The Home Buying Process
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Below, you'll find a step-by-step overview of the home buying process. This real-world example walks you through the various steps, and it provides links to related information.
A Sample Home-Buying Experience
The easiest way to understand the home buying process is to go through it step by step. Bearing in mind that the process varies from one buyer to the next, it usually goes something like this. This is the story of John and Jane Doe, who are buying their first home.
These are the steps that most home buyers go through:
- Start Saving: John and Jane have done their homework, so they're well aware of the costs incurred during the home buying process. There's the down payment, of course. This might be 3.5% to 20% of the purchase price (unless they use a VA loan). But the home buying expenses don't stop there. They'll also have to pay closing costs on the loan, and those can add up to several thousand dollars. Some lenders require additional cash reserves, above and beyond these things. The message: Start saving early! More about this step
- Set a Budget: John and Jane are smart home buyers. They realize the importance of setting a budget for themselves, before talking to any mortgage lenders. So they tally up their monthly expenses and subtract this number from their net monthly income (i.e., take-home pay). They are careful to allow for savings account contributions, entertainment / lifestyle expenses, and other things that are important to them. More about this step
- Check Credit: John and Jane have heard that mortgage lenders will review their credit scores when they apply for a loan. It's true. In fact, it is one of the first things the lender will look at. Lenders use credit scores when making their approval decisions, and also when assigning an interest rate to the loan. John and Jane are curious to see where they stand. So they check their scores in advance. They also review their credit reports to make sure they don't contain any errors. More about this step
- Get Pre-Approved: During the mortgage pre-approval process, the lender will examine John and Jane's financial situation to see if they qualify for a loan. They'll also tell the couple how much of a home loan they can get. It doesn't guarantee that they'll actually get that amount, but it does give them a ballpark figure to work with. This helps the Doe family in two ways. It helps them narrow their search to properties they can afford, and it helps ensure that sellers will take them seriously. More about this step
- Start House Hunting: This is the most exciting part of the home buying process for most people, but especially for first-time buyers. This is when you go out and shop for homes, one of which will become your home. John and Jane are well prepared for this step. They've established a budget for themselves, saved up for their down payment and other costs, and gotten pre-approved by a mortgage lender.
- Make an Offer: After about two weeks of house hunting, John and Jane have found the perfect home for their family. It's in the neighborhood they like, and it's well within their budget. Now they need to make an offer to buy the house. Their agent helps them pull up a list of "comps," which is short for comparable sales. These are similar homes that were recently sold in the same neighborhood. John and Jane use this data to determine (and support) their offer amount. Their offer includes contingencies for financing and home inspection, too. More about this step
- Get a Home Inspection: John and Jane are not builders or contractors. So they can't look at the house and tell what condition it's in. Sure, they can see the obvious surface flaws. But it's what lies beneath the surface that really concerns them. This is why they hire a home inspector. The home inspection is an important part of the home buying process. The couple are smart enough to realize this, so they've made a contingency in their contract that requires a satisfactory inspection. The home inspector will examine the structure of the house and all of the installed systems. More about this step
- The Home Appraisal: For this step, the mortgage lender will send a professional appraiser to determine the value of the home. In most cases, the lender has a larger financial stake in the deal. So they want to make sure the house is worth the amount John and Jane have agreed to pay for it. If the home "meets appraisal" (meaning it is worth at least as much as the purchase price), then the loan will probably go through. If the appraisal comes in low, John and Jane might ask the seller to lower the price -- or they'll simply walk away from the deal.
- Close the Deal: Now they're on the home stretch ... pun intended. Also referred to as settlement, the closing is the last step in the home buying process. This is where all of the paperwork is finalized and payments are disbursed. The sellers will get a check for their proceeds, if any. The buyers will bring a check to cover their closing costs. The title for the property is transferred from the seller to the buyer. And the keys are handed over! More about this step
Keep in mind that the home buying process varies from one buyer to the next. You might have to go through additional steps that are not listed above. On the other hand, you might choose to skip one of the steps above. But this is generally how the process works. We recommend that you do not skip the home inspection, as some buyers choose to do.
You can learn more about the home buying process by using the search tool at the top of this website.