Buying a home for the first time is a big step.
Financing it requires a steady progression through financial readiness and budgeting to loan research, pre-approval, lender selection, underwriting and closing. Understanding the requirements can help you avoid costly mistakes.
Here's a look at the process from beginning to end.
1. Take a good look at your finances
Figure out how much you earn, what you owe and what you have in the bank. Start with your most recent pay stubs, last year’s taxes and the monthly payments you make on long-term debt, like credit cards and car loans.
A rough rule-of-thumb is that homebuyers should spend less than 30% of their pre-tax income (not your take-home pay) a month for housing.
Get copies of your credit reports and check them for accuracy. If you’ve paid off a credit card and a report hasn’t noted it, call to make sure your file is updated. Lenders will offer lower mortgage interest rates to homebuyers with higher credit scores. Focus on reducing your debt by making monthly payments on time and paying down cards.
Figure out how much money you could put down on a house. Generally, 20% is considered a good amount for a down payment, but some lenders and loan types will accept less. It doesn’t have to be much — in some cases, it’s possible to buy a home with no money down through special government programs.
2. Set a homebuying budget
Next, you'll want to determine a realistic price range for a monthly payment. Use Homes.com’s mortgage and affordability calculators to run the numbers, tinkering with how much of a down payment you might pay and what interest rate you might qualify for. You can also adjust loan terms.
Remember that just because a lender approves you for a certain amount doesn’t mean you need to spend that much. Aim for a payment that leaves room in your budget for other expenses and savings goals.
3. Take a look at what kind of mortgage you want
There are three types of home loans:
- Conventional loans: These are loans that are not guaranteed by the U.S. government. They have higher down payment requirements and credit requirements.
- Government-backed loans: There are three kinds. The Federal Housing Administration program lets you put as little as 3.5% down on a home and accepts people with lower credit scores. The Department of Veterans Affairs has a zero-down loan program for eligible service members and veterans. The United States Department of Agriculture has a program for zero-down loans for homes in a qualifying rural or suburban areas. Good news: More than 95% of the United States is rural or suburban, according to the USDA.
- Special programs: There are state, local and lender programs that will give first-time homebuyers money for a down payment and for closing costs. Don’t overlook these funding sources.
When checking out loans, review pros and cons like down payment requirements, credit requirements and any qualifications for the loan (like if it’s in a rural or suburban area). Review pros and cons, including down payment requirements, credit score minimums and potential risks like balloon payments or prepayment penalties.
4. Get a lender to pre-approve you for a loan
Pre-approval is when a lender reviews your financial and credit statements and decides if you’re a good risk for a loan. It isn’t a final approval, but it shows sellers you’re serious and gives you a clear idea of what you can afford.
To apply for a pre-approved loan, take all the documents you gathered along with bank statements and two years of tax returns and send it to a lender. It's a good idea to apply to several lenders to compare their interest rates and loan terms.
If you’re not ready to take that step, you can pre-qualify for a loan. This is an informal review. A lender won’t do a full request for your financial documents. Pre-approval is a great way to figure out, early on, where you stand in getting a mortgage.
5. Shop for a loan
A small difference in a loan’s interest rate can add up to thousands of dollars over the life of a loan. Look at different lenders, checking for:
- Interest rate
- Annual percentage rate or APR
- Lender fees
- Closing costs
- Options for buying points to lower your rate
- Loan terms and flexibility
Choose a lender who offers competitive terms and communicates clearly throughout the process.
6. Make an offer
If you find a home that fits your needs, work with your agent to make an offer to the seller. This involves a lot of paperwork, and you’ll usually sit down with your agent to fill it all out.
If you’re pre-approved, include a pre-approval letter that a lender can give you in your offer. Sellers will give higher priority to offers that have been pre-checked for accuracy and show you can buy the home.
You can ask the seller if they will pay part of your closing costs or money that can be used to lower your interest rate. When the offer is accepted, you’ll sign the purchase agreement and typically deposit earnest money into escrow. Escrow is an account maintained by a third party in which the buyer and seller deposits funds.
7. Finish the final mortgage loan process
If a seller accepts your offer, your lender will do an even more thorough review of your financial and credit statements. The lender will look at a few more things:
- Appraisal to confirm the home’s value
- Title search to verify ownership and clear any liens
- Employment and income verification
- Asset verification
- Final review of your credit and debt-to-income ratio
The lender will send you a final loan estimate. Avoid taking on new debt or changing jobs during this stage, as it can derail your approval.
8. Close on the loan
Three days before meeting to sign the final purchase agreement documents and collect the keys to your new home, you typically will get a Closing Disclosure outlining your loan terms, monthly payment and cash you need to pay for any expenses like getting the house appraised for value or getting a home inspection.
At the meeting, you’ll sign documents such as the Mortgage Note, Deed of Trust and any required occupancy certificates. You’ll also remit your down payment and closing costs, unless those are rolled into your loan or covered by seller credits. Once funds are disbursed and the deed is recorded, you’ll get the keys to your new home.