If affordable homes, hospitable communities, and a low cost of living aren't enough to draw you in, Kentucky is home to fun activities for the outdoor enthusiast and Kentucky Derby fan alike.

Ready to make the move? The real estate market can be overwhelming for even the most experienced house hunters. Knowing the steps to find your dream home without overspending makes all the difference.

Luckily, expert broker and

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Figure out your finances

The first step in buying a new home is to evaluate your financial situation. There are many costs associated with buying a new property, and it's important to understand exactly how much home you can afford.

To determine what kind of house you can afford in Kentucky, the following numbers will be important:

Credit score

Debt-to-income ratio (DTI)

Down payment

Closing costs and other fees

Homeowners insurance

Check your credit score

Your credit score is calculated based on your ability to pay back debts in full and on time and signals to lenders how likely you will be to pay back a loan. Factors included in your credit score calculation are student debt, past loans, and credit card debt.

To secure a conventional loan in Kentucky, most lenders will require a credit score of 620. While a lower credit score can still secure a loan, you’ll enjoy the best loan terms if you work to improve your credit before applying.

Calculate your debt-to-income (DTI) ratio

Lenders look at your debt-to-income (DTI) ratio to determine what type of mortgage you’re eligible for. The lower your DTI is, the more likely you will be approved for a mortgage.

To calculate your DTI, add up your recurring monthly payments and divide that number by your pre-tax monthly income. Monthly payments to factor into your DTI include:

Minimum credit card payments

Student loans

Auto loans

Child support

Personal loans

Estimated mortgage payment

For example, the average monthly income in Kentucky is $4,187 and the average monthly debt is $1,844. Your debt-to-income ratio would be 1844/4187 = 0.44.

If you are aiming to have a conventional loan in Kentucky, aim for a DTI of 44% (or preferably less).

Keep in mind that your DTI does not include other non-debt monthly payments such as groceries, utilities, or retirement savings.

You should still keep these extra payments in mind when evaluating what kind of mortgage you can afford with your monthly income.

Key Takeaway Most mortgage lenders in Kentucky will approve a conventional loan if you have a DTI of 44% or lower.

Determine your down payment

A down payment is what you pay upfront when you obtain the home, calculated as a percentage of the home’s selling price. Lenders take your down payment to secure your incentive in paying off the loan and offset the risk of missed mortgage payments.

For a conventional loan in Kentucky, you will need a down payment of 20%. So if you’re purchasing a home valued at the state average price of $155,599, your 20% down payment would amount to $31,120.

Not every prospective home buyer has the amount for a down payment just sitting in the bank. Luckily, there are other options available that use different means to offset lender risk, including Veterans Administration (VA) loans and Federal Housing Administration (FHA) loans.

VA loans allow veterans to qualify for a loan with no down payment with the one-time payment of a VA funding fee. Similarly, FHA loans allow for down payments as low as 3.5% under the condition that the borrower pays for private mortgage insurance throughout the term of the loan.

MORE: How to decipher home insurance quotes

Key Takeaway A good down payment in Kentucky is 20% of the property’s purchase price. If you’re unable to make this payment, check into government-backed loan programs.

Prepare for closing costs and other fees

The legal closing of a transaction requires additional payments that are largely the buyer’s responsibility.

Closing costs typically amount to 2-5% of the home’s price and include such services as appraisal fees, home inspection and loan application fees, property taxes, and homeowners insurance premiums.

According to a 2021 report by ClosingCorp, closing costs in Kentucky sit at an average of 1.28% of a home’s price tag. So if you purchase a home in Kentucky for between $100,000 and $200,000, expect to pay between $1,114 and $4,458 in closing costs.

Keep in mind that closing costs are typically paid out-of-pocket, so it's important that you have enough savings to cover them.

MORE:

How to make a counteroffer after a home inspection

Key Takeaway Don’t forget about the closing costs that finalize your home purchase.

Look for homeowners insurance

Once you’ve settled into your new home, you’ll want to know that you’re secure from hazards like theft, fire, and storms. While you can’t prevent these disasters from occurring, you can protect yourself from the financial fallout with homeowners insurance.

Your lender will most likely require you to take out a home insurance policy for the duration of your mortgage. Even if it’s not required for you, home insurance is a smart investment.

The average cost of homeowners insurance in the United States is $1,387 per year ($115 per month), while Kentucky homeowners insurance averages at $1,839 per year.

To find the right homeowners insurance policy for you, compare rates from at least three different insurance companies to find the lowest rate (hint: look at quotes from your

car insurance

company and see if you can bundle the policies together).

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MORE:

How to choose the right kind of home insurance for you

Key takeaway Homeowners insurance is an ongoing expense that protects your property from unnecessary costs and damages long after you’ve purchased the home.

Get preapproved for a mortgage

The next step in the home buying process is to get preapproved for a mortgage.

Having a mortgage preapproval letter confirms to lenders that you are financially capable of buying a home. In addition, it confirms to sellers that you will be able to receive financing to close a sale.

Preapproval involves an extensive investigation into your finances by your lender and will require you to fill out an application. You will need to produce such documentation as proof of income, tax returns, and pay stubs, along with a list of all debts you are currently paying.

The investigation process may take as long as 7-10 days. Once the lender has assessed all of your documentation, you’ll receive the loan amount for which you’re approved and a letter of preapproval.

Key Takeaway Getting preapproved for a mortgage demonstrates to sellers that you are financially qualified to close a sale.

How to pick the right mortgage in Kentucky

To find the right mortgage, get information from different lenders and compare interest rates.

Buying a home is a serious financial commitment, and having the right lender can make or break your home buying journey. You want a lender that works to ensure your transaction closes smoothly and actively provides all necessary information.

After your transaction has closed, you will want to be confident in the mortgage you’ve chosen. The two main factors to consider when picking a mortgage are your mortgage term and interest rate:

Long-term mortgages (30 years) come with lower monthly payments but a higher interest rate

Short-term mortgages (15 years) come with higher monthly payments but a lower interest rate

Compare different lender options and rates and find what is best suited to you.

MORE:

Can you negotiate upgrades on new construction homes?

Look for a house

Now comes the fun part—house hunting!

To find the house that's right for you, you will want to have a strong sense of what you prioritize in a home. Consider the following before you begin your search:

Proximity to schools, parks, grocery stores, downtown areas, etc.

Number of bedrooms and bathrooms

Front or backyard space

Dog- or child-friendly property

Closets and storage

Windows and lighting

Pick your city or neighborhood

The right area for you will depend on the location’s climate, crime rate, affordability, and cultural attractions.

According to the most recent census data, the most affordable cities in Kentucky include Princeton, Flatwoods, and Bardstown, whereas Pikeville and Murray rank as the most expensive.

Buyer’s market vs. seller’s market

Having an understanding of the current housing market in your desired location will allow you to set reasonable expectations of pricing and home availability.

If the supply of homes is high but demand is low, you’re in a buyer’s market. Conversely, if there are fewer homes available and buyers are engaging in bidding wars, you’re dealing with a seller’s market.

You’ll be able to negotiate more in a buyer’s market.

Key Takeaway Do your research to determine what the current housing market looks like before making an offer.

Find a real estate agent

A real estate agent can be your main ally during your home buying journey, especially if you’re new to the area or a first-time buyer.

When choosing a real estate agent, pay attention to their qualifications, reviews, years of experience, and transactions in the last year.

Red flags to watch out for in real estate agents include:

They can’t accurately summarize your needs and priorities

They fail to answer your questions

They have poor communication skills

They have only handled a few transactions in the past year

Make an offer

You’ve found your dream home! Now it’s time to make an offer. How fast you need to move will depend on the current housing market.

In Kentucky, homes typically stay on the market for 53 days before receiving an offer. Keep in mind that the market fluctuates with the seasons. In February, for example, homes tend to stay on the market for 38 days longer than average.

When in doubt, ask your real estate agent what the current time frame is for making an offer.

If your offer is accepted and all inspections and appraisals of the home have been completed, you can say hello to your new life as a homeowner!

MORE:

How to choose the right kind of home insurance for you

How to save on homeowners insurance

With all of the work that goes into buying a house, insurance may not be the first thing on your mind. However, you won’t want to go without homeowners insurance in Kentucky, even for a few months.

Luckily, the insurance shopping process is quick and easy when you’ve got

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How much money do I need to buy a house in Kentucky?

The exact amount will vary depending on where you’re buying, how big of a down payment you can make, and what kind of mortgage you qualify for. With average Kentucky home values at around $182,676, it’s wise to start with at least $36,535 in savings.

What credit score is needed to buy a house in Kentucky?

Ideally, you should have a credit score of at least 620 to buy a house in Kentucky. However, you may still qualify for an FHA loan or a VA mortgage if you have a good credit score.

What is the best place to buy a house in Kentucky?

With respect to affordability, Hazard has been ranked as the best place to live in Kentucky. However, if you’re in search of luxury, Pikeville has been named the most expensive place in Kentucky to call home.

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