How to Buy a House in South Dakota: 6 Steps

In South Dakota, the average home value is $311,866, lower than the national average of $362,481. This makes the state a more affordable option for prospective homebuyers compared to many other states.

Understanding down payment assistance programs, mortgage types and state-specific regulations and requirements can ensure a smooth journey toward homeownership if you want to buy a house in the Mount Rushmore State. MoneyGeek has compiled the pointers to help with homebuying in South Dakota, from saving the down payment and choosing the ideal location to finding the best financing option for your particular needs and credit history.

According to the U.S. Census Bureau, the homeowner vacancy rate in South Dakota for the second quarter of 2024 was 1.1%. The homeowner vacancy rate measures the proportion of homes that are vacant and available for sale and provides insights into the housing market's supply and demand dynamics.

A stable vacancy rate that offers homebuyers some choice and flexibility is typically around 2%. South Dakota's homeowner vacancy rate of 1.1% indicates high housing demand for limited inventory. Potential buyers may face challenges in finding suitable properties, such as increased competition among buyers and higher home prices.

Before buying a house in South Dakota, examine and improve your financial and credit history. Lenders will assess your creditworthiness, so a strong financial profile enhances your chances of getting approved when applying for a mortgage.

Credit score significantly influences the mortgage loans and interest rates you qualify for. A higher score increases your chances of securing a favorable rate. According to Experian, the average credit score in South Dakota in the third quarter of 2023 was 734.

If you have a bad credit score, or a score between 300 and 579 on the FICO scale, purchasing a house is still possible, but obtaining mortgage approval may be challenging. Check the table below to determine your ideal mortgage type based on minimum credit score requirements.

Source: Experian

Your debt-to-income (DTI) ratio is a key metric that lenders use to determine how much of your monthly income goes toward debt payments and evaluate how much you can responsibly take on. In South Dakota, the average mortgage debt was $187,463 in the third quarter of 2023, according to Experian. This figure highlights the additional financial responsibility that comes with owning a home.

Your monthly debt payments, which are included in your DTI ratio, include obligations such as mortgage, credit card and student loan payments. Use our debt-to-income ratio calculator below to better understand your financial standing and see your front-end DTI, which covers housing-related debts, and your back-end DTI, which includes all monthly debt obligations.

Purchasing a home is a major financial decision, and it's easy to make the mistake of buying one beyond your budget. To ensure that your housing costs remain manageable and don't strain your finances, consider the 28% rule, which suggests that your monthly mortgage payment should not exceed 28% of your monthly income.

According to the U.S. Bureau of Labor Statistics, the median annual income in South Dakota in April 2024 was $43,680 or a gross monthly income of $3,640 before taxes. With the 28% rule, your monthly mortgage payment should ideally be no more than $1,019.

Use our mortgage calculator below to get a ballpark figure of your monthly mortgage payment in South Dakota.

A down payment is the initial amount you pay when purchasing a house, typically amounting to a percentage of the home's total price. A 20% down payment is considered standard, but this can be challenging for many homebuyers. For instance, in South Dakota, the average home value is $311,866, which means a 20% down payment would be $62,373. For homes priced at $335,000 or anything above average, the 20% down payment would rise to $67,000.

Fortunately, saving up for a 20% down payment is not a requirement. Many mortgage types allow for lower down payments. Government-backed loans like VA loans require no down payment, while FHA loans require just 3.5% down.

Remember that if you put down less than 20%, your lender may require you to take out private mortgage insurance. Our PMI calculator can estimate your monthly PMI premium based on your credit score and down payment.

South Dakota offers several down payment assistance programs to make homeownership more accessible and ease the financial burden of buying a home. You can explore options provided by the South Dakota Housing Development Authority (SDHDA) or refer to the table below for more information.

Finding the right home location in South Dakota involves considering the average house price, proximity to family, friends, work or school, access to public transportation, parks, restaurants and shopping centers and many other factors. Evaluating these elements can help you choose a location that aligns with your lifestyle and needs.

The cost of living is another critical factor when selecting your new home. According to the Missouri Economic Research and Information Center (MERIC), South Dakota's cost of living index for the first quarter of 2024 is 93.4, below the national average of 100. This number indicates a relatively lower cost of living in the state. When choosing the right location, consider the following essential expenses:

• Food
• Health care
• Clothing
• Utilities
• Education
• Transportation
• Entertainment

Check the table below to see the average home values of some cities in South Dakota based on recent data. You can also use our cost of living calculator to help estimate how much you'll need to pay for all the essentials in different locations.

Source: Zillow

Working with a real estate agent can significantly accelerate your house hunt in South Dakota. They offer the advice you need, handle the paperwork, provide you with an expanded list of property options and recommend service providers, such as title companies and inspectors, to assist you in buying your home.

Do your due diligence and interview agents with experience in the neighborhoods you're interested in. Consider these 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

You can also use the license holder search tool from the South Dakota Department of Labor and Regulation to find or verify real estate agents in the state.

When buying a home in South Dakota, finding a mortgage that fits your budget is key. Options include conventional, jumbo, FHA, VA and USDA loans. You can select terms ranging from 10 to 30 years. Additionally, consider whether a fixed-rate mortgage or an adjustable-rate mortgage (ARM) best suits your needs. Choosing the right financing can enhance your approval odds and save you money.

Interest rates on a mortgage can change daily. Factors like the type of mortgage, the lender and the economy play a role in these fluctuations. While interest rates indicate the cost of borrowing money, the Annual Percentage Rate (APR) provides a more comprehensive picture. APR includes additional fees, giving you a clearer understanding of the cost of borrowing.

As of October 2024, the APR for a 30-year fixed conforming loan in South Dakota was 5.98%. For a 30-year fixed-rate FHA loan, the APR was 6.28%. Check the table below to see the current mortgage rates in South Dakota by mortgage type.

Getting pre-approved for a mortgage in South Dakota sets a clear budget for your home search and demonstrates to sellers that you are a serious buyer. Lenders typically issue a mortgage pre-approval letter, valid for 60 to 90 days, which is a testament to your financial readiness and can strengthen your offer in a competitive market.

To obtain a mortgage pre-approval, you need to submit several documents, including:

• Proof of income, such as pay stubs or tax returns
• Employment verification
• Credit history report
• Identification, such as a driver's license or passport

Understanding the difference between mortgage pre-approval and prequalification is essential. Pre-approval is a thorough examination of your financial status, while prequalification is an assessment based on self-reported information. Pre-approval provides a more accurate picture of your borrowing capacity, making it a more reliable step in the home-buying process.

Home inspections in South Dakota are highly recommended because they provide a detailed assessment of a property's condition. Inspectors typically examine critical components such as the roof, foundation, plumbing, electrical systems and HVAC. The inspection report includes findings on these areas and any issues or potential concerns that need addressing.

For instance, an inspection might reveal major issues such as a failing roof or outdated electrical wiring. These findings can significantly impact the home's appraisal value, potentially lowering it. In such cases, buyers might reconsider their offer, as the cost of repairs could outweigh the property's current value.

Home inspections in South Dakota are regulated under the South Dakota Real Estate Commission. Licensed inspectors must follow state-specific standards of practice and provide clients with reports detailing the home's condition and any components needing immediate repair.

If you're looking for a home inspector in South Dakota, ensure they are licensed. Check what other clients have said by reviewing online feedback and asking for references. You can also verify credentials using the South Dakota Department of Labor and Regulation's license search tool.

In South Dakota, home appraisals play a vital role in determining a property's fair market value. This evaluation helps buyers and lenders decide the property's worth. According to the 2023 Appraisal Survey from the National Association of Realtors (NAR), the median appraisal cost was $500.

While both inspections and appraisals are integral to homebuying, they serve different purposes. A home appraisal estimates the property's value, which is crucial for lenders to ensure that the loan amount aligns with the property's worth. A home inspection assesses the property's condition, identifying potential issues that may need repair.

Closing marks the final step in buying a house, where ownership officially transfers to you, and you receive the keys. Your lender must provide a closing disclosure document three days before the official closing, outlining loan terms, monthly payments and closing costs. Plan a final walk-through with your real estate agent before closing to ensure the property remains in the expected condition.

During closing day, you will review and complete a lot of paperwork to finalize your home purchase.

• Final loan application: This document confirms the terms of your loan and your agreement to them. It ensures that all financial details are accurate and up-to-date before finalizing the mortgage.
• Deed transfer: This document officially transfers property ownership from the seller to you, legally recording you as the new owner of the home.
• Promissory mortgage note: This is a legal document in which you promise to repay the loan. It outlines the terms of repayment, including the interest rate and payment schedule.
• Homeowners insurance in South Dakota: This insurance protects your new home against risks like fire, theft and natural disasters, safeguarding your investment and ensuring peace of mind.

Closing costs are fees paid at the end of a real estate transaction. According to NAR, South Dakota's average closing costs are $3,839. These costs include the following:

• 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 there are no liens or legal claims against the property and protects against future claims.
• Escrow deposit: This is an account where funds are held to pay property taxes and insurance premiums.
• Prepaid costs: These are upfront payments for items like homeowners insurance and property taxes.
• Other closing costs: This category includes other fees such as recording fees and attorney fees.

If you are a first-time homebuyer, learning about the different first-time homebuyer programs in South Dakota can help you achieve homeownership faster. These programs offer various benefits that can make the process more accessible and efficient.

Buying a house in South Dakota is a financial commitment that lasts for years. We answered frequently asked questions about buying a house in South Dakota to kickstart your homebuyer journey.