How to Buy a House

Take the mystery and stress out of buying a house with this simple explainer.

Find your dream home.

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A home is the largest, most expensive purchase most people ever make. So, as exciting as house hunting may be, it can also be nerve-wracking, especially for first-time buyers. Keep stress at bay by doing your homework. The more prepared you are, the smoother everything will go. To get you started, here’s an overview of the home-buying process, from creating a wish list to closing the deal.

What are the basic steps to buying a house?

Buying a house doesn’t seem daunting when you break it down step-by-step. Start at the top and work your way down for greatest success!

  • Put together your wish list. Knowing what kind of house you want can help you make informed decisions. What are your must-haves and nice-to-haves? Think about the neighborhood you’d like to live in (general or specific), how much space you need inside (bedrooms, bathrooms, etc.) and out (yard, garden, patio), and what sorts of amenities (garage, pool, laundry room) you desire in a home. Compare your list to homes currently on the market to gauge what you’ll need to realize your dream.

  • Check your credit score, which is the first thing a lender will do. Your score needs to be at least 620, but you’ll qualify for a better mortgage rate if it’s 720 or higher. To improve your score, pay your bills on time and reduce or eliminate your credit card balances.

  • Save cash for a down payment. The average down payment on a house is 10 percent, although the standard in hot real estate markets is 20 percent. For a $400,000 home, the down payment would be $40,000 to $80,000.

  • Choose a real estate agent. Ask friends, family, or neighbors for referrals. Meet with a few different agents to ask them questions, and check their customer reviews online.

  • Find a lender and get preapproved for a home loan. Getting preapproved lets sellers know that you’re serious, which can be helpful if you’re buying in a competitive housing market. Shop around, ask your real estate agent for recommendations, read customer reviews, and compare interest rates before selecting a lender.

  • Look for a house! This is the fun part. Your real estate agent can steer you toward homes that meet your criteria and budget. You can also check out additional homes online.

  • Talk to the neighbors. Before you make an offer on a house, gather intel from people who live nearby. Ask what they like—and dislike—about living in the neighborhood.

  • Make an offer. Work with your real estate agent to put together an offer at a fair price, (based on the market and other factors). At this point, you may put your earnest money check to the sellers in escrow[link to escrow post].

  • Buy homeowners insurance. Lenders usually require that you purchase a policy before closing begins.

  • Have the home inspected. Hire a professional to conduct a home inspection, to uncover any defects the home may have.

  • Close on the house. This is the day you’ve been waiting for! It’s when you read and sign the paperwork that will make you a homeowner and pay the closing costs.

How much house can I afford?

Most first-time buyers can afford a home that’s about three times their income. If your household brings in $135,000 per year, that means $400,000 or so. Talk to a lender to assess what you can afford given your personal financial situation.

How do I prequalify for a home loan?

To prequalify for a home loan, follow these steps:

  • Pay down your debt. Do you have high credit card balances? Owe money on hefty student loans? When determining how much house you can afford, lenders consider your mortgage payment as well as your monthly expenses, so pay off as much debt as you can.

  • Check your credit rating. If there are any inaccuracies on your credit reports, make sure they get corrected. If you need help rebuilding your credit score, contact an accredited financial counselor.

  • Save up. Depending on the type of loan you get, you’ll need to contribute between 3 and 20 percent of your new home’s purchase price as a down payment.

What should I look for when buying a house?

When you find a house you adore, it’s easy to focus on the positive. But it’s important to cast a critical eye as well. As you walk through your potential dream home, check for:

  • Good “bones.” Don’t get distracted by cosmetic details such as paint and carpeting. Pay attention to structural issues like wall cracks, uneven floors, or lopsided window frames that may indicate problems with the house’s foundation.

  • Layout constraints. Consider whether the overall floor plan makes sense for you and your family.

  • Roof condition. Is the roof sagging? Shingles missing or damaged? Repairs could be pricey.

  • Working parts. Try the light switches. Flush the toilets. Turn faucets on and off. Run the heat and/or air-conditioning systems. Open and shut windows and doors.

  • Odors. If you notice a musty smell, mold could be an issue.

  • Cleanliness. Whether a house is pristine or dirty may provide a clue to the homeowners’ general level of care for the home during the time they’ve lived there.

If you end up making an offer on the house, a professional inspection can confirm any major problems—and reveal things you didn’t notice. Depending on the market, you may be able to negotiate with the seller on the repairs.

How do I buy in a seller’s market?

Buying a house in a competitive market requires extra strategy. Shrewd moves include:

  • Think fast. In a seller’s market, homes go quickly. Hesitate to make an offer, and you’re likely to miss the opportunity.

  • Don’t lowball. Offer at least the listed price. Bidding wars are common in a seller’s market. Consider looking at homes priced a bit below your budget so you can bid up.

  • Work with a savvy real estate agent. Hiring your cousin who just got her real estate license is tempting. But in a seller’s market, an experienced professional will likely produce better end results.

  • Provide loan pre-approval and proof-of-funds documentation to the seller, so it’s clear you’re a qualified buyer.

  • Put down a big earnest-money deposit, which is a “good faith” deposit that’s part of your down payment. Earnest-money deposits usually range from 1 to 3 percent. If you can go higher, do it.

  • Don’t be greedy. In a buyer’s market, you may be able to persuade the sellers to include the refrigerator or make small repairs as a condition of the sale. In a seller’s market, avoid asking for extras.

What should I know about making a down payment?

A down payment is a partial payment for a home that you pay out of your own pocket—usually from 3 to 20 percent of the sale price, depending on your credit score, the type of mortgage you get, and the value of the home you buy. By making a down payment, you’re letting your mortgage lender know that you’re a serious, financially stable buyer. If you put down less than 20 percent, your lender might require you to buy private mortgage insurance

You will most likely make your down payment in two installments. You make the first payment, called “earnest money,” before you sign the purchase contract. Earnest money (usually 1 to 3 percent of the home’s sale price) goes into escrow. A third-party escrow company holds the funds until the sale is final. The second payment is due at closing. The bigger your down payment, the lower your monthly mortgage payment will be.

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Home Buying Definitions

The availability, qualifications, and amounts of coverages, costs and discounts may vary from state to state and there may be coverages and discounts not listed here. In addition, other terms, conditions, and exclusions not described above may apply, and total savings may vary depending on the coverages purchased. For more information regarding your eligibility for certain coverages and savings opportunities, please contact your AAA agent. Insurance products in California offered by AAA Northern California Insurance Agency. License #0175868, in Nevada by AAA Nevada and in Utah by AAA Utah. Insurance provided by CSAA Insurance Group, a AAA insurer.