8 Steps to Buying a Home
While we can't find a home for you, we can help guide you through the steps to buying your home. Here are two sources that may be helpful to you: The FDIC’s guidebook Your Own Home (part of FDIC’s Smart Money series) and the Consumer Financial Protection Bureau (CFPB) Buying a House: Tools and Resources for Homebuyers. We also offer some handy online tools you can use to answer many of the questions you’ll ask yourself—we’ll refer to most of them here.
Before you do anything else, get your credit score and credit reports. Your loan depends on your credit score, and this step gives you time to get this key information and correct any errors.For more information, refer to our financial literacy topic, Borrowing Smart: Understanding & Managing Your Credit Report.
Rent or Own?
If you’re on the fence about whether to buy or rent, here are some things to think about:
*Consult your tax advisor regarding the deductibility of interest and property taxes.
You may be ready to buy a home if you have:
- A steady, reliable source of income
- Been employed with a stable work history
- A good credit history and a record of paying bills on time
- The ability to make the mortgage payment every month, plus handle additional costs for taxes, insurance, maintenance, and repairs
- Money saved for a down payment and closing costs
Still unsure about whether to rent or own? Try our online worksheet, Am I Better Off Renting?
Great—you’ve decided to buy a home. How much home can you afford?
Unless you’re planning on paying in cash, that’s another way of asking how much of a mortgage you can afford. That depends on your income minus your expenses.
Your monthly spending
A borrower needs to determine how much they can afford to pay, on a monthly basis, towards their mortgage. In order to do so, first they should understand their monthly expenses. Figuring this out shouldn’t take long, but it does require you to be realistic about your expenses. Start with our online worksheet, How Much Am I Spending?
Be sure to include any regular savings contributions you make. It always makes sense to include an “other” category for unplanned expenses. If you want to be super diligent, compare your estimates with your actual spending patterns over time, using your credit card, bank savings and checking, and other statements. And adjust your estimates accordingly.
Your housing costs
Keep in mind that your housing costs will include not just your mortgage payment but property taxes, homeowner’s insurance, any homeowners fees such as condominium or homeowner’s association dues, and utilities. You’ll also want to factor in what your average monthly upkeep costs will be for repairs, and other items. Try our tool, What Home Can I Afford?
Your Down Payment
When considering how much you plan to put down for a down payment, you need to factor in your closing costs. Closing costs can include various payments to lawyers, banks, municipalities and so on. Closing costs vary depending on the type of home that you’re buying and your loan type. For now, estimate your closing costs at 2%-5% (Source: Zillow) of the price of your home. As you learn more, adjust this estimate so that it’s as realistic as you can make it.
We also recommend including, in your up-front cost estimates, an emergency fund of three to six months of expenses as a safety cushion.
To figure out your down payment, try these tools:
Often times, home buyers put down 20% down or more, but that is not required. You can put down less, but you may have to purchase mortgage insurance, which will increase your monthly mortgage payment. You pay more to put less money down.
Try our online tool, How Can I Reduce Mortgage Insurance Costs?
Finding the right mortgage can take some work. But since that means finding the lowest price on the best terms, that work is well worth it.
First, get a general idea of what your mortgage payments will be using our online tool. This tool should only be used as a guide; it doesn’t guarantee what your actual mortgage payments will be.
You'll notice that your payment depends on a number of variables: your down payment amount, interest rates, the term of your loan, taxes and insurance, and of course the price of your home. You can change these variables—in fact, that’s exactly what the different kinds of mortgages let you do.
One really important fact: the more you borrow and the longer you borrow, the higher the cost of your loan. That makes sense. The more of the bank’s money you’d like to use, and the longer you’d like to use it, the more interest that you will pay. So there's always a trade-off: by reducing your costs today (your down payment, your monthly mortgage amount, or both), you very often will pay more in total costs over the term of the loan.
Now, start considering what kind of mortgage will be best for you. It could be a traditional fixed, 30-year mortgage. Or your particular circumstances may make an adjustable interest rate or shorter-term loan more sensible. Use these tools to explore the different kinds of mortgages:
Getting a mortgage pre-approval or pre-qualification can strengthen your hand as a prospective homebuyer. It’s a letter from the lending institution that shows the seller you’re a serious qualified buyer, but doesn’t commit you to a particular lender.
Ask your lending institution about getting pre-qualified or pre-approved. (Note that these terms mean different things at different banks.)
Keep in mind that mortgage prequalification and pre-approval generally have expiration dates of one to three months. So take this step only when you’re truly serious about buying.
A real estate agent who’s representing you can help you come up with your offer on a house. (To confirm who your agent is representing, ask your agent. Depending on your state, the law may require your agent to disclose whom they’re representing and the terms.) Source: Consumer Financial Protection Bureau.
Of course, your offer may not be accepted. Try not to get too attached to any particular house you’re bidding on. Remember: there was a time you didn’t know that house existed. There could very well be another house you don’t know exists—maybe it’s about to come on the market—that you’ll like even better.
Consider making your offer contingent on getting a loan and an inspection. If you’re unable to get a loan or if the inspection reveals major problems, you’ll want your offering contract to give you an out.
You have an accepted offer. Congratulations! It’s now time to get that loan. Your work beforehand will make this fairly simple. You’re an educated buyer.
How many loan offers should you get? It’s recommended that you get loan estimates from three or more lenders and compare them. Do this with our online mortgage comparison tools:
You’re so close. Do you really have to do more comparison shopping? No, but shopping for closing services could save you some serious money.
These costs are all in the loan estimate your bank sent you. They can vary, but they often include title services (title insurance, title search, and related costs) as well as closing agent fees. You can get help with this. Your lending institution is required to give you a list of companies that provide these services. You can also go outside that list, if your lender allows.
In the days before your closing, review the closing documents to make sure everything is in order. You’ll also want to take a walk-through of the house to confirm the sellers have fixed anything they’ve agreed to and that the house is in good shape.
You may be eager to get the closing done quickly. Give your closing the attention it deserves. You may wish to hire an attorney to help review your closing documents. Take the time you need to read all the documentation, understand each document, and ask any and all questions. You don’t have to sign anything you don’t agree with or didn’t expect.
Most likely, all of your preparation will make for a smooth closing, with no surprises. But keep in mind that until you sign the closing documents, you can walk away at any point if you feel uncomfortable. There are risks in doing so and it's best to consult your lawyer to discuss the repercussions of walking away. Some risks are a lost deposit and lost underwriting and appraisal fees. This may be small compared to committing to an agreement that isn't in your best interests.
What’s Inside Your Mortgage Payment?
Once you have a mortgage, you’ll pay it off in monthly installments. What are you paying, and to whom?
- Principal: The part of your payment that's applied to the outstanding balance of your loan. Your principal amount usually becomes a larger percentage of your monthly mortgage payment over time.
- Interest: The charge for borrowing money. Depending on the type of mortgage loan you’ve taken out, interest payments may make up a majority of your payment in the first few years of your mortgage.
- Taxes: If your real estate or other property taxes are included in your mortgage payment, each payment includes one twelfth of your estimated annual real estate taxes.
- Insurance: If your insurance premiums are included in your mortgage payment, each payment includes one twelfth of your annual homeowner’s and other insurance premiums (flood, private mortgage insurance, etc.).