How to Buy a House in Minnesota: 6 Steps

Purchasing a house is one of the most significant financial decisions one can make. In Minnesota, the average home value stands at $340,047, which is lower than the national average of $362,481. This difference may offer potential homebuyers a more affordable entry into the housing market compared to other states.

Understanding down payment assistance programs, mortgage types and state-specific regulations is vital for a smooth homebuying journey in the North Star State. MoneyGeek has compiled key pointers to assist you in navigating the process, from saving for a down payment and selecting the ideal location to securing the best financing option tailored to your needs and credit history.

In the second quarter of 2024, the homeowner vacancy rate in Minnesota was 0.4%, according to the U.S. Census Bureau. The homeowner vacancy rate measures the percentage of homes available for sale that are currently unoccupied. It provides insight into the housing market's supply and demand dynamics.

Minnesota's homeowner vacancy rate of 0.4% indicates a market with not enough inventory to satisfy homebuyer demand. A stable vacancy rate, allowing homebuyers some choice and flexibility, is typically around 2%. For homebuyers, this means navigating a competitive market with limited options. They may face challenges such as higher prices and bidding wars, making it essential to be well-prepared financially.

Before buying a house in Minnesota, closely examine your financial and credit history. This is crucial because the stronger your financial profile, the better your chances are of getting approved when applying for a mortgage. A strong financial standing can provide you with better interest rates and terms, making your home purchase more affordable in the long run.

Your credit score significantly influences the mortgage loans and interest rates you can qualify for. A higher score increases your chances of securing a reasonable rate. According to Experian, the average credit score in Minnesota in the third quarter of 2023 is 742.

If your credit score falls within the 'poor' range of 300-579 on the FICO scale, buying a house is still possible, though getting approved for a mortgage can be challenging. Refer to the table below to determine which mortgage type suits you based on minimum credit score requirements.

Source: Experian

Your debt-to-income ratio (DTI) is a crucial metric that lenders use to determine how much of your monthly income is dedicated to debt payments. This helps them assess the amount of mortgage debt you can responsibly manage. In Minnesota, the average mortgage debt was $207,718 in the third quarter of 2023, according to Experian. This figure highlights the additional financial responsibility that comes with homeownership and underscores the importance of understanding your DTI.

Monthly debt payments factored into your DTI include obligations such as mortgage payments, credit card balances, student loans and auto loans. Use our debt-to-income ratio calculator below to see your front-end DTI, which focuses on housing-related expenses and your back-end DTI, which includes all monthly debts. This tool will help you understand your total monthly debt payments and assess your financial readiness for a mortgage.

Buying a house you can't afford can lead to financial stress and limit your ability to meet other financial goals. To avoid this pitfall, consider the 28% rule, which suggests that you should not spend more than 28% of your monthly income on your mortgage payment. This guideline helps ensure that your housing costs remain manageable and leaves room for other essential expenses.

According to the U.S. Bureau of Labor Statistics, the median annual income in Minnesota as of April 2024 is $50,880. This translates to a gross monthly income of $4,240 before taxes. Applying the 28% rule, a homebuyer should aim for a monthly mortgage payment of no more than $1,187. This example illustrates how the rule can guide your budgeting process when considering a home purchase.

Use our mortgage calculator below to get a ballpark figure of your monthly mortgage payment in Minnesota. This tool can help you plan your budget and ensure your housing costs align with your financial situation.

A down payment is the initial payment made when buying a house, typically representing a percentage of the home's purchase price. Traditionally, a 20% down payment is considered standard, but it can be a significant hurdle for many homebuyers. In Minnesota, for example, the average home value is $340,047, which means a 20% down payment would be $68,009. For homes above the average value, such as $380,000, the 20% down payment rises to $76,000.

Fortunately, saving for a 20% down payment is not a requirement for all homebuyers. Most mortgage types allow for lower down payments. Government-backed loans like VA loans and FHA loans offer alternatives, requiring 0% and 3.5% down payments, respectively.

If you put down less than 20%, your lender may require you to take out private mortgage insurance. You can use our PMI calculator to estimate your monthly private mortgage insurance premium based on your credit score and down payment.

Minnesota provides several down payment assistance programs to help make homeownership more accessible. These programs are designed to alleviate the financial burden of initial home purchase costs, making it possible for more individuals to achieve their dream of owning a home. One notable program is offered by the Minnesota Housing Finance Agency (MHFA).
Check out the table below for the available down payment assistance programs in Minnesota offered by the name under Source.

Finding the right location in Minnesota requires careful consideration of various factors. Start by evaluating the average house prices in different areas, as this will significantly impact your budget. Proximity to family, friends, your workplace, or school can enhance your quality of life and reduce commuting time. Additionally, consider the accessibility of public transportation, parks, restaurants and shopping centers, which can contribute to a more convenient and enjoyable lifestyle.

Cost of living is another critical aspect to consider when choosing your new home. According to the Missouri Economic Research and Information Center (MERIC), Minnesota's cost of living index in the first quarter of 2024 is 94.8, which is below the national average of 100. This means that living in Minnesota may be more affordable compared to other states. Essential expenses to consider include:

• Food
• Healthcare
• Clothing
• Utilities
• Education
• Transportation
• Entertainment

Source: Zillow

Working with a real estate agent can significantly speed up your house hunt in Minnesota. These professionals provide the advice you need, offer extra hands to handle paperwork and give you access to an expanded list of property options you might not find on your own. They can also recommend other service providers such as title companies and inspectors, which can help streamline the process of buying your home in Minnesota.

When finding a real estate agent, it's essential to do your due diligence and interview agents who have experience in the neighborhoods you're interested in. Consider the following tips:

• Find someone compatible with your needs and personality
• Verify the agent's credentials, training and licensure
• Ensure they have in-depth knowledge of the area
• Shop around for agents and compare their rates

Navigating the homebuying process in Minnesota involves understanding various mortgage options. Buyers can choose from conventional loans, jumbo loans, FHA loans, VA loans and USDA loans. You also have options for 10-year, 15-year, 20-year, or 30-year terms based on your financial goals. Consider whether a fixed-rate mortgage or an adjustable-rate mortgage (ARM) suits your needs. Selecting the best financing option not only increases your chances of approval but also helps in saving money over time.

Interest rates on a mortgage can change daily due to factors like the type of mortgage, the lender and the economy. While interest rates indicate the cost of borrowing, the annual percentage rate (APR) offers a more comprehensive view by including additional costs such as fees and insurance. This allows you to understand the true cost of borrowing.

As of October 2024, the APR for a 30-year fixed conforming loan in Minnesota is 5.88%, while the APR for a 30-year fixed rate FHA loan is 6.24%. Check the table below to see the current mortgage rates in Minnesota by mortgage type.

Getting pre-approved for a mortgage in Minnesota can streamline your home-buying process. It provides a clear picture of how much you can borrow, making your offer more appealing to sellers. Lenders issue a mortgage pre-approval letter, which typically remains valid for 60 to 90 days, giving you a window to find your ideal home.

For a mortgage pre-approval, you will need to submit the following documents:

• Proof of income, such as pay stubs or tax returns
• Credit report
• Employment verification
• Asset statements, including bank accounts and investments

Understanding the difference between mortgage pre-approval and prequalification is essential. Pre-approval involves a thorough review of your financial history, offering a more accurate borrowing limit. In contrast, prequalification is a preliminary assessment based on self-reported information, providing a rough estimate of what you might afford.

Home inspections play a pivotal role in the homebuying process in Minnesota. They offer prospective buyers a detailed understanding of a property's condition. Inspectors typically examine various parts of the house, including structural elements, electrical systems, plumbing and HVAC systems. An inspection report usually outlines the findings, highlighting any issues that may need attention or repair. This process helps buyers make informed decisions and potentially negotiate repairs or price adjustments with the seller.

For example, consider a scenario where an inspection reveals significant foundation issues. Such findings can impact the home's appraisal, potentially lowering its estimated market value. This can affect the buyer's financing options if the appraisal falls below the purchase price. Additionally, the buyer might decide to rescind their offer if the cost of repairs outweighs the benefits of the purchase. Understanding these potential outcomes helps buyers navigate the homebuying process more effectively.

Minnesota does not regulate home inspections or require home inspectors to obtain a license. Despite the lack of state regulation, many home inspectors in Minnesota voluntarily adhere to the standards of practice set by recognized national organizations, such as the American Society of Home Inspectors (ASHI) or the International Association of Certified Home Inspectors (InterNACHI). This adherence helps ensure a level of professionalism and quality in the services provided.

If you're looking for a home inspector in Minnesota, make sure they are licensed, even though it's not a state requirement. This can be a mark of professionalism and adherence to industry standards. It's also wise to find out what other clients have said about their experiences by checking online reviews and asking for references. These steps can provide valuable insights into the inspector's reliability and quality of service. Although there is no specific search tool provided here, taking these actions will aid in making an informed decision.

Home appraisals play a pivotal role in the homebuying process in Minnesota. They provide an unbiased estimate of a property's market value, which is crucial for both buyers and lenders. According to the 2023 Appraisal Survey from the National Association of Realtors (NAR), the median cost for a home appraisal in 2023 was $500.

While both inspections and appraisals are integral to buying a home, they serve different purposes. A home appraisal focuses on determining the property's value, which helps lenders ensure the loan amount aligns with the home's worth. In contrast, a home inspection evaluates the condition of the property, identifying potential issues that may need addressing. Lenders require appraisals to mitigate risk, ensuring they do not lend more than the property's market value.

Closing is the final step in buying a house in Minnesota, marking the moment when ownership is officially transferred and you receive the keys to your new home. Your lender will provide a closing disclosure document three days before the official closing. This document outlines the loan terms, projected monthly payments and closing costs. As closing day approaches, plan a final walk-through of the property with your real estate agent to ensure everything is in the expected condition.

On closing day, you will review and complete various paperwork to finalize your home purchase. These documents are essential to legally transfer ownership and secure your mortgage. Below are some of the key documents you will need to sign:

• Final loan application: This document reiterates the terms and conditions of your mortgage loan, ensuring that all information is accurate and up-to-date. It is your last chance to confirm that the details match your agreement with the lender.
• Deed transfer: This legal document is crucial for transferring ownership of the property from the seller to you. It must be signed by both parties and recorded with the local government to make the transaction official.
• Promissory mortgage note: By signing this note, you are formally agreeing to repay the mortgage loan according to the specified terms. It outlines the repayment schedule, interest rate and any penalties for late payments.
• Homeowners insurance in Minnesota: This insurance policy protects your new home against potential damages such as fire, theft, or natural disasters. In Minnesota, it is particularly important to have coverage for weather-related incidents to safeguard your investment.

Closing costs are the fees paid at the end of a real estate transaction. In Minnesota, the average closing costs amount to $3,852, according to NAR. These costs typically include several fees:

• Appraisal fee: This fee covers the cost of having a professional appraiser evaluate the property's market value.
• Title search and insurance fee: This fee ensures that the property's title is clear of any liens or disputes, providing protection against future claims.
• Escrow deposit: This is a deposit made to cover future property taxes and insurance payments.
• Prepaid costs: These are upfront payments for items like homeowner's insurance and property taxes.
• Other closing costs: This category includes various other fees such as attorney fees, recording fees, and courier fees.

If you are a first-time homebuyer, learning the different first-time homebuyer programs in Minnesota can also help you achieve homeownership faster.

Buying a house in Minnesota represented a significant financial commitment that would last for years. We answered some frequently asked questions about buying a house in Minnesota to kickstart your homebuyer journey.