The real estate industry has undergone significant disruption within the last 10 years. From searching for listings online to the emergence of the iBuyer, technology has vastly improved the options we have for buying and selling a home.
Having more options, however, doesn’t always make it easier to figure out how to buy a house. We’ll walk through the key steps of the home-buying process, from starting your search to securing financing, A real estate attorney can assist you with property ownership disputes.
Here’s what we’ll cover:
- Step 1: Identify what you want in a home
- Step 2: Choose how you want to buy a home
- Step 3: Determine how much you can afford
- Step 4: Research your financing options
- Step 5: Make an offer
- Step 6: Conduct a home inspection
- Step 7: Arrange a home appraisal
- Step 8: Sign the paperwork and close the deal
1. Identify what you want in a home
You’ve probably been daydreaming about your ideal home for years, but keep in mind, your needs can change. According to Bankrate, it takes about five years to build enough equity to offset the costs of buying a home so it’s safe to plan for the long-term.
Think about how your needs might evolve over time, are you downsizing? Planning for a family? Are you moving to be closer to work?
We put together a checklist of some of the criteria to consider. There’s no perfect home. Finding the right home is about making the right trade-offs.
- Property typeEach different property type—single-family home, condo, townhome—varies in size and amenities. For example, with a condo you might have a more communal feel with shared facilities, but that could come with an HOA fee. Single-family homes can come with more space and no HOA, but they often require more maintenance.
- SizeNot all square footage is created equally. You may have a target size in mind, but a home’s layout can dramatically affect how large or small it feels and how functional it can be.This is also where it pays off to think long-term. Do you plan on starting a family? Kids going off to college soon? Is retirement on the horizon? Imagine the size home you will need in the next 10 years and adjust from there.
- ConditionSome people say you should buy the worst home on the best block. Others only want new construction. It’s wise to set your threshold for a home’s condition before you start shopping and decide how long you can live with an outdated kitchen or poorly landscaped back-yard. How much time, effort, and funds do you want to dedicate after you move in?
- SchoolsSchool district quality tops the list of location considerations for many buyers. Even if you don’t have school-aged children, it can still pay off to consider local public school ratings. Study after study has shown that homes in a highly-ranked school district command a higher resale value.
- CommuteThe typical American’s average commute is 26.9 minutes each way, according to the U.S. Census Bureau, and this number is much higher in major metros like Los Angeles and Washington D.C. Decide how long of a commute you’re willing to tolerate and try to limit your search within that radius.Don’t forget to add up how much you’ll spend on your commute. You might find that a higher mortgage payment for a home closer to work is actually more cost effective.
- NeighborhoodThis one is a little more difficult to calculate but perhaps the most important of all: would you like living there? Ask yourself what you truly value about your lifestyle. Do you want to be able to walk to the grocery store? Are you a get-to-know-the-neighbors type person? Can the location support your family’s activities and interests?
If you can, spend time in your prospective neighborhood to decide if it’s right for you.
Talk to friends and family about your move. Stick to your values, but keep an open mind. Buying a home is a big decision, and it’s not easy to reverse.
→ Learn how buying a home with Opendoor simplifies the process and gives you more options.
2. Choose how you want to buy a home
As more information becomes available to home buyers online, it’s now easier to navigate the process on your own. Some people want a do-it-yourself experience, while others are happy to pay extra in commissions for more support.
Here are the general steps of buying a home and how a new wave of real estate companies, often termed iBuyers, are offering an alternative to the traditional process:
- Select the level of support you needAfter some casual shopping, the first step for many buyers is to find a real estate agent. Not familiar with commissions? Here’s how agent commissions are paid.Alternatively you could find a home you like and work directly with a company like Opendoor to save on commissions. You can choose from buying directly from us, buying with an agent you’re working with, or we can refer you to a top local agent in your area.
- Start touring homesIn the traditional process, once you’ve connected with an agent, they act on your behalf, beginning first with contacting sellers’ agents to arrange home tours.
- If you’re working with Opendoor, you can view one of our homes between 6am and 9pm, any day of the week. There’s no need to schedule an appointment, just use our app to unlock the front door.
- Make an offerOnce you find a home you’d like to purchase, you’ll typically consult with your agent on how to make a competitive offer. Your agent will then submit each offer in writing to the seller’s agent, whose responsibility it is to share the offer with the seller.Once the seller reviews the offer, they will either accept or counter the offer, either by further negotiating the offer price, rejecting proposed terms for the deal, or both.If you’re working with Opendoor, you can make an offer on a home using our app or your agent can submit an offer on your behalf. Here’s how buying a home from Opendoor works.
- Inspection and appraisalAfter an agreement is reached an inspection and appraisal are both performed, at which point more negotiations can take place. For example, if major defects are uncovered or if the appraisal comes in too low and the bank refuses to fund the loan, you may need to adjust your offer or consider exiting the deal.An inspection and appraisal are standard procedure no matter how you decide to buy. One of the benefits of buying an Opendoor home is if you missed something in the inspection or you just aren’t in love with your new home, you get a 30-day satisfaction guarantee.
- Close and get the keysOnce all of the terms are settled and everyone has come to an agreement, the home enters escrow, typically for 30 days. During this period, an escrow company holds the buyer’s deposit as well as the deed to the house until all of the steps outlined in the purchase agreement are completed. This is where the proper legal documents and transaction records are signed.Finally at the end of escrow, the keys are exchanged and the deal closes.This process is typically the same no matter how you choose to buy a home. However, if you work with Opendoor, you can line up your buying and selling timeline. This way you can avoid the costs of temporary housing costs or staying in your inlaws’ basement between moves. Learn more about trading in.When thinking about how you want to buy a home, consider the amount of time and effort you want to devote to the process. How much flexibility and support do you need? Whether you choose to go the traditional route or work directly with a company, you have options.
→ Haven’t heard of Opendoor? Learn how we make home buying easier.
3. Determine how much home you can afford
While determining your budget is the logical first step in the home-buying process, most people will probably start with the home search.
There’s nothing wrong with a little online window shopping, but keep in mind, the home price is just the beginning of setting your budget.
Home buyers by the numbers
- 33% — Percentage of first-time homebuyers
- $250,000 — Median home sale price
- $91,600 — Median household income
- 13% — Median down payment
- 46 — Homebuyer median age
- 10 — Number of weeks for the typical home search
- 10 — Number of homes toured before making a purchase
Source: 2018 National Association of Realtors (NAR), Profile of Home Buyers and Sellers
Unless you’re paying all cash, you will be financing your home purchase with a mortgage. This means that the amount you are able to safely borrow will determine the price of the home you can buy, and not the other way around.
You may be aware of the 28/36 rule, which says you should spend no more than 28% of your monthly gross income on housing costs. But when it comes to qualifying for a mortgage, lenders focus on more than just your income. They also look at how much you spend each month servicing your debts. Most lenders consider a 36% debt-to-income (DTI) ratio to be acceptable, while some will accept a higher DTI if you have a large amount of cash savings or a stellar credit score.
By calculating your current DTI you can get a good idea of how much you can afford each month for your mortgage payment, and therefore how much you can afford to borrow. Remember, the more you have saved toward your down payment, the more home you will be able to purchase.
Use our mortgage calculator to understand your costs and estimate your monthly payment.
A typical dept-to-income scenario
- The median household income in the U.S. as of 2017 was $61,372 according to the Census Bureau
- Average credit card debt per household of $8,788, according to WalletHub, means a minimum monthly payment of $219.70.
- Average monthly car payment for a new vehicle is $523, according to Experian.
- With a DTI of 36%, most lenders would consider a mortgage payment of $1098 per month, or a mortgage for $180,222 at 4.5% interest to be affordable.
4. Research your financing options
Now that you have a working idea of the home you can afford, you’re ready to explore your financing options. You’ll want to speak with a licensed mortgage professional to understand exactly what you can qualify for, but we’ll get you started with a basic primer on the typical options.
Conventional vs. government-backed
In the world of mortgages there are two main types of loans: conventional and government-backed or insured. Each has its own benefits and potential drawbacks, and each comes with a set of qualifying standards.
Government-backed loans, like an FHA loan, are not loans made by the government. Rather, they are guaranteed by the government, so in case a borrower is unable to make the payments, the U.S. government pays the lender for the balance of the loan after foreclosure. This guarantee makes lending to lower income individuals, people with moderate credit history, and/or with down payments as low as 3.5% less risky for banks.
Conventional loans come with no guarantee, which is why they often have higher qualifying standards than government-backed loans. If you have a solid credit score and a 20% down payment, taking a conventional loan means you avoid paying additional fees that come standard with an FHA loan.
The FHA also sets limits on the loan term and the amount you can borrow, so in some cases an FHA loan may not even be an option. Get all the details about this government-insured mortgage in our guide “What is an FHA loan and how does it work?“.
Here are the basics of each:
|Credit Score Requirements
||Minimum of 620
||Minimum of 500
|Minimum Down Payment Requirements
||As low as 3%, but typically 5% to 20%
||3.5% for credit scores of 580 or higher; 10% for credit scores of 500-579
|Debt-to-Income Ratio Requirements
||Typically up to 36%
||Typically maximum 43%
||Appraisal fees, title insurance, homeowners insurance, etc.
||All standard fees, plus higher appraisal fee and upfront mortgage insurance premium of 1.75%
|Loan Limits (2019)
||Usually $484,350 to $726,525 *
||Usually $314,827 to $726,525 **
* For one-unit properties. Actual loan limit
depends on the county. Higher limit requires a jumbo loan at additional cost
** For one-unit properties, depending on the county
Sources: U.S. News and World Report; Investopedia; Fannie Mae; The Mortgage Reports; Federal Housing Finance Agency (FHFA); Department of Housing and Urban Development (HUD)
Aside from choosing a loan type, other options to consider include the term of the loan—15-year versus 30-year—and the interest structure–fixed-rate (FRM) versus adjustable rate (ARM). A 30-year FRM is the most common because the payments can be lower, and they do not change over the course of the loan.
Monthly payments on a 15-year loan will likely be higher than with a 30-year mortgage, but since the loan is paid off faster you will pay less interest overall and could save thousands. An ARM is a popular loan used by investors and buyers who do not plan to own the home long-term. The interest rate for an ARM is typically much lower than with an FRM during the introductory period, which often lasts for five years depending on the type of ARM you choose. After the initial period, your rate will likely increase.
5. Make an offer
Landing on an offer amount is only the first step in the process and must be weighed along with the other contingencies and concessions you plan to ask for.
These are a few of the other key components to making an offer that you’ll want to consider:
- What contingencies do you need?Depending on your circumstances, you may need to include proposed terms for the contract as part of your offer. For instance, if you also need to sell your current home and have opted to buy and sell the traditional way, you may need to ask for a home sale contingency, which allows you to back out of your purchase offer in the event you can’t sell your current home at your desired price.
- What contingencies are you willing to accept from the seller?Likewise, the seller may counter your offer with certain terms and you’ll need to decide if they are acceptable. For instance, a seller who is also looking to purchase a home, which is often the case, may ask to lease their home back from you after the sale for a period of time while they search for the home they want to buy.
- How do you plan to compete?In markets with high competition, some home buyers employ different tactics to make their offer more competitive. Removing contingencies is a popular way to sweeten the deal for sellers. The more straightforward your offer, the more attractive it can be. The appeal to emotion is yet another tactic. A heartfelt offer letter or even offer video could set you apart from the pack.
Of course there’s also the question of how to submit the offer. When buying a home the traditional way, you or your real estate agent will likely send a written offer to the seller’s agent, who will then review the offer with the seller.
6. Conduct a home inspection
No guide on buying a house would be complete without mention of the all-important home inspection. Even though your offer has been accepted and you have entered into a purchase agreement with a seller, you still need to complete this crucial step before closing the deal.
Prior to entering into the purchase agreement, home sellers are required to disclose any and all known issues with the property. However, there are many potential flaws or required repairs that the seller might not be aware of, such as a cracked foundation or mold in the attic.
Unless you choose to waive it, most purchase agreements will include an inspection contingency. This means if any defects or required repairs arise from the inspection you can request that the seller cover the costs of the repairs. In some cases, if both parties can’t agree on who will be responsible for the repairs, you may be able to cancel the contract.
7. Arrange a home appraisal
When you take out a mortgage, the loan is secured by the value of the property. Banks are not likely to fund a loan for more than a home is worth.
To ensure the home is worth at least as much as they are lending, mortgage lenders will arrange for a home appraisal before they disperse the funds to the seller. If the appraisal comes in low and the bank refuses to fund the full amount necessary to satisfy the agreement, you have one of two options: cover the remaining amount with cash or request that the seller lower the purchase price to seal the deal.
This tends to be more of a problem in highly competitive housing markets where buyers engage in bidding wars, escalating the final sale price to astronomical highs.
8. Sign the paperwork and close the deal
Once the contract is signed, you are now ready to enter escrow. This means that funds like the buyers’ deposit, their down payment, and other loan funds, go into a neutral account while all of the necessary paperwork is processed.
Once everything is signed, sealed, and delivered, the escrow company then disburses the funds to the seller and to any other party who is owed a fee, including any real estate agents involved in the sale.
It’s important to keep closing costs in mind before you make an offer on a home since they can typically range from 1-3%f the purchase price and may affect how you set your home buying budget.
Preparing for this process in advance can go a long way in reducing surprises and eliminating stress. For many people, buying a home is one of the biggest purchases they make in a lifetime.
While it’s important to establish what you’re looking for in a home and what tradeoffs you’re willing to make, don’t get too attached to any option before determining how much you can afford.
Now that so much of the process can be done online, from discovering and touring homes to making an offer, consider how much support and flexibility you need. Companies like Opendoor are reimagining the experience and giving buyers more options to navigate a process that’s been relatively unchanged for decades.