In this post, I’ll cover the steps you’ll need on how to buy a home, so you can purchase the house of your dreams.

Keep in mind that this post is for how you’d buy a home to live in, and not how you’d go about buying an investment property.

First, Prepare Your Credit Score To Buy A Home

The more expensive your home is, the more risk the banks need to take on supplying your mortgage. Having a high credit score means you’ll be more easily approved for loans. Without bank loans, you’ll either need to:

1. Pay for the house in cash (huge opportunity cost), OR
2. Go to a loan shark for money (you may lose a few limbs)

In general, you’ll want your credit score to be 640+. Ideally though, you should have a credit score of 750+ so you can basically buy any home that you’d like to afford.

There’s many ways to increase your credit score, but the highest impact and simplest ways to do it is simply:

1. Lower your expense ratio by spending less on your card relative to your credit line.
2. Pay off your cards each month. Ideally, you’ll pay it off every 2 weeks so your expense ratio is lowered to basically 0.

I just do these 2 things and my score is around 814-815.

Make sure you get your credit score on point before proceeding to next steps. This is because you’ll save a ton of money and get significantly better loan terms with a higher credit score.

Second, Understand PITI And Do Financial Planning

One of the biggest parts on how you should go about buying a home is to make sure you have enough money.

Sounds obvious, but mortgage payments are fairly complicated a lot of times. Mortgages are mostly broken down into PITI:

• Principal – How much you owe the bank.
• Interest – The interest you need to pay each month. This varies based on the financing and loan you get from the bank.
• Taxes – These are just property taxes that everyone needs to pay. Will vary depending on where you’re buying.
• Insurance – homeowner’s insurance. And mortgage insurance if your down payment is less than 20%.

To figure out your monthly expenses most accurately, google “PITI calculator” and see how much monthly payments you’ll be doing. Please do this step and really understand the numbers so you don’t go bankrupt trying to pay your mortgage.

Knowing how the mortgage payments work will help you figure out how expensive of a house you can afford. This means during negotiation stages, you’ll have an easy number you can peg to for your max offer.

Conventional wisdom says your monthly mortgage payment should be 30-45% of your pre-tax income. I say it should be 20-25% as I’m much more risk-adverse. For example, you should allow for a large margin of error in case you calculated something incorrectly or if there are any financial emergencies or surprises.

Third Step On How To Buy A Home: Know Your Choices Between Mortgage Products

Do you want to have a 15-year mortgage or a 30-year mortgage?

And which types of loan do you want to go for? There’s:

• Conventional loans: backed by bank and has a minimum down payment of 3%. These are fairly regular loans, hence “conventional.”
• FHA loans: partially backed by government and has a minimum down payment of 3.5%. The requirements for qualifying for an FHA is lower than a conventional loan, but they’re more limited. Your credit score can be fairly low to qualify and you can have a higher debt-to-income ratio than a conventional loan, but your loan limit will also be much lower than a conventional loan. Banks prefer to lend less money (and take on fewer risks) for folks who have lower credit scores.
• VA loans: No down payment required and is a program for veterans. More rare than FHA/conventional.
• Other less common loans, like USDA loans.

If you need a very big loan that exceeds the conventional loan’s limits, then you’ll want to look into jumbo loans as well.

Lastly, what kind of financing do you want on your loan? Do you want a fixed interest rate or an adjustable-rate mortgage (ARM)? ARMs have lower rates to begin with but will vary based on market conditions. Fixed rates are more expense to begin with, but the rates will never change.

For most people, my recommendation is a fixed-rate at 30 years. Fixed rate because you know what your expenses are so you can plan better. 30 years because a 15-year mortgage will increase your monthly expenses drastically and the opportunity cost is simply not worth it. For example, if you’re spending an extra $800/mo for a 15-year mortgage, why not just invest that extra $9600/yr on SP500 and let it compound? Unless you’re being prime real estate, we already know SP500 will likely outpace your home’s appreciation. Thus, it’s unlikely you’ll end up better doing a 15-year mortgage.

Ultimately, figure out the thing that works best for your finances since you can easily not fall into the “most people” category.

Once you know what kind of loan produt you want, shop at least 5 lenders to get the best rates. Different lenders may have different tradeoffs. Some charge points upfront (i.e. a fee that’s 1% of the total loan) in exchange for a lower monthly rate, while some charge higher rates but don’t require points. Some take longer to close but have better terms, while some take shorter to close and have worse terms. Some lenders are just strictly better than others.

Pick the one that works for your situation. Conventional banks are an OK choice, while credit unions are better for more competitive markets as they can close faster than conventional banks.

My only hard recommendation: avoid Wells Fargo at all costs. They never close on time which pisses off your realtor and the seller.

Step 4: Get Your Docs In Order

Save yourself a lot of time, and a lot of back-and-forth emails with lenders by getting your docs prepared. Lenders don’t want to give you a 6-figure loan without knowing who you are, so it’s reasonable they ask you for a lot of financial information.

These are the minimum documents that they might require. I highly suggest you know where these documents are prior to talking to lenders:

• W-2/1099, for the past 2 years
• Pay stubs the past 30-60 days
• Proof of all other income sources
• Bank account statements, and proof of funds that you can actually close the deal
• Retirement account statements
• Photo ID
• Social security number
• Current debts
• Last 2 years’ tax returns
• Letters of any monetary gifts that’ll help fund your down payment.

Grab all of these documents in digital format, put it in a single folder. This way, when a lender asks for this info, you can just drag and drop all the files from the folder to the email. They might ask you for more information afterwards, but this will get you most of the way there and can save you many days in email back-and-forths.

Step 5: Get Pre-approved

Once you get hazed and let your lender of choice violate your financial privacy, you should get a pre-approval letter.

This letter just says “we’ll conditionally lend you this amount of money.”

The purpose of this letter is so you can show it to realtors so they know you can actually afford to buy a home. This gives realtors and all the sellers they’ll talk to an assurance that you’re not wasting their time.

Step 6: Get A Realtor

Hire a realtor (or realtors if you’re poly-realtorist) to help you find houses. If you’re not a licensed agent, I definitely recommend getting a realtor to help you buy a home in order to minimize liability.

You can do this before you get your pre-approval letter, but most realtors will generally ask you for one upfront. If you don’t have your pre-approval letter yet you can reach out to realtors saying that your pre-approval letter is en route. This way, the realtor at least knows that you know what you’re doing and will take you seriously as a lead.

If you go to a realtor prepared with a letter, that’s the most ideal. This is because you want to be seen as professional and efficient in the realtor’s eyes. No realtor wants to do unnecessary, extra work. So if you can show yourself to be well-prepared, you’ll move up to your realtors’ client lists and they’ll be more motivated to work for you. All this boils down to is that they’ll work harder, negotiate harder, and put more money in your pocket at the end of the day.

But anyway, once your relationship with your realtor(s) is/are good, then you’ll look at houses together. You’ll find some you like, some you don’t like, and make offers on ones you love.

The housing market can be extremely competitive, and part of my Etsy side hustle, I sell home offer letters that you can give to your sellers here. This helps you differentiate yourself between all other buyers and gives the impression that you’re actually serious about closing. With this letter, you might even be able to get away with a lower bid because the seller is more re-assured you’ll close vs. someone else with a higher bid.

If you’d like to save a few bucks, simply share this article on your social media and send me a screenshot of it to hello@goodmoneygoodlife.com and I’ll be happy to just shoot you the home offer letter for free.

Last Phase On How To Buy A Home: Closing.

First, you’ll need to put down earnest money, if any. This’ll be part of your down payment, so it’s basically “free” in that sense. It’s just to show sellers you’re serious enough to put down money to lock down the deal.

Next, figure out your closing costs so you can plan for all the extra fees accordingly. Feel free to ask your bank to give you a clear picture of all the closing fees involved so you know your all-in cost at the closing table.

Once you know the math, look at your loan estimate and closing disclosures carefully. If some terms or numbers don’t add up, ask your realtor or lender. Things that look wrong open up for opportunities to negotiate = more money in your pocket. It’s very important here you don’t be shy and ask as many questions as possible. It’s your realtors’ and lenders’ jobs to answer all your questions. An unanswered question could cost you thousands of dollars.

During your closing period, you should opt to do a home inspection to minimize your risk of accidentally buying a really, really bad house. You should also schedule follow-up inspections for the most concerning items that your inspector finds during your due diligence process. Don’t save $500 on inspections to expose yourself to the risk of needing tens of thousand in repairs. Besides, the more major flaws you find during the inspection period, the more you can negotiate the price down!

Once you’re happy with the inspection and it isn’t a piece of garbage house, your next mission is to make sure you’re not getting ripped off. Hire an appraiser so you know the true market value of the home. If the appraisal comes below what you’re offering, this is a chance to negotiate the prices down even further. Appraisals also pair well with the contract’s financial contingency if there’s one. A financial contingency basically says that if the appraised value is under what you’re offering, then you can bail out of the deal and get your earnest money back. In more competitive markets, you won’t be able to put a financial contingency in the contract but I highly recommend having one.

Now that everything is good, there’s one last step you need to do: read the closing docs carefully! Don’t just skim it. Understand every word. Know exactly what’s included in the house, and what’s not. Know exactly what kind of repairs you’ll need to do yourself on day 1 and what kind of repairs they’ll be doing for you. Skipping this step or missing something could cost you a lot of money. Don’t be lazy!

Finally, hire a notary so you can notarize and sign the closing docs.

Easy, Right?

Don’t let this super long post on how to buy a home scare you from buying a house of your dreams.

The process of buying a home is super long, so you’ll likely have a few months to execute this post’s instructions, step-by-step.

In addition, part of your realtor’s job is to hold your hand throughout your buying journey. So, use this article as a resource on the high-level stuff you need to do when buying a home while leaning on your team (realtors, lenders) to iron out the specifics of your deal.

Congrats, you’re a homeowner now!