Rachel Cruze: 10 Steps To Buying a House
Written by
Stephanie Mickelson
Edited by
Cory Dudak
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Rachel Cruze is a financial expert skilled in guiding people through the steps to paying off debt, setting a budget and saving an emergency fund. She recently shared her real estate insights with finance consultation site Ramsay Solutions, breaking down the 10 steps you should follow to buy a house without compromising yourself financially.
Following these steps can help ensure that you have enough money left over after your monthly mortgage payment to pay for other living expenses while enjoying your new home.
1. Make Sure You’re Ready
Being ready to buy a house is often more than just a financial decision. Cruze recommended assessing where you are in your life as well as how much you have in your bank account. If you’re planning on moving out of the area within a year, it may be better to wait until you’re settled elsewhere to buy a home.
She also recommended waiting a bit if you’ve recently gotten married — Cruze recommended waiting until you’ve been married for a year to begin house hunting. While it may seem hard to wait, you can use that time to prepare financially by getting out of debt, setting aside an emergency fund and saving up a down payment.
2. Determine How Much You Can Afford
Determining how much you can afford means following a few guidelines, namely making sure your payment — including the principal, interest, property taxes and home insurance — is no more than 25% of your monthly take-home pay. That means that if you bring home $4,000 per month, your total mortgage shouldn’t exceed $1,000.
When you’re calculating how much home you can afford, make sure you take other expenses into account. If you’re out of debt, you won’t have to account for debt payments, but you should account for expenses like groceries, utilities and entertainment. If your expenses total more than 75% of your total income, you’ll need to do some recalculating to make sure you can cover everything, including your mortgage.
3. Save Your Down Payment
Putting 20% down on a house means you won’t have to pay private mortgage insurance, or PMI. It also lowers the amount you’ll have to borrow and will lower your monthly payments.
You should also consider saving for your closing costs, which are paid when you close on the home and typically cover property taxes, insurance and fees from the lender and title company. Saving between 2% to 6% of the purchase price for closing costs will likely cover what you need, but the percentage will vary, so talking with your lender and title company can give you a better idea of the actual dollar amount.
Another expense to save for is the cost of moving expenses. The cost to move can vary widely, but at minimum, you will likely need to pay for a moving van or a moving company. You may need to make updates to the home quickly after moving in. Further, it’s always a good idea to have some money set aside for take-out or restaurants as you may not want to cook after a day of moving.
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4. Get Preapproved
Getting preapproved for a mortgage doesn’t guarantee that you’ll get the loan, but it’s a good first step. It requires submitting income verification like pay stubs, tax returns and bank statements to your lender. They’ll also want to look at your debt-to-income ratio.
Cruze recommended getting a 15-year fixed-rate conventional loan. This type of loan will have a higher monthly payment than a 30-year loan, but it will help you pay the house off faster. Additionally, a fixed-rate loan ensures you won’t get hit with higher interest rates that can result from an adjustable-rate mortgage.
5. Choose a Real Estate Agent
A real estate agent can walk you through every step of the home buying process and buyer’s agents don’t cost the buyer anything. That’s right, you don’t pay anything to the buyer’s agent. Their commission comes from the sellers. It’s in your best interest to interview at least three buyer’s agents and determine who will be the best fit for you in your home search.
When you sit down with a potential agent, make sure to ask them about their process and how they will guide you through the next five steps that Cruze lays out. According to Cruze, “A professional agent won’t shy away from tough questions — they’ll encourage them.” The right agent will understand your needs and have experience with homes similar to the type you’re looking for as well as a deep knowledge of the local market.
6. Start Looking for a House
After getting preapproved for a mortgage and finding the right real estate agent, it’s time to start looking at houses. This step can be simultaneously exciting and overwhelming as you narrow down the list of things you want in your future home. If you’re married, Cruze recommended making separate lists of the things you want in a home and then comparing them to come up with the most important features.
7. Make Your Offer
This may be the most stressful moment of the entire home buying process. When you find a house you love, it’s time to write an offer telling the seller what you’re willing to pay and then waiting for the seller to accept or decline your offer.
Your offer will include your information along with the seller’s, the property’s address, the purchase price, lender information, down payment amount, earnest money deposit amount, items that will be left in the home (typically appliances), contingencies and a closing date.
If the seller accepts your offer, you’ll sign the purchase agreement, pay your earnest money if you include any and move onto the next step. If there are other offers and you need to up your offer or enter negotiations with the seller, your real estate agent will be your point of contact and will handle negotiations.
8. Order a Home Inspection and Appraisal
Once you’re under contract, meaning the seller has accepted your offer, you can move onto this step. Depending on how you’re funding your home purchase, one or both of these may be required. But even if they’re not, they are both a good idea, so you walk into your new home with all the information you need.
If you include a home inspection contingency in your offer, you’ll order a home inspection. The inspector will look for issues in the home, like structural problems, repairs that need to be done or other major issues. If there is a problem you’re not willing to deal with, you may be able to get out of the home purchase with your down payment intact and get your earnest money back, or the seller may be able to fix the issues before you close. You may even be able to get the seller to lower the price of the home. Your agent will be a valuable resource through this process, especially if the inspection turns up issues that need to be fixed.
An appraisal is an official assessment of the property’s value. If you’re paying cash, this is an optional yet still recommended step. If you’re getting a mortgage, your lender will require an appraisal as they won’t lend more than what the house is worth. If the appraisal comes in lower than the purchase price, talk with your agent about what you should do next.
9. Wait for the Mortgage to be Finalized
Ok, this might be the most stressful step. Waiting for the final loan approval can be tough even if you’re already preapproved. In this stage, the mortgage company will go through your finances with a fine-tooth comb. It’s incredibly important not to do anything that could impact your credit while you’re under contract. This includes opening a credit card, making a large purchase on credit or changing jobs.
When the mortgage is finalized, you’ll get your final closing date. It could take a month or more to get everything finalized, so try to be as patient as possible.
10. Close on the House
When the time finally comes to close on the house, you’ll get a copy of your closing documents, so you can review any cost associated with closing. These include prepaid expenses like home insurance and property taxes as well as the interest that accrues between the closing date and the date of the first monthly payment. They also include mortgage fees, escrow fees for property taxes and home insurance, title insurance, HOA fees if applicable and other fees. If you’re confused about anything, you can talk with your agent or your lender to get them answered. This is a big purchase, so you should understand everything you’re paying for.
Once you sign the papers, you’re a homeowner! You’ll get the keys and you can start the process of moving and settling into your new home.
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