Many first-time homebuyers are still hoping to find a place to call their own, even with high mortgage rates and low housing inventory. Here's a step-by-step guide on how to buy a house you love—and can actually afford.
1. Check your credit
Before you hit any open houses, make sure you have—or are actively working on getting—a good credit score. That shows you're on time with paying debts and could spare you from needing a larger down payment or only qualifying for higher interest rates. The reason this is step 1: If your credit score needs improvement, you might need some time to make that happen.
Real estate broker Josh Steppling, 33, worked on improving his credit score before applying for a mortgage. He paid all his loans and bills on time and kept his spending far beneath his credit limits. "I had a score near 800 when my wife and I purchased, so my mortgage rate was nearly a full percentage point lower than some clients I had," says Steppling—a perk of good credit that could lead to significant savings over time.
2. See if you qualify for any financial assistance
If you're a first-time home buyer, many cities and states offer programs or financial assistance for qualified households as an incentive to put down roots in the area. Martin Orefice, 41, benefited from one of those programs when he bought his Orlando home. "I got $20,000 for a down payment, and it was not a loan that I had to pay back," says the CEO of Rent to Own Labs. "The only stipulation was that I had to live and work in Orlando for at least 5 years." You might need to meet other requirements, such as earning below a certain income threshold or living in the area for a certain amount of time before you buy. Here are some programs that could get you to homeownership sooner.
3. Determine your homebuying budget
There are a few sets of big costs that will help you understand how much house you can afford. Some you'll need to pay before you move in, and others are what you'll pay over time.
- Your down payment: Depending on the purchase price and type of loan you're taking out, expect to put down anywhere from 3% to 20%, according to Rocket Mortgage, a mortgage lender.1 A smaller down payment might be appealing because you won't have to save as much, but a bigger down payment comes with other perks. Besides reducing your overall mortgage amount, interest you'll pay over time, and monthly payments, it could land you a better interest rate (because you need to borrow less money) and make your offer more attractive to sellers (because they might see you as less likely to bail over financing issues). Plus, it could help you avoid paying private mortgage insurance, an additional 0.2% to 2% of the loan amount per year that some lenders charge buyers who put down less than 20%, according to credit reporting company Experian.2 Whether you have more or less to put down, here's how to save for a down payment.
- Closing costs: These one-time payments are like service fees for everyone involved in processing your purchase, which could include your lender, lawyers, real estate agents, and title company. Plan to budget about 2% to 6% of the mortgage amount, suggests LendingTree, an online lending marketplace.3
- Monthly payments: Your down payment and interest rate largely determine your monthly mortgage payment. Real estate taxes and homeowners insurance could also get rolled in. But you'll need to account for other regular costs, such as utilities, maintenance, and repairs.
4. Gather receipts
Before you can get a mortgage or even a preapproval, you have to go under a microscope. Besides checking out your credit, lenders will often dig into your work history—typically going back 2 years—to see how steady your income is. They'll also look at your debt-to-income ratio, aka how much of your earnings goes to paying off existing debts. Fidelity suggests limiting debt payments to 36% of your income, if possible. So be prepared to show documents like bank statements, tax returns, and proof of employment.
5. Get preapproved for a mortgage
A preapproval letter states how much a lender would loan someone—and on what terms—based on their current financial situation, explains Mathew Pezon, 35, a real estate investor and owner of Pezon Properties in Lehigh Valley, Pennsylvania. In addition to confirming what you can afford, Pezon says preapproval letters help sellers know a buyer is serious. Just remember: Preapproval isn't the same as final approval, which comes after more thorough vetting. And preapproval from a certain lender doesn't mean you have to get a mortgage from them.
6. Start home hunting
You could go it alone on the apps, but a real estate agent could help find homes that meet your criteria, set up appointments to view them, prepare offer letters, and negotiate on your behalf. They also could help make sure you don't overpay because they know the local market, including "comps" or comparable sales/similar properties.
Consider looking at more than what's formally listed. Once Steppling knew the neighborhood he and his wife wanted to be in, he started spending an hour a day there. "I'd walk my dog, talk to people, and see if anyone was interested in selling," he explains. "Buying a home off market means you don't have competition." As a result, he estimates he bought his home for $25,000 under market value.
7. Ask the right questions
It's easy to get hung up on a home's look, but before making an offer, it's wise to get more information about the property. Consider asking the following questions:
- How long has the property been on the market? If it's been a while, find out if there's a problem that's deterred other potential buyers. On the other hand, if the home was just listed, be prepared to act fast if you want to make an offer.
- Is there a homeowners' association (HOA)? An HOA could come with monthly fees and regulations that impact how you landscape your yard, what color you may paint your home, and even where you may walk your dog.
- Is the roof in good condition? Fixing an old, damaged roof is expensive, and an insurer might not be willing to cover a home with a worn-out roof, potentially making it harder to get a mortgage.
- Were any additions or renovations made? If the work was unpermitted or not up to code, it could be a deal-breaker for some lenders or home insurers until you fix them.
- Is the electrical wiring and plumbing up to date? These can be costly upgrades, so look for sneaky signs of leaks or mold (such as flaky plaster or water marks), make sure the water heater works well, and turn on faucets to check the water pressure. Similarly, check that there are plenty of outlets in each room and turn on appliances. If the lights dim, that could signal the electrical panels need work.
- Is the house structurally sound? Sloping floors and doorways are a clue that the home's main support beams need to be leveled or fortified.
8. Make an offer
Your real estate agent can draft an offer letter, which could include potential deal sealers, such as that you've been preapproved for a mortgage and can be flexible on closing dates. Offering a good faith deposit could also sweeten the pot. That's a percentage of your down payment that would go to a third party, such as an attorney, if your offer is accepted. The seller would get to keep it if you back out after you've struck an agreement.
If your offer is accepted, a contract will be drawn up and then you can move on to getting a mortgage, appraisal, and inspection. You might be able to include a contingency in your contract that allows you to withdraw if issues come up during the inspection.
If the offer is rejected, you'll have to decide if you want to go back with a higher amount and/or additional concessions—such as only pulling out if the inspection reveals major structural or safety issues—or walk away. Or the seller might kick back a counteroffer themselves.
Be prepared to negotiate, and not just on price. If you're buying a newly built home, for example, ask for what you want now to avoid paying for upgrades later. You might be surprised at how far the developer will go to keep you as a buyer. James Beckett, 32, and his girlfriend requested extras when they bought their new home in Dallas, including appliances, TVs, upgraded carpets, and more. "They agreed to all our requests," he says. "Perhaps we should've asked for more!"
9. Get a mortgage
There are a few different types of mortgages. Conventional loans are the most common, but they tend to have stricter rules around minimum credit scores than government-insured loans, such as Federal Housing Administration loans.If you find the options dizzying, consider a mortgage broker, who is supposed to seek out the best rates, closing costs, and terms for your financial situation. That strategy helped Zayna Thomas, 29, when she and her then-fiancé were looking to buy in Northern Utah. "I was sure I wouldn't find better than the first pre-approval we got from a bank I have a long history with," Thomas says. "But an independent mortgage brokerage saved us over $9,000 in closing costs."
10. Shop around for service providers
Doing your own research rather than going with who your lender or real estate agent recommends for title insurance, an inspection, and more could help further cut costs. Jake Hill, 38, shopped around when he purchased his home in Austin, Texas, in 2018. "It was tempting to take the easy route and just go with the defaults," says the CEO of DebtHammer. But Hill requested a list of available closing service providers in the area, which lenders are required to provide. "I'd estimate I saved about $2,000 between closing and title insurance," he says.
11. Get the home inspected and surveyed
This is a chance to revisit the property alongside an inspector who will go room by room and note any problems, from the roof to the appliances to the electrical system. They'll write up a report with their observations and suggestions on issues that need addressing. If there are problems you didn't promise to ignore in your contract, you might be able to talk the seller down in price or have them fix these issues.
Now is also a good time to get a property survey (or find out if the seller has a recent one). A surveyor will come map out boundaries around and under the property—including any wells or septic systems—to determine who owns what. This could mitigate any future property line disputes.
12. Get an appraisal
Many lenders require home appraisals to make sure the amount they're loaning you matches the property's actual worth. It's up to the seller to prep the home and the lender to choose a company to do the job. Appraisers will determine the home value by looking at factors such as square footage, how recently upgrades were done, comps, location, and the current housing market. Once the appraisal is done, a report is written up with one of the following 3 results:
- The appraisal comes in under the offer price. This is the worst-case scenario, which means you'll likely have to go back to the seller and negotiate a lower price or make up the smaller loan amount with a bigger down payment.
- The appraisal matches the offer price. In this case, your lender has the green light to process the loan, and you can move on to closing.
- The appraisal comes in over the offer price. This is a win for the buyer. You not only get a home under market value but also instant equity once you close.
13. Do a final walkthrough and close
Ahead of your closing date, request a final walkthrough of the property and make sure any requested repairs have been completed and the home is in the condition you expected. The home should be empty, so you could get a better look at issues that furniture and décor might have hidden. If you find anything you don’t like, you could ask for credits toward closing costs in lieu of repairs.
Your lender will send over a closing disclosure, which details how much money you need to bring—typically in the form of a bank check—as well as details of your loan and monthly payments.
You also might be able to improve your mortgage terms at closing, like Pezon did. He paid “points,” an additional fee to a lender in exchange for a lower interest rate. “This saved me money over the life of the loan,” explains Pezon. “At a certain point, the upfront cost will be offset by the reduced interest rate, resulting in long-term savings, if the home isn’t refinanced or sold.”
Even if your mortgage terms stay the same, you’ll review and sign what feels like a mountain of paperwork at closing. But you’ll get a set of keys to your new place too.