1. Get your finances in order
Before you can buy a house, you’ll need to make sure you can afford it. Take a close look at your entire financial picture to ensure that you qualify for mortgage options that suit your needs. A solid financial background can make your offer more attractive when you bid on homes and potentially help you negotiate a lower price.
Review your credit report and credit score
Lenders will check your credit report to learn more about your credit score and history as a borrower. Your score also affects the mortgage interest rate you’ll be offered. Generally, a score of 620 or higher will qualify you for most loan programs, but a higher score will open the door to better rates, which will reduce your monthly mortgage payment.
Understand your debt-to-income ratio (DTI)
Your debt-to-income ratio is a measure of the proportion of your monthly income that goes toward debt payments. Most lenders prefer a DTI of no more than 36%–50%.
Reducing your DTI can improve your chances of getting pre-approved and help you qualify for a larger loan amount. If you aren’t sure what your DTI is, talk to a lender and ask them to conduct a soft credit pull, which won’t hurt your score
Save for a down payment and other costs
A traditional 20% down payment isn’t required for most loans. However, you’ll still need to save for a down payment and additional closing costs. Along with your down payment, you’ll need to budget for:
- Home inspections
- Appraisal fees
- Prepaid taxes and insurance
- Moving expenses
Depending on your loan type and how much you put down, you may be required to set up an escrow account to cover costs like homeowners insurance and property taxes.
Many lenders require escrow if your down payment is less than 20%, though requirements can vary by state and loan program. It’s important to note that escrow funds are separate from your down payment — the down payment is the portion of the home’s purchase price you pay upfront, not money set aside for future expenses.
Gather essential financial documents
When you’re ready to apply for a mortgage loan, lenders will ask for several documents, including:
- Tax returns (ordinarily for two years)
- W-2s or 1099s
- Recent pay stubs
- Bank statements
- Documentation of other assets or debts
Having all of these items ready will enable the lender to process your application sooner.
While they can grant a prequalification without everything, they can provide a more accurate assessment of your eligibility with these forms. That way, you’ll know exactly how much you’re eligible to borrow and how much your monthly payment will be.
2. Explore your mortgage options
Next, it’s time to find out what type of mortgage loans and rates you qualify for. Here’s a brief overview of some of the potential options.
Types of loans to consider
Depending on your life circumstances and finances, you may be eligible for:
- Conventional loan: Traditional homebuying option that requires a good credit score and a larger down payment but no private mortgage insurance
- FHA loan: Backed by the federal government to provide buyers with more options for purchasing a home
- VA loan: Available to eligible Veterans and Active-Duty Service Members
- USDA loan: Only applies to homes in eligible rural or suburban areas throughout the nation
Keep in mind that you may not qualify for all of these loan options. Most homebuyers go with either an FHA or a conventional loan. An experienced lender can identify which specific options you can take advantage of.
How interest rates and loan amounts are determined
Your credit score, loan type, loan term and current market conditions influence the interest rate you’ll get. The loan amount you qualify for will depend on your income, DTI and how much you’ve saved for a down payment.
Get pre-approved for a mortgage
A mortgage pre-approval can give you a clearer picture of your budget and show sellers that you’re a serious buyer. Many sellers won’t even accept an offer if you don’t include a pre-approval letter. During this process, the lender will review your financial information and provide a letter stating how much you can borrow.
3. Start your home search
Now the fun begins — house hunting. But before you fall in love with your dream kitchen or backyard oasis, you’ll need a game plan.
Work with a real estate agent
An experienced real estate agent is your guide to the local market. They’ll help you schedule showings, structure offers and negotiate terms. They’ll also handle all the necessary paperwork. Make sure to choose someone familiar with your target area.
Set your budget and purchase price range
Decide on a maximum purchase price that aligns with your budget. Don’t just look at the cost of the home — consider other factors that will impact your monthly expenses, such as property taxes, HOA fees and utilities.
It’s best to use your pre-approval letter as a ceiling, not your target. For instance, if you’re pre-approved for $400,000, you can filter out all homes above that price, but don’t feel like you have to exclusively look at homes around that threshold.
Make your offer more attractive
A strong offer can make all the difference in a competitive market. Here’s how to make your offer more attractive:
- Include a pre-approval letter
- Offer a larger earnest money deposit
- Be flexible on the closing date
- Limit contingencies where appropriate
- Work with a responsive agent
If your offer isn’t selected, don’t get discouraged. Resume the search for a home and be ready to make another offer when you find one that suits your preferences.
4. Conduct inspections and appraisals
Once you make an offer that gets accepted, there will be an inspection period during which you can take a closer look at the home.
Schedule a home inspection
A professional home inspection will help uncover hidden issues with the property. If any major problems are identified, you can negotiate a lower price, ask the seller to make repairs or withdraw your offer.
Get the home appraised
An appraisal will confirm to the lender that the home’s value matches or exceeds the asking price. If the home appraises for less than your offer, your financing may need to be adjusted, or you may need to renegotiate with the seller.
5. Finalize your mortgage and close on your new home
You’re in the home stretch now (no pun intended). These final steps make it official.
Review your closing disclosure carefully
You’ll receive a closing disclosure at least three days before your closing date. This document will outline the final loan terms, monthly payments and closing costs. Review it carefully and ask your lender any questions you have before signing.
Secure home insurance
Your lender will require home insurance to protect the property. Shop around for coverage options that meet the lender’s minimum requirements while giving you peace of mind regarding your budget.
What to expect at closing
When you close on your new home, you’ll sign the mortgage documents and pay your down payment and closing costs. Then, you’ll receive the keys.
Congratulations, you’re now a homeowner!
Final thoughts
Are you ready to buy a house? If so, the steps outlined above will help you prepare for this complex yet rewarding process. For the best outcome, choose a reputable mortgage professional and real estate agent to guide you along the way.
