Buying a house is exciting, but it's by no means easy. Everything from the local economy to your financials to the housing market in Minnesota will impact what home you buy and how much it costs.
The more you know about the steps to buying a house and the current real estate trends in Minnesota, the better you’ll be able to navigate your choices.
Key takeaways for buyers in Minnesota
If you're on the hunt for your dream home, finding the right agent makes all the difference. Clever offers a free service that matches you with local realtors from top companies like Berkshire Hathaway and Keller Williams.
The best part? When you buy with Clever, you could earn a cash-back refund worth up to 0.5% of the home price. On a qualifying $500,000 purchase, you'd get $2,500. That's real money back in your pocket!
JUMP TO SECTION
Step 1: Evaluate your financial situation
If you're planning to take out a mortgage to pay for your home, you need to understand how your financial situation impacts your buying options.
We'll go into more detail below, but here are the financial factors you need to have in good shape before buying a house:
Key Takeaways: Financial Requirements
Home buying is complicated. It’s not easy figuring out how to get started, how much you can afford, and what the heck “amortization” is on your own.
The best way to learn? Talk with a licensed lender who can answer your questions and show you the ropes.
Fill out the form below to learn how much home you can really afford.
Get Pre-approved Today!
Get matched with a lender who can tell you how much house you can afford. To get started, where do you plan on buying?
Future mortgage payment
The first step to getting your finances in order is determining how much you can afford to spend on your mortgage each month.
When deciding whether to approve your mortgage, most lenders follow the 28/36 rule:
- Total housing costs (including your future mortgage) shouldn’t exceed 28% of your monthly income
- Total monthly debt payments shouldn’t be more than 36% of your monthly income (this number is called your debt-to-income ratio)
So, let's use the median monthly income in Minnesota, which is $5,860 (based on Census data), as an example to calculate a potential mortgage payment.
$5,860 x 28% = $1,641
Mortgage lenders want to know you'll be able to afford monthly payments. To do this, they look at what your debt-to-income ratio (DTI) would be after taking on a mortgage.
The higher your debt-to-income ratio, the less likely you are to be approved for a mortgage; however, most lenders are more forgiving if you have a high credit score. While some lenders will approve mortgages for borrowers with a DTI as high as 43%, in most cases, it's best to keep your DTI under 36%.
To calculate your DTI, add up all of your recurring monthly debt payments, plus your estimated mortgage payment, and divide it by your gross monthly income (before taxes).
When figuring out how much you pay each month in debt, don't forget to include:
- Minimum credit card payments
- Student loans
- Auto loans
- Alimony or child support
- Personal loans
- An estimate of your mortgage payment
Let's look at a few examples, using the average amount of debt in Minnesota, to see how to calculate debt-to-income ratio.
How to calculate your debt-to-income ratio
Given that the median monthly income in Minnesota is $5,860, a typical DTI in the state is 40%.
$2,335 ÷ $5,860 = 40%
Keep in mind your DTI will impact what type of mortgage you can apply for. In most cases, a conventional loan requires an after-mortgage DTI under 36%, a VA loan under 41%, and an FHA loan under 43%. While these rules aren't set in stone, if your DTI is higher than these benchmarks, you will face more scrutiny during the underwriting process.
Don't forget your other expenses!
When assessing your mortgage eligibility, lenders don’t include non-debt costs like groceries, health insurance, utilities, or your retirement savings, but it’s still a good idea for you to plan for those expenses!
Consider how much of your monthly income goes towards these costs and make sure there's still enough left over to cover a mortgage payment.
Down payments are a way for lenders to offset their risk. By making a down payment, you put “skin in the game.”
For example, if you put $20,000 down to purchase a home, you have a strong incentive to not default on your mortgage since you’d be giving up that $20,000 if the bank foreclosed on your home!
For a conventional loan, you'll need a down payment of around 20%.
Government-backed loans, like VA and FHA loans, have lower down payment amounts because they use other means to offset potential risk.
For instance, veterans can qualify for a VA loan with no down payment but must pay a one-time VA funding fee. FHA loans require down payments as low as 3.5%, but the borrower must also pay for private mortgage insurance (PMI) throughout the term of the loan.
In Minnesota, the median home value is $274,571. Using that as an example, here's how much you'll need to save for a down payment:
Based on home value data from Zillow (October 31, 2020)
Need help saving up for a down payment?
Luckily, across the country, there are thousands of down payment assistance programs to help first-time or low-income buyers afford a house. In most cases, these programs are either governmental grants or second mortgages with deferred or forgiven payments.
Here are some details on down payment assistance programs in Minnesota:
Legally closing a real estate transaction involves many services (title searches, document recording, etc.) that cost money.
The seller is responsible for some closing costs, but typically, the buyer pays the majority of these expenses out of pocket. A buyer's closing costs usually run between 2-5% of the loan amount and include costs like:
- Appraisal fees
- Loan application fees
- Property taxes
- Title insurance policies and fees
- Homeowner's insurance
Step 2: Choose the right neighborhood
A house's neighborhood is just as important as its layout and features. In general, you'll need to consider the following factors to decide which area is best for you:
Key Takeaways: Neighborhood factors
After Step No. 1, you should have a good idea of your home buying budget. Do some research on current sale prices in different neighborhoods to start narrowing down your options so you don't end up looking at houses that are out of your price range.
Also, look at past home value trends; this will give you an idea of how much your home's value can appreciate over the years. You want a neighborhood that's in your budget, but can also lead to a big return when you decide to sell.
To give you an idea of how appreciation could impact what your house is worth in the future, let's look at some examples of how homes in three neighborhoods in Saint Paul have appreciated over the years.
Home value appreciation in Saint Paul
2010 Home Value
2020 Home Value
Based on home value data from Zillow (October 31, 2020)
Once you have a list of neighborhoods you can afford and that are a good investment, you'll need to evaluate how well each area meets your personal needs and preferences.
To finalize your list of target areas, look into neighborhood features like:
- School districts
- Restaurants and amenities
- Crime rates
- Transportation options
Step 3: Find a great real estate agent in Minnesota
A local real estate agent will be your main ally during the home buying process. Aside from finding and showing you houses, they can also make recommendations for other services like lawyers, lenders, and escrow companies. And once you find a house, it's your realtor who will make sure you get a great deal.
Take the time to research different agents who are experienced in your desired part of town and price range. Pay attention to realtors’:
- Years of experience
- Number of transactions in the last year (the more the better)
- Experience in your price range and chosen neighborhood
- Overall review score
- Individual reviews and complaints
Once you have a list of 3-5 potential agents, schedule times to interview them to see if they'd be a good fit. Ask them questions about the neighborhood you're looking at (school system, trends in property values, any planned developments) to see if they have the knowledge and experience to help you make an educated decision.
Also, know that you can go to showings with an agent (or more than one) before signing a buyer's agency agreement. This is common and lets you go for a "test drive" with a realtor to see how well they meet your needs before committing to working with them.
Step 4: Get pre-approved for a mortgage
Most sellers won't show you their home unless you have a mortgage pre-approval letter. They don't want to waste their time with buyers who aren't serious or financially ready to put in an offer.
Getting pre-approved for a mortgage gives you and the seller confidence that if they accept your offer, you'll be able to get financing and close the deal.
Key Takeaways: Mortgage Considerations
Compare interest rates
While there's a wide range of mortgage terms, most conventional mortgages are for 15, 20, or 30 years. With a shorter term mortgage, you'll have a lower interest rate, but a higher monthly payment.
Let's see how the numbers break down for loans of different terms for a home worth Minnesota's median home value of $274,571 (assuming a 20% down payment).
15-Year Mortgage vs. 30-Year Mortgage
Based on home value data from Zillow (October 31, 2020) and interest rates from Bankrate.com (Dec. 10, 2020)
Choose a Lender
Aside from interest rates and mortgage terms, you'll also want to find a lender who actively works with you to ensure the deal closes.
If the lender's underwriting process is slow, or if they take forever to give you all the necessary paperwork, it can derail your entire transaction.
Don’t let a bad lender derail your home buying journey.
The best way to get a lower interest rate is by shopping around. Even if you’re already pre-approved, it pays to get several quotes on rates and fees. A few percentage points can mean hundreds of thousands of dollars over the life of your loan.
>> Get preapproved to learn how much home you can really afford
Maintain your credit
Once you're pre-approved for a mortgage, it's imperative that your financial situation doesn't change. If your credit drops, it can derail the process and keep you from closing on your house.
Here are some easy ways to ensure your credit doesn't change after you receive your pre-approval letter:
- Avoid opening new credit accounts
- Don't close any accounts that have been open for a long time
- Make all of your credit card payments on time
Step 5: Start house hunting in Minnesota
Tips: house hunting during COVID-19
Viewing homes is the fun part of buying a house! But don't forget, eventually you'll have to make the big decision about which one is right for you.
Here are some of the most important factors to remember when looking at different homes:
Key Takeaways: House hunting tips
Make a list of priorities
Start by writing out a list of everything you want in a home. Rank each item based on how important it is to you. This will help you begin to separate your "must haves" from your "nice to haves."
Then have a discussion with your agent about whether your list is realistic. They know what homes in your price range and target neighborhood are like and can point out where you might have to make concessions.
Trust your agent. As long as they stick to your price range, they can show you a variety of properties and might even surprise you with a house you wouldn't have considered without them.
Look at current housing inventory
When you start house hunting can impact your number of options. For example, in Minnesota, June is when there are historically the most homes on the market. While in November, there are almost 27% fewer homes available.
If you're viewing homes in a time of low inventory, you might have to be less picky before choosing a home to bid on.
Housing inventory in Minnesota by season
Average No. of Houses on the Market
48,683 houses per month
48,956 houses per month
42,141 houses per month
29,322 houses per month
Based on 2020 data from Realtor.com
Step 6: Make offers
Once you find a house you love, it's time to make an offer and convince the seller to sell to you. But if you don't know when to make an offer or how to make it more attractive, the seller might not accept it.
Key Takeaways: Making offers
How long you have to make an offer
Currently, in Minnesota, homes typically stay on the market for 45 days. But every market goes through seasonal changes. During some months, homes get snatched up more quickly than in others.
Depending on when you're house hunting, you might have to make an offer sooner than you'd expect — especially if homes spend fewer days on market than the annual average.
Looking at the table below, historically, you'll need to move fastest in September when homes only stay on the market for 44 days. But if you're looking to buy in January, you have more time to make your decision since houses typically spend 47 days longer on market than the annual average.
When in doubt, talk to your agent. They can let you know how quickly you need to put in an offer for your dream house.
Average time homes spend on market in Minnesota
Writing the perfect offer
Price isn't the only thing that can influence a seller to accept your offer. You can make other compromises, based on the state of your market, to sweeten the deal for you and the seller.
Here are some common negotiating opportunities to work out a win-win deal with the seller:
- Seller concessions: As the buyer, you'll have to pay for most of your closing costs out of pocket. To save on these upfront costs, you can ask for seller concessions. Instead of lowering your offer price to have more money on hand, the seller pays for your closing cost and the expenses are essentially rolled into your mortgage.
- Repair credits: If the home is in need of repair, you could ask for credits instead of having the seller make and pay for the repairs. The seller avoids the hassle of waiting for contractors to complete the job, and you get to oversee the repairs in the future to make sure they meet your expectations.
- Inspection contingencies: Most purchase agreements have inspection contingencies that allow you to change your offer (or back out all together) if the inspection turns up major problems. If you have a high degree of certainty about the house's condition (like if the seller can show you a recent inspection report), you can forgo this contingency to give the seller a higher sense of confidence.
- Letter to the seller: Many sellers have a personal attachment to the home. They've lived there for years and want to know the next owner will take care of the property. Writing a letter to the seller can show them how you picture your life in the house and appeal to their sentimental side.
Step 7: Inspections and appraisals
Once a seller accepts your offer, there are a series of due diligence steps that ensure the home you’re buying is exactly what you signed up for. After inspections and appraisals, you'll have a chance to go back to the negotiating table if something unexpected pops up.
Key Takeaways: Inspections vs. Appraisals
Inspections give you peace of mind about the condition of the property. You should always hire a licensed inspector and make sure they check out the following parts of the property:
- Electrical system
- HVAC system
If the home has a septic system, it's also a good idea to pay for a septic inspection that scopes out the system with cameras to look for any potential issues.
Minnesota Specific Inspections
Aside from a general inspection, Minnesota also recommends buyers have the following inspections and testing done before closing on a home:
Unlike an inspection, an appraisal isn't strictly about the condition of the home; it's about its value. If you're taking out a mortgage, your lender will require an appraisal to ensure the house is worth the amount of money they're giving you.
Step 8: Final walkthrough and closing!
When it's time to close, you'll be able to do a final walkthrough of the property to ensure it's still in the expected condition. While you might be excited for the buying process to be over, stay focused so you don't miss anything.
During the walkthrough, be sure to run through the following checklist:
- Inspect the ceilings, walls, and floors for cracks, chipped or peeling paint, or other imperfections
- Test every light switch and electrical outlet
- Run the water to look for leaks and check the pressure and temperature
- Flush all toilets
- Make sure you have working keys for all the doors (don't forget any garage door openers or smart lock technology)
- Test any appliances that are included in the sale
- Check the heating and air conditioning system
- Open and close all windows while checking that they lock and there are no unexpected drafts
- Make sure all trash or belongings from the previous owners have been removed
On closing day, be prepared to sign a ton of paperwork. Your agent (or your lawyer) should explain every document before closing, but still ask any remaining questions you have before signing.
Key takeaways of buying a house in Minnesota
The 8 Steps to Buying a House
Buying a house is an involved and time-consuming process, but it doesn't have to be overwhelming. If you know what steps to prepare for and have the right agent by your side, you'll find the perfect home in your price range.
Find the right agent for you.
Clever can match you with a local agent who has the experience you need.