A Step-by-Step Guide to Homeownership

Quick Answer

Buying a home is a multi-step process. You’ll first want to be sure you’re financially ready. If so, prepare to secure a mortgage, make an offer, close the deal and work toward paying off your home loan.

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The homebuying process can be overwhelming, especially if you're a first-time buyer. There are lots of hoops to jump through, from securing a mortgage to finding a home and closing the deal. Once you've got the keys to your new house, you'll then be responsible for paying off your home loan. And all this hassle is worth it for many homebuyers—in fact, almost three-quarters of seniors surveyed by American Advisors Group said purchasing their home was the best financial decision they ever made.

Here's a brief but thorough guide to homeownership, from start to finish.

Prepare to Buy a Home

1. Decide if You're Ready to Buy a Home

The first step is determining if now is the best time to buy. Consider your local market to get a feel for housing inventory and home prices. The size of your down payment will determine how much of the purchase you'll need to finance. Putting down at least 20% is ideal, but not mandatory. Some loan programs require as little as 3% down.

You'll also want to be sure your budget can absorb closing costs, property taxes, homeowners insurance and home maintenance costs. It's wise to have a flush emergency fund you can tap to cover three to six months of mandatory expenses if need be. If your financial health is looking good, it then comes down to clarifying the kind of home you want to buy and the neighborhood you'd like to live in.

2. Check Your Credit

A less-than-perfect credit score could leave you with a higher interest rate on your home loan. It could even prevent you from getting approved altogether. The minimum credit score for a mortgage depends on the type of loan you're seeking:

  • Conventional loans: Generally 620 or higher
  • FHA loans: 500 if you put down 10%, or 580 for a 3.5% down payment
  • VA loans: No minimum credit score, but participating lenders usually prefer 620 or higher
  • USDA loans: Usually 580, though you may get away with a lower score in some cases

Your credit report, which contains the information that shapes your credit score, is free from Experian. You can also view credit reports from all three national credit reporting agencies at AnnualCreditReport.com.

You can also view your FICO® Score 8 for free with Experian. Knowing your credit score can help you better understand your ability to qualify for a mortgage. It also gives you time to improve your credit before buying a house. With a CreditWorks℠ Premium membership, you can view the same FICO® Score versions lenders use so you'll know exactly where you stand.

Some additional action items may include:

Secure a Mortgage

1. Get Preapproved for a Mortgage

Mortgage preapproval can help you determine how much house you can afford. You'll provide a mortgage lender with financial information like your income, debts, credit details and employment status. If you qualify, the lender will issue a letter outlining your expected loan amount, interest rate and loan type.

Getting preapproved doesn't guarantee you'll get the mortgage, but it's useful because it can clarify your house-hunting budget. Just be sure to shop around with different lenders to get the best rate. Preapproval may also be required before you can schedule home tours or work with a real estate agent.

2. Find a Home and Make an Offer

An experienced real estate agent can help you find listings that meet your criteria and craft a competitive offer when the time comes. Their fees are typically covered by sellers and factored into the cost of a home. When you find a property you'd like to put an offer on, your real estate agent can write up an offer letter outlining what you're willing to pay and when you can finalize the deal.

If you find yourself in a bidding war, consider offering more than the asking price and limiting contingencies. These usually have to do with financing, inspections, insurance and appraisals. For example, it isn't uncommon to make your offer contingent upon a satisfactory home inspection. Just take caution when waiving contingencies because many of them are designed to protect buyers.

3. Close the Deal

Once an offer is accepted, you'll submit any additional documents your lender may need (recent paystubs or employment verification, for example) and put down an earnest money deposit. This deposit is usually equivalent to 1% to 3% of the offer price, and it's typically put toward your down payment. (If the deal falls through, you may or may not get the deposit back so read the fine print carefully.)

Most lenders will require you to pay for a home inspection and appraisal before finalizing your mortgage.

A certified home inspector will analyze the property, check for issues, then offer a report summarizing their findings. You might request that the seller make necessary repairs before closing, or agree to a lower sale price. Your lender will likely choose the property appraiser, whose job it is to document the home's resale value and certify that it's comparable to similar properties in the area. HomeAdvisor puts the average cost of a home inspection at $340 and the average cost of appraisal at $349.

You'll then pay closing costs, finalize your contract and receive your keys shortly after.

Keep Up With Your Home Loan

1. Make Good on Your Mortgage Payments

With all the paperwork settled, you'll begin paying your mortgage. This is critical—a single missed mortgage payment can stay on your credit reports for up to seven years. Falling behind could also result in foreclosure. If this happens, you'll be evicted and the property will be repossessed by your lender.

You'll also be responsible for paying homeowners insurance premiums and property taxes. Many lenders will roll these costs into your monthly mortgage payment, hold them in an escrow account, then pay them on your behalf. Expect to fund your escrow account when securing your mortgage. It typically adds up to one or two months' worth of escrow payments.

2. Pay Off Your Mortgage

Stay in your home long enough and you'll eventually pay off your mortgage. Most lenders will then file a certificate of satisfaction with your county government. The deed will be transferred to you, and you'll own your home free and clear.

While homeowners insurance isn't required at this point, maintaining it can protect you if you encounter major home repairs or someone gets hurt on your property. If your mortgage lender previously handled your property taxes, you'll need to step in and begin making the payments yourself.

The Bottom Line

Homeownership can be a complicated journey that helps build your wealth over the long haul. As mentioned earlier, your credit is a key part of the process. Free credit monitoring with Experian allows you to stay on top of your credit health and spot potential identity fraud sooner rather than later.

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