Owning your own home is fantastic. It’s your castle,
your place. And one of the greatest benefits of owning a home is
that you can create wealth for yourself.
But are you scratching your head wondering exactly how
to buy a house? After years of giving advice to home buyers,
expert Clark Howard and Team Clark have come up with an
9 Steps to Buying a New Home
Let’s face it: Buying a house can be complicated whether
you’re an experienced or first-time home buyer, and there are
many mistakes that you’ll want to avoid.
In this article, we’ll take a look at the process of how to
buy a house in a step-by-step fashion…
Table of Contents
- Get Your
Finances in Order
Pre-Approved for a Mortgage
Shopping for Homes Online
- Find the
Right Real Estate Agent
- Negotiate the Sales
- Lock In
With the Contingencies
- Arrange Your
- Close the
1. Get Your Finances in Order
Becoming a homeowner is likely the biggest financial move you
will ever make in your lifetime. But before you can learn how to
buy a house, you’ve got some homework to do.
Within this first step, there are four main topics we’ve got
- Down payment
and emergency fund
reports and credit score
Save for a Down Payment and Build an Emergency
Ideally, you should aim to have a down payment equal to 20% of
the purchase price of the kind of home you want to buy. But if you
can’t come up with that amount, there are other options.
For example, the FHA loan
program only requires a 3.5% down payment of the purchase
price. The downside to putting that little down is that you’re
typically locked into a mortgage insurance premium (MIP) for the
life of the loan. MIP protects the FHA in case you default.
Contrast that with putting less than 20% down on a conventional
loan. You’ll pay private mortgage insurance (PMI) — which
protects the lender just like MIP does — but
the PMI can be dumped when your loan-to-value ratio reaches
Either way you slice it, it’s best to avoid MIP or PMI by
coming up with a 20% down payment!
Start by Looking at Your Timeline
That means you have some pre-planning to do. Begin by looking at
your home-buying timeline. If you have 24 months until you’re
likely to make a home purchase, try to estimate what 20% down would
look like and divide that by 24.
For example, if you plan to buy a $200,000 home, 20% down would
be $40,000. That’s a pretty big chunk of cash. Divided by 24,
you’d have to save about $1,666/month if you want to avoid
Here are some other examples:
|Purchase Price of Home||12-Month Timeline to Build Up 20% Down
|24-Month Timeline||36-Month Timeline|
|$150,000||You must save $2,500/month||Save $1,250/month||Save $833/month|
In addition to saving for a down payment, you also
want to build up an emergency fund when you’re getting ready to
buy a house.
The costs of buying a house go beyond just taking out
a mortgage. When you own a home, there’s no landlord to call when
you need to replace the water heater or you need a new HVAC system.
So, you’ve got to be ready for these expenses by building up
rainy day money.
You want to keep this cash liquid so it can be tapped
at a moment’s notice. That’s why it’s best stored in an
online savings account.
Check Your Credit Reports and Monitor Your Credit
Another part of the homework you have to do when you’re
getting ready to buy a house is pull your annual credit reports.
You also have to check (and rehabilitate, if necessary) your credit
Checking Your Credit Reports
Go through the reports thoroughly. You’re looking for two
things in particular:
- Errors that you will have to dispute
- Unpaid collections that you will have to pay
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Errors technically should take 30 days to correct once you
inform the bureau and creditor of their mistake. But in actuality,
the process can take up to three or four months. That’s why you
need to start this step at least four to six months before you’re
actually ready to apply for a mortgage loan. Here’s our
step-by-step guide to disputing an error on your credit
When it comes to unpaid collections, you want to make sure there
are no surprise delinquencies eating up your credit. If there are,
many times they’ll be small bills that you just forgot about or
that got lost in the mail. Get those things paid off as soon as
possible before you apply for a mortgage.
Monitor Your Credit Score
Now that you’ve done a background check on your credit
profile, the next thing to do is continually monitor your credit
score. This will ensure it continues to hold steady or improve as
you get closer to applying for a mortgage loan.
“Both coach you on how to bump up your score over time, and
they’re very sophisticated with how they do it,” Clark says.
“So if the goal is to get a lower interest rate, start working on
it nine months before with these sites. You should be able to see a
substantial impact on your score that many months out.”
Pay Down Your Debt-to-Income Ratio
Your debt-to-income ratio is a financial term used in the
mortgage and other related industries to determine how risky you
are as a borrower. The debt-to-income metric is basically a
measuring stick by which a lender can decide whether you make
enough money to cover your future mortgage obligations each month
Your debt-to-income ratio is calculated by dividing all the
money you owe each month (credit card bills, other monthly bills,
student loans, other monthly debt obligations, etc.) by your
According to the
Consumer Financial Protection Bureau, lenders do not want to
see this ratio over 43%. Ideally, you want it to be as low as
To reduce your debt-to-income ratio, you’ll have to pay down
debts such as credit cards, car notes and other personal loans.
Gather Your Paperwork
Applying for a mortgage means a lot of paperwork to
fill out. Your lender may ask you several times to send the same
paperwork over to them. You want to be sure you have it handy to
fulfill their requests.
At a minimum, you’ll want to gather the following
documents and have them ready:
- Two current pay stubs
- Two to three months of bank statements
- Last two years’ worth of tax returns
2. Get Pre-Approved for a Mortgage
Getting pre-approved for a mortgage is in an in-depth process
that generally involves the bank digging through all your financial
documentation, checking your credit and giving you a conditional OK
to buy a home up to a certain dollar amount at a preliminary
It’s a critical step in learning how to buy a house. In this
section, we’re going to take a look at four key pieces of
- Where you
should think about getting pre-approved
Howard’s 90% mortgage rule
- Why you
should get multiple quotes over 14 days
- Why you
shouldn’t make major purchases once you’re
Look at Non-Bank Lenders for Pre-Approval
Clark says there are any number of places you could
get pre-approved when you to buy a house. But there’s one place
he never wants you to get that letter — at
a big bank!
“What’s changed over the years is that banks are now very
uncompetitive in the mortgage market,” he notes. “All the
action is credit unions and non-bank lenders like Rocket Mortgage or Quicken Loans.”
As a general rule, credit unions will offer the lowest rates.
But Clark is quick to remind people that “not all credit unions
are created equal.”
So you’ve got to make sure you’re happy with the level of
customer service at a credit union before you give them your
Fortunately, you aren’t locked into doing a loan with the
lender that pre-approves you. So this gives you time to shop around
further if you decide you don’t like the lender for any
Shopping With a Mortgage Broker
Another kind of non-bank lender you may want to look at is a
mortgage broker. A mortgage broker is basically a salesperson who
shops your mortgage application to multiple lenders on your
The pros of using a mortgage broker include the fact that they
can shop unusual loan situations to lenders. That could be, for
example, a self-employed person going for a mortgage who has a
different level of income each year.
“Behind the scenes, a mortgage broker tells lenders, ‘Look,
I know this client doesn’t fit your typical customer profile, but
here’s why I think they’re right for your portfolio…’ Clark
says. “They basically pitch your loan to different people and
market you as a borrower.”
If you’re interested in working with a mortgage broker, get a
referral from your real estate agent. You could also ask friends
and family who’ve gone through the home buying process if they
know of one.
Clark’s 90% Mortgage Rule
Chances are you’ll be pre-approved for a higher home purchase
price than would probably make sense in your life. It’s up to you
to think through what that translates to as a monthly payment.
Don’t forget to add to that figure the monthly taxes and
insurance, along with possible repairs and maintenance that you
wouldn’t otherwise have to pay when you’re a renter.
That’s led Clark over the years to come up with his 90%
“When it comes to a mortgage, you should step back 10% from
what your lender says you qualify for,” he says.
So start by seeing what you qualify for on a traditional 30-year
fixed rate loan. Then back off and go house shopping at only 90% of
that dollar amount.
Here are some examples:
|Pre-Approval Amount||Clark’s 90% Rule Cap|
“By following this rule, you will help create extra financial
breathing room in your life,” Clark says. “The expense of
housing is like a rubber-band — stretch it too far and it will
break. Stay at 90% or lower and your wallet will smile.”
Meanwhile, Clark says another way to think about it is this:
Base what you pay for home on what you’ve been comfortable paying
for rent. Your rent is already a known expense in your life, so try
to stick as closely as possible to that target.
Get Multiple Quotes Over 14 Days to Limit the Hurt to Your
Each time a lender pulls your credit to give you a quote for a
mortgage interest rate, it will ding your credit file.
You can minimize the damage by getting all quotes within a
14-day period. That way it doesn’t look you’re applying for
multiple loans from multiple lenders.
Technically, you have 30 days to shop around before it hurts
your credit. But Clark prefers you hold yourself to this shorter
timeline so two weeks doesn’t bleed over into a month.
Don’t Make Major Purchases Once You’re
Clark has a firm rule as part of the pre-approval
process: Once you get that pre-approval letter, never apply for any
other credit within six months of when you expect to buy your
“It’s not so much what the credit application will
do to your credit score, though that is a concern,” he says.
“It’s more that it harms your debt-to-income ratio, which could
put you in a more risky lending category. That may mean your
mortgage application is denied in the worst-case scenario or just
that you find yourself pushed you into a higher interest
3. Start Shopping for Homes Online
Once you’ve gotten pre-approved, it’s time to
start looking for the house where you’re going to live!
The process of learning how to buy a house is
different today because of the unprecedented online access to
information about homes, neighborhoods, areas and more.
Download the Right Apps
You can get so much information — about square footage, the
number of bedrooms, the number of bathrooms, the age of the home,
the price per square foot and so on — right there in the palm of
The more you “windshield shop” like this, the more you can
target your home-buying efforts.
“I have what I like to call my ‘hundred house rule.’ The
idea is that you should look at a minimum of 100 homes either in
person or online to get a sense of what the real estate market and
the inventory is at the moment,” Clark says. “Today that’s so
easy to do online. You can look at well more than that in a couple
Concentrate on Identifying Zones
Once you get a sense of what you want and what the market is
offering, it’s all about being thorough and not focusing on just
It’s more about identifying zones — streets, neighborhoods
and areas you’d be comfortable living in — and then having
What you want to do is develop a list of 10 or 20 target houses
in your ideal zones — streets, neighborhoods and areas you’d be
comfortable living in.
“Last time I bought a house, after all the searching online,
we came up with 18 target homes. And we ended up buying one of
those 18,” Clark says.
4. Find the Right Real Estate Agent
You’ve already culled the herd of houses for sale by
following Clark’s ‘hundred house rule’ and picking up to two
dozen target homes in your quest to learn how to buy a house.
The next step is to hire a buyer’s agent. The real
estate agent you pick will be able to do something even more
important than chauffeur you around to houses: They’ll be able to
help you with keeping emotion out of the buying process.
Know What to Look for in an Agent
As a buyer, you’re not paying a commission. The
seller is and that’s how the agent gets compensated. So what
should you look for in an agent?
It all boils down to two things:
Expertise and experience.
For you as a buyer, if there’s a particular
neighborhood you want to buy in, you’re going to need an agent
who is a big seller in that area. In the lingo of the trade, you
want to know that they “farm” your desired neighborhood. That
means they’ll have the inside scoop on available properties and
can make the home-buying process much easier.
For example, an agent who farms the areas you’re
interested in would be able to tell you why you shouldn’t buy on
a certain street. They will have neighborhood-specific knowledge to
help you find the right house at the best price.
Identifying the agents who farm an area is easy.
You’ll see their sales signs again and again as you drive through
the neighborhood. Failing that, you could try asking family and
friends for a referral.
Another important factor to consider in finding the
right real estate agent is experience. Particularly if you’re a
first-time homebuyer, you don’t want to work with a person who is
just selling their first house! Look for someone who’s been in
their field for a number of years.
5. Negotiate the Sales Price
A real estate agent can help you greatly with negotiating the
price of your purchase as you navigate the process of learning how
to buy a house.
Look at the Neighborhood Comps to Base Your Offer
Your agent will have access to comps — recent sale prices of
other similar homes in the neighborhood — that they can provide
you as you get ready to make your offer. You can also get the same
info from your county’s tax assessor office. And thanks to
technology, websites like Redfin and Zillow make it very easy to
see this info, too.
Submit Your Offer
Again, your realtor will help you submit your offer.
Because they should know the area, they’ll guide you to make sure
you’re not paying too much for a home you put in an offer on.
The question of how long a home has been on the market
factors into the decision about how low you should go on your
offer, according to Clark.
“The longer the home sits on the market, the more
likely it is that you can come in with an aggressive price. The
seller is not hungry in the first 45 days after their home is for
sale,” Clark says. “Then the market wears them down. They get
tired of the uncertainty and they may have committed to buying
Clark says the tipping point start sometime around six
to seven weeks out. That’s when the seller becomes more amenable
to making a deal.
But even then, you’ll reach a natural point of
resistance. If a home has been on the market a really long time,
sellers may be unwilling to flex on price.
So time on market is not automatically a signal that
you can make a low-ball offer, but there does tend to be a sweet
spot once you hit six weeks or longer.
Get Ready for Closing Costs and Points
Closing costs are fees you’ll pay to the lender and title
company for facilitating your real estate purchase. They typically
average around 3% of the purchase price, but can sometimes be as
high as 5% depending on your location.
If the market conditions are right (i.e. it’s a “buyer’s
market”), you may ask the seller to contribute to closing
However, Clark says not to get hung up on 3% or 5%. Rather, he
prefers you do a holistic look at what kinds of fees you’re going
to pay by lender. Each offer you receive should have three
- Interest rate
- Closing costs
The interest rate is the bright, shiny object most people tend
to focus all their attention on. But it’s only part of how you
compare one loan offer to another. You’ve also got to consider
points, if any, and closing costs.
Points are upfront charges for taking out a loan. Each point is
1% of the amount you are borrowing. So one point on a $200,000 loan
is a $2,000 fee you have to pay at closing.
Points usually come in two flavors: Origination points and
discount points. The first is a commission to the lender for making
the loan. The second lets you buy down the interest rate.
“The best way to choose a loan is to choose a zero-zero
mortgage, one with no origination points and no discount points,”
Finally, look at your closing costs. Lenders now have to give
you an estimate of the maximum you will have to pay. This makes it
much easier for you to figure out which loan is actually your best
6. Lock In Your Rate
Mortgage interest rates fluctuate all the time based on larger
market conditions. A mortgage rate lock holds your interest rate
steady, typically for a period of 30, 45 or 60 days.
Clark says the decision about when to lock in your rate should
Source: FS – All – Real Estate News 1
How to Buy a House in 9 Steps