down. “Buyers will likely have a little bit more negotiating power – as long as the interest rates stay high. Once rates go back down, the negotiating power may diminish,” Harn says. “We are seeing sellers consider sale contingency offers, and more open-minded to repairs than they were in 2020-2022.”
Once your offer is accepted, you’ll deposit earnest money with a third party, such as a law firm, title company or real estate broker, which is held in escrow until closing and applied to your down payment or closing costs. Earnest money is known as a good faith deposit, generally 1% to 5% of a home’s purchase price, and shows you’re a serious buyer.
With the deal pending, it’s time to get moving with the due diligence process – part of which is the home inspection. A home inspection is a visual assessment of the home’s condition by a licensed inspector, and their findings can help buyers make a more informed decision.
If your purchase offer includes a home inspection contingency, you could negotiate repairs or walk away from the sale altogether.
When you go under contract, you’ll want to submit your mortgage application as soon as possible. Shop around and compare mortgage offerings to find a lender that best suits your needs. Your lender will give you an estimate of how much you can qualify for and your interest rate.
Your lender may also offer a mortgage rate lock once you’re preapproved, which is typically available for up to 60 days or sometimes longer. A rate lock is a great idea when rates could rise, but if rates drop, you can’t just switch to the lower interest rate.
Some experts see mortgage rates dropping in 2024. “I believe mortgage rates will decrease, possibly reaching the 6% range, making homeownership more accessible to a broader audience,” Castillo says. “This shift has a notable impact on sellers, as it levels the playing field between all-cash buyers and those relying on financing.”
Your lender will typically require an appraisal of the property to ensure the determined sale price matches the market value of the property. The appraisal often figures into the total closing costs of a home.
A couple of days before closing, you’ll complete a final walk-through of the property, which allows you to check and make sure it’s still in good condition.
The closing itself is fairly straightforward and requires signatures noting the transfer of ownership. You may sign documents in person with a representative from your title insurance company or with e-signatures if they are allowed, depending on your state.
Once you have the keys in hand, you’re now the owner of a new home. “In any market, I offer the same tip, especially to a first-time buyer – if you see a house you absolutely love, buy it. You can always refinance down the road,” Herman says.
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