Buying a house is one of the biggest steps you can take in your life. But it’s one you want to take carefully because becoming a homeowner has significant long-term financial consequences.
Before you contact lenders or look at houses, organize your finances.
The true cost of a home includes several ongoing factors, all of which you want to account for when figuring out how much home you can afford.
Tip #1: Decide where you want to live. You don’t want to find your dream house in a neighborhood you don’t like, so consider your location first. Think about your commute, the local amenities, and if it’s important to be in a good school district. Then narrow your search to homes in that area.
Tip #2: Focus on the foundation, not aesthetics. You can repaint walls and replace backsplashes with relative ease, but replacing a roof or doing lead abatement is a much taller order. Look beyond decorative details to make sure you’re buying a sturdy home.
Tip #3: Think about how long you want to be in the house. If you’re looking for your forever home, consider how your family may grow or your needs may change. Keep those plans in mind for a house that can accommodate those changes.
Once you’ve found your perfect home, you can make a formal offer. A real estate agent can guide you through this process, since local laws around writing an offer and what should be included may vary.
If you’re in a hot market, you may want to include a letter telling the seller why you want to buy their home. No guarantees that’ll sway them in your favor, but it could persuade a sentimental seller to accept your offer instead of someone else’s.
You may want to apply for a mortgage from several lenders at one time. This lets you compare their rates and fees to find the best deal. Applying simultaneously gives you the most accurate comparison, since their offers are based on the same information.
Submitting your applications at the same time has another benefit as well. Every time you apply for a loan the lender does a hard credit inquiry—basically a request for your credit report. Hard inquiries appear on your credit report for two years, and they temporarily lower your score. When you request quotes from several lenders at the same time, they’ll all be working with your current credit score rather than that lower number.
To choose the right loan, it helps to compare the costs associated with each lender’s loan.
|A percentage of the loan paid monthly on top of principal payments
|Annual percentage rate (APR)
|How much you pay yearly on the loan, including interest and fees
|Amount the lender charges to process your loan application
|Credit score check
|Fee for the lender pulling your credit report
|Can include lead paint inspection, escrow fees, attorney fees, homeowner’s association fees, title insurance, appraisal fees, and other expenses depending on the lender and type of loan, homeowner’s insurance, property taxes, and private mortgage insurance
A note on closing costs: Closing cost amounts vary based on your lender and the type of loan you take out, along with how much you put down as a down payment. It’s important to ask your lender what fees they charge and for the total cost of the loan before you accept their mortgage offer.
After you’ve received an initial approval for a loan, you’ll submit documents on your finances, employment history, and any other details your lender requests for verification. The application then goes to an underwriter who analyzes your application and decides whether or not to approve the loan. Assuming all goes to plan, your lender will arrange a closing date.
Closing is when you officially become a homeowner. You’ll sign the final loan documents, the lender will transfer payment to the seller, and you’ll get the keys to your house at long last.
Becoming a homeowner is a major milestone, and the more prepared you are, the richer the experience will be. If you prepare your finances and let your budget guide your search for that dream home, you’ll be in great shape to make the leap to buying your own place.