How to buy a house in 2020

Your complete guide to getting a mortgage and buying a home.

Elissa

Elissa Suh

Published March 25, 2020

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KEY TAKEAWAYS

Buying a home is much more than simply applying for a mortgage, getting a stamp of approval, and moving in. A lot of the mortgage process happens behind the scenes and is out of your control, but there is also a lot that you can control to ensure you’re in the best position to buy that coveted home and close in a timely manner. You’re financially ready to buy when you’ve saved enough money for a down payment, and closing costs, in addition to mortgage interest and principal.

The homebuying process can take a few months and has a few different moving parts. You’ll have to find a mortgage lender, work with a loan officer, a real estate agent, and a home inspector, and even a lawyer. In this guide, we’ll walk you through everything you need to know — from finding a real estate agent to the paperwork you’ll need — to prepare you for buying a home and getting a mortgage.

In this article:

1. Set a budget

Before buying a house, it’s important to know how much you can afford and avoid becoming house poor. A house is one of the largest purchases you can make, so it’s imperative to know all the costs involved and if you have the money for them. Many people will need to take out a mortgage, which is simply a loan specifically designed for buying a house.

Assess your income and debts

Take into account how much money you make and how much you owe. You’ll need this debt-to-income ratio when you start filling out mortgage applications.

Check your credit score

A higher credit score can help you get better mortgage rates.

Save for a down payment

This is where a large chunk of your money goes. But making a larger down payment can decrease the size of your mortgage loan. It will also lower your loan-to-value ratio, which will help mortgage lenders determine how much mortgage you can afford. If you put down at least 20% you’ll also avoid private mortgage insurance.

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Set a budget

What’s the maximum payment you make every month? Your mortgage payment consists of more than just what you're repaying the lender; there's also property taxes and homeowners insurance to consider.

To get started, you can use a mortgage calculator to see what a monthly payment might look like based on purchase price, down payment, and more.

2. Get mortgage preapproval

When you're ready to buy a home, the first step is getting preapproved for a mortgage by reaching out to a few lenders, like a credit union or bank, or consider an online loan. Mortgage preapproval gives you an idea of how much of a loan you’re likely to qualify for.

A preapproval letter can show a home seller that you’re serious about purchasing a home and put you ahead of other buyers. Getting one is straightforward and doesn’t delve too far into your financial background or require any commitments. The lender will look at your income, debt, and assets, but they typically won’t require any hard documentation until later. Mortgage preapproval entails only a soft pull on your credit report, so your credit score won’t be affected.

Learn more about how to get preapproved for a mortgage.

3. Find a house and make an offer

This is the fun part: searching for your dream home. First-time buyers may want to work with an experienced real estate agent, who is familiar with the area. A buyer’s agent can prove invaluable, helping to not only find the right home at the right price but also to provide crucial negotiating experience. If you didn’t know by now, there are many steps to buying a home, and a real estate agent can guide you through the entire process.

Once you’ve found a home in your price range, you’ll put in an offer. The seller may counteroffer, especially if there’s another potential buyer.

When your offer is accepted, the real estate agents will draw up a purchase offer to be signed by all parties involved. The buyer may need to make a good faith deposit (also called an earnest money deposit), a sum of money meant to prove that the purchase offer is serious.

The sale contract will stipulate how long it will take to close (30 to 60 days is normal) and typically includes a few contingencies, conditions that must be met to make the agreement binding. For example, the purchase offers commonly include a home inspection contingency and mortgage contingency, which means that the purchase of the house is dependent on the buyer’s ability to secure a mortgage. That brings us neatly to our next step.

4. Secure your mortgage loan

Now it’s time to secure your mortgage loan and finalize the details. You’ll need to decide on the type of loan, the type of rate, and the term length. Are you getting a conventional loan or one backed by the government, like an FHA loan? A fixed-rate mortgage or an adjustable-rate mortgage? Do you want the mortgage loan to last 15 years or 30? Are you getting a good interest rate? Should you buy down the rate?

While 30-year fixed-rate loans are most popular, homebuyers choose differently based on their priorities, like whether they prefer steady monthly payments or paying off the loan faster. You’ll have to consider all of these things when choosing your mortgage.

If you’re overwhelmed, we can walk you through all of your mortgage questions right here.

Fill out the mortgage application

Remember that preapproval was an unofficial estimate. Getting actual approval for a mortgage requires a little more work, including furnishing all the necessary documents. You’ll have to provide the lender with the usual personal information (Social Security number, date of birth), employment information (pay stubs, W-2 forms), and financial information (monthly expenses, tax returns, sources of income). The lender will examine your assets and liabilities, and calculate your debt-to-income ratio.

At this time, the lender will also do a hard pull on your credit history and recheck your credit score. If they discover that there’s been a significant drop in your income or credit score, then you may no longer qualify for the same mortgage loan quoted to you in your preapproval letter. That’s why it’s important not to do anything that could jeopardize your finances when you’re in the midst of buying a house, like switching jobs or opening a new credit card and taking on more debt.

If you’re comparing final loan estimates from multiple mortgage lenders, try to do it within a close range of time. Otherwise, you may see a slight dip in your credit score due to all the pulls on your report.

5. Wait for underwriting to complete

The process of approving your mortgage loan is called underwriting. This may take a few weeks, depending on how much information the underwriter must process. Two important things that will happen in the background:

The mortgage lender will get an appraisal to find out the home’s value. This ensures the lender that they’re not giving you an overdetermined loan for more than the property is worth. (The buyer does not need to be present for this process; the lender will set up an appraisal and pass along the cost.)

Similarly, a title company will conduct a title search to make sure that there are no clouds, like a third-party claim to the property.

Learn more about what a mortgage underwriter does.

6. Set up a home inspection

The next step for many homebuyers is to get a home inspection. A home inspection isn’t required, though many savvy buyers know to make time for one. (It’s often built into a purchase offer as well.) A professional inspector will walk through the property and scrutinize every last inch of it. If anything turns up that might reduce the value of the home, the buyer might be able to negotiate seller concessions.

7. Sign paperwork and close

A few days prior to closing, you will receive a closing disclosure to review before signing. The document outlines everything you need to know, including how much money to bring to closing. A real estate attorney usually arranges the time and place for closing. It typically takes place at their office. A good real estate agent should refer you to an attorney.

In addition to the down payment, you’ll need to pay closing costs, which include an application fee, attorney fees, origination fees, and more. You can make the payment with a cashier's check, certified check, or a wire transfer. Closing can be pretty hefty, ranging from 2% to 5% of the mortgage loan.

Learn more about closing costs.

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Personal Finance Editor

Elissa Suh

Personal Finance Editor

Elissa is a personal finance editor at Policygenius in New York City. She writes about estate planning, mortgages, and occasionally health insurance. In the past she has written about film and music.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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