Essential steps to buying a home

Whether you're a first-time buyer or it's been a while since you've purchased a home, the prospect can be daunting. Here's a step-by-step guide to understanding your homebuying journey.

Put yourself on a budget.

If you're casual about your finances, it's time to formalize things. Start tracking your monthly spending and compare it to your income to manage your money better.

It might surprise you to find out where your money is going. That could inspire you to make some smart decisions about what to prioritize. More than anything, it's crucial that you're spending less than what you earn. If not, you're probably not ready to buy a home.

Don't max out your house budget.

When you get preapproved for a mortgage, the dollar amount on your preapproval letter isn't a target — it's the maximum amount you're preapproved for. If you give in to the temptation to get the most expensive house you can afford, you could set yourself up for future financial stress. It's important to leave room in your budget for other expenses.

Consider all homeownership costs.

Your mortgage payment usually includes principal, interest, property taxes and homeowners insurance premiums. Buying and owning a home also involves other expenses, like closing costs, private mortgage insurance, or PMI — in most cases this is required if your down payment is less than 20% — and ongoing home maintenance and improvements.

Other costs may include utility bills, homeowners association, or HOA, dues and other types of property insurance, like flood or wind coverage. You should also be prepared for yearly increases in some of those costs.

Plan for changing finances.

Your mortgage payment needs to be manageable for the future. That's why it's critical to think ahead. For example, if you're a two-income household but one of you hopes to become a stay-at-home parent, your purchase price and overall homeownership expense should reflect your reduced future income.

You should also plan for events beyond your control, such as job layoffs. If you have a high-paying career that would be hard to replace, leave room for a potential career setback.

Figure out what you can afford.

Although not a hard-and-fast rule, consider limiting your monthly mortgage payment — including taxes and insurance — to 28% of your gross monthly income. Lenders will look at your gross income, debt levels and other measures to determine if you qualify for a loan. But you'll want to look at your monthly budget to see what fits most comfortably for your situation. A higher payment may limit your ability to meet your other obligations and goals for the future, so settle on a number that gives you some flexibility.

Once you've determined your desired monthly payment, you can work backward to get a target purchase price and help narrow your home search.

Make sure you have sufficient cash available for the down payment and closing costs. A 20% down payment could help you avoid paying for PMI.

For veterans, there are VA loan options that could let you put as little as 0% down. But there are circumstances where a down payment on a VA loan may be required.

Pay down those debts.

Lowering your outstanding liabilities may strengthen your position in several ways. It can make lenders more likely to see you as a good credit risk, may increase the amount of money you're able to borrow and potentially lower the cost and fees for your mortgage.

Determine the mortgage that's right for you.

Look for a mortgage lender with a reputation of superior service and timely closings. You'll then need to decide the type of mortgage that meets your needs and shop around for competitive pricing.

There are two major types:

• A fixed-rate mortgage locks in your interest rate for the term of the loan.
• An adjustable rate mortgage, or ARM, fixes your rate for an initial term then adjusts for the remaining term with changes in interest rates.

Since they typically have lower initial payments, an ARM can be appealing from a cash-flow standpoint. But an ARM can be risky if you intend to keep your home beyond the initial fixed-payment period. If interest rates rise, you may be stuck with a monthly mortgage payment higher than you anticipated, or you could refinance — at a cost, to a fixed mortgage.

Apply for a mortgage preapproval.

A preapproval allows you to shop with more confidence, may give your offer more credibility with sellers and could speed up the process once your offer is accepted. Some mortgage lenders will review your information, including your credit report, credit scores, income, other debt and assets to determine if you are preapproved.

Picture your ideal home.

Make your house search more efficient by making a list of the desired features of your home. Then categorize them into "must haves" and "nice to haves," so you can evaluate homes appropriately.

Consider the traffic.

Location is important, and there's more to it than meets the eye. For example, it's one thing to like a neighborhood but quite another to like the traffic you'll face. That's why you should test your commute during rush hour and see what to expect.

Get to know the neighborhoods.

Location is one of the most important things you can't change about a house. That's why it's important to invest extra time evaluating different parts of town.

Visit them on different days of the week and at different times throughout the day. You should also evaluate your options for schools, restaurants, parks, shopping and personal interests like gyms and houses of worship.

Neighborhoods can also affect your bottom line. Educate yourself on the varying property tax rates and community HOA fees.

Meet the neighbors.

Neighbors can have an impact on your happiness as a homeowner. Before buying, take the time to meet the people next door and across the street. In addition to gauging compatibility, these discussions can reveal important information about the home.

Remember, more house is more work.

A larger home means you need to spend more time dedicated to its upkeep, indoors and out. If you don't want to spend your free time cleaning or doing yard work, consider a smaller house with a smaller yard.

Cosmetic changes are easier than structural ones.

If you're thinking of upgrading a not-so-perfect house, make sure you understand what it may take to match your vision. For example, changing cabinets may be simple, but moving key supporting walls and rerouting plumbing are major projects.

Make note of factors you can't fix.

No home improvement project will change the size of your lot, your commute or the noise from nearby traffic. If you find yourself struggling with those factors, you should consider a different house.

Find a reputable real estate agent.

Many find their agent by asking friends or financial professionals for recommendations on agents they've worked with before. But this can be tricky if you're moving to a new area. Hiring the best agent may pay off. For more tips on finding the best real estate agent for you, refer to this article, How to be sure your real estate agent has your best interest in mind.

Go house hunting.

A professional real estate agent will have a firm understanding of the local market and help guide your home search. Be sure to stay within your original price range and not get emotionally swept up in the process. You can save time and narrow your home choices by doing some preliminary shopping on the web, using real estate search sites, and visiting open houses in the neighborhoods you're considering.

Take it slow.

Don't let house-hunting fever get the best of you. Given the long-term nature of homeownership, impulse moves could prove costly, not only in dollars but emotions as well. To avoid wasted money and lingering regrets, take a deliberate, logical approach to your home search.

Use your head, not your heart.

A lot of emotion is wrapped up in choosing a home, so it's important to keep a level head. No decision this important should be made on impulse and without serious consideration of your finances and the other factors important to you.

Make an offer.

Making an offer on a home can be both fun and daunting. You don't want to lowball the seller because you could lose the home to other buyers willing to pay more. But you also don't want to overpay.

Ask your real estate agent for a market analysis to include details on recent sales of similar homes in the neighborhood and adjacent neighborhoods. What price per square foot did they sell for? Did they sell above or below the original asking price? How does this home compare in terms of square footage, lot size, amenities and upgrades?

Also consider how long the home has been on the market and get a feel for the seller's motivation. Do they seem motivated to sell? Have they already lowered the asking price?

Once you have an accepted offer, complete the mortgage application. Your lender will request documents, such as pay stubs, bank statements and tax returns, to verify your income and assets. This step can be time consuming, so it's important to stay on top of any document requests to avoid a delay in processing and possibly the loan closing.

Nail down the inspection and insurance.

Once you've found your dream home and started the mortgage application, it's time to have a certified inspector carefully inspect the property to identify any deal-breakers or anything that should be repaired. The inspection cost is generally paid by the buyer, and needed repairs can be negotiated with the seller.

Home insurance is important to protect your asset and is required if you finance the purchase of your home. Your lender will review the details on your coverage and be listed as a lienholder on your insurance policy. You may also be required to maintain flood, wind or other coverage depending on the location of your home.

Your lender may incorporate the insurance premium and property taxes with your mortgage payments through an escrow account. You'll make the overall monthly payment, and the lender or servicer of your mortgage loan will pay the insurance and taxes from your escrow account. When selecting your insurance coverage amount, keep in mind the cost to rebuild the home and replacement value may be quite different from its market value.

Review your loan documents.

Go over your closing costs, which may include fees such as attorney's fees, title insurance and property taxes. Before the final step — closing and signing the paperwork — visit the home one more time for a walk-through to make sure everything looks good and required repairs have been completed.

Be ready for closing day.

Closing usually takes place at the office of a local settlement agent or attorney. You'll want to make sure you have personal identification, any other required documents and a certified check or wire transfer to cover your closing costs and down payment. Be sure to confirm with your lender and title company the exact amount and the appropriate place to send a wire transfer to protect yourself and prevent last-minute issues at closing. Be aware of closing scams and how to protect yourself and your funds during closing.^{See note1}

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.