If you’re planning to seek a mortgage to buy your first home, the best thing you can do is educate yourself about the process and prepare your finances beforehand.
Homebuying is a complicated and stressful process — more so now with mortgage rates that have doubled in recent years, fewer starter homes on the market and a shaky job market. You shouldn’t rush into it. The more time you have to prepare, the better.
Here’s what you should ask yourself: Why do I want to become a homeowner? Am I willing to go through the work involved in learning the many facets of homeownership and getting my finances together? Am I equipped to handle the upkeep of a home? Do I plan to live in the home at least five years?
You probably shouldn't buy a home if you're doing it just to keep up with your friends or if you're unwilling to make the sacrifices to learn about the process, bypass immediate gratification to save money or are uninterested in taking care of the property. If you plan to move in five years, you probably wouldn't make back what you spent for the down payment and closing costs.
Pro tip: Before diving into the financial details, consider enrolling in a homebuyer education program. Martin Sanchez, executive director of mortgage sustainability and business execution at Wells Fargo, recommends resources like U.S. Department of Housing and Urban Development ’s pre-purchase counseling or Fannie Mae’s HomeView course. These programs cover the basics of homeownership, mortgage processes and financial planning, and may even qualify you for discounts on closing costs. Taking time to educate yourself can make the process smoother and help you avoid common pitfalls.
Understanding the complete financial picture
Buying a home isn’t about qualifying for a mortgage; it’s about building a solid financial foundation that can both cover the upfront costs and the ongoing responsibilities of ownership. Don’t underestimate those costs.
Before approving a mortgage, lenders typically review key factors such as income stability, credit history and available funds for your down payment and closing costs. They also look at debt-to-income ratio, which is a key financial metric used by lenders to assess a borrower’s ability to manage monthly payments and repay debts. The debt-to-income ratio compares your total monthly debt payments to your gross monthly income (income before taxes and deductions) and is expressed as a percentage. Most lenders prefer a 36% debt-to-income ratio, which means the debt payments you make every month would be 36% of your before-tax income.
But true financial readiness goes beyond meeting these requirements. It’s about ensuring you can manage homeownership comfortably without jeopardizing your other financial goals.
Building your savings foundation
Preparing for homeownership means saving much more than just the down payment. A solid financial cushion ensures you can handle not only your upfront costs of buying a home but also the unexpected expenses that often arise along the way.
Don’t be discouraged if you can’t save 20% for a down payment. Sanchez points out that many conventional loans allow you to buy with as little as 3% down, and Federal Housing Administration loans require about 3.5%. There are also down payment assistance programs available through cities, counties and lenders, which can be combined to reduce your upfront costs. Research these options early to maximize your flexibility.
Start by planning for both the purchase and the move. Think of lender fees, inspections, moving costs and any updates you want to make after settling in or furniture you may need to purchase. It’s wise to keep a separate emergency fund so it remains available as a true rainy-day reserve.
Pro tip: “Building an emergency fund is important, three or six months of expenses. Make sure you’re leaving room for things that can go wrong, any maintenance expenses that go wrong with the home,” Sanchez said. “Just be realistic with your budget and be honest with yourself, because that's not always easy."
The more you save in advance, the more flexibility you’ll feel when it’s time to make an offer and close on the home. Even if the logistics don’t work out now, building a consistent savings now can gives you greater options.
- How big should your down payment be? Hint: It doesn't have to be 20%.
- Is an FHA loan right for me?
- How to save for a down payment
Evaluating your debt situation
Before purchasing a home, it’s important to take an honest look at your current debts and monthly obligations. Balancing credit cards, car loans and other payments can influence how much house you can comfortably afford. Reducing high interest debt ahead of taking on a mortgage could be a better move. It can create more flexibility in your monthly budget and can help you feel more secure as you plan for homeownership.
While everyone’s financial situation is unique, maintaining a healthy balance between savings and manageable debt is a strong indicator that you’re moving closer to being ready to buy a home.
Lenders look for stable work history
Lenders look for income that is steady, which shows consistent work history and clear proof of earnings. Most lenders prefer applicants with at least two years of stable employment, though requirements can differ depending on your circumstances and the type of loan. If you’ve recently changed jobs, showing documentation that highlights career advancement or transitions within the same industry can be beneficial.
If you’re self-employed or have variable income, Sanchez says that you’ll need to provide additional documentation, such as personal and business tax returns, profit and loss statements and bank records. Working with loan officers experienced in these situations can make the process easier.
You should be ready to submit pay stubs, tax returns, bank statements and other records that verify your income. Keeping these documents organized and accessible can help speed up the loan approval process. If you earn money from sources beyond your main job, such as bonuses, rental properties or side businesses, make sure you understand how lenders assess these types of income.
Review your credit profile
Your credit history plays a role in whether you qualify for a mortgage and interest rate you may be offered. That’s why it's important to know your credit standing.
Pro tip: “The first step is pulling your credit," Sanchez said. "Where are you at? Is it accurate?”
If you’re unsure about your credit profile, take time to review your credit report and learn which factors could impact your eligibility. Simple actions such as paying bills on time and keeping credit card balances low, can gradually strengthen your financial position. You don’t need to have a perfect credit score to purchase a home, but being informed gives you an advantage when you’re ready to move forward.
Lastly, “not closing credit lines, because that will, in itself, lower your [credit] score,” Sanchez said.
Consider your cash flow
Taking on a mortgage means committing to a long-term financial responsibility that should fit comfortably within your everyday spending and priorities.
Before you begin searching for a home, review your current cash flow closely. Consider your monthly income and how it’s allocated, understanding where your money goes, will help ensure that a future mortgage payment fits alongside your regular expenses rather than competing with them.
Remember, homeownership comes with additional costs beyond the mortgage itself, such as property taxes, insurance, utilities and ongoing maintenance. If you’re considering specific neighborhoods, try to estimate these monthly expenses so you can plan accordingly.
It’s also important to keep your broader financial goals in mind, whether you’re saving for retirement, travel or education. Owning a home should complement your lifestyle, not overextend it. Aim for a payment that truly fits your situation, rather than simply accepting the maximum amount for which you’re preapproved.
Pro tip: “Not only do you have to think about the amount of your mortgage and all the different fees that go into it, closing costs, taxes, insurance, maintenance, etc.," Sanchez said, "but also do you want to continue the lifestyle you have now, can you do that when you purchase this home?”
He added: "Consider things that are not on your credit report. Do you like going on nice vacations? Do you want to dine out three to five times a week? Do you have private school tuition? All these big things that you wouldn't necessarily think of, but you pay for every single month.”