Buying a home is a huge accomplishment, but the housing market is competitive.
Thats especially true when it comes to mid-priced, affordable houses.
So how do you get ahead in a hot market? The key is preparation.
The sooner you prepare to buy a house, the easier it’ll be to beat the competition.
But even if youre already house hunting, this step-by-step guide can still improve your home buying prospects.
In this article (Skip to)
- Preparing to buy: Early stages
- Prepare to buy a house FAQ
- Check todays low rates
How to prepare to buy a house if youre in the early stages
First-time home buyers who are in the early stages of preparing to buy a house have a leg up.
You have extra time to get ahead of your credit, debt, and savings — which means youll have a bigger home buying budget and lower mortgage rate when youre ready to buy a new home.
Here are four steps to help you prepare to buy a house when you’re still getting ready for homeownership:
1. Check your credit
Once you decide to buy a new home, the first thing you’ll need to do is check your credit history. This involves pulling credit reports from each of the three credit reporting bureaus (Experian, TransUnion, and Equifax) to better understand your credit score.
Your credit score determines whether you’re eligible for a mortgage, and it influences your mortgage rate. The higher your score, the lower your rate.
Most mortgage programs require a minimum credit score between 580 and 620.
Ideally, you should check your credit history at least 6-12 months before applying for a mortgage loan. This allows time to improve a low credit score, if necessary.
You should also check your credit reports for accuracy and dispute any errors, especially negative errors that decrease your score.
To get your credit file, contact each of the three bureaus separately, or order all three copies from AnnualCreditReport.com. Each year you’re entitled to one free credit report from each of the bureaus.
2. Figure out your DTI
Your debt-to-income ratio (DTI) is the percent of your monthly gross income that goes toward debt repayment. Mortgage lenders use this percentage to gauge affordability.
Typically, lenders prefer a DTI ratio that’s no higher than 36% to 43%, depending on the mortgage program.
- If you have a gross monthly income of $4,000
- Your monthly debt payments (including a future mortgage payment) shouldn’t exceed $1,720
- Your DTI is 43% ($1,720 / $4,000 = 0.43)
Some mortgage lenders allow a higher debt-to-income ratio, but only when a borrower has compensating factors such as a high credit score or a large cash reserve.
To improve your DTI ratio, pay off as much debt as possible before applying for a mortgage. This includes credit cards, auto loans, student loans, and other loans.
You don’t have to be debt-free to purchase a home, but less debt can increase purchasing power.
3. Save for a down payment
Today, the majority of mortgage programs require a down payment. This amount ranges from a minimum 3% to 5% for a conventional loan, and a minimum 3.5% for FHA loans.
So if the purchase price for your first home is $200,000, you may need at least $6,000 to $10,000 as a down payment.
A down payment isn’t required with a VA loan or a USDA loan.
Keep in mind, too, if you purchase a new home with less than a 20% down payment, you’ll likely pay private mortgage insurance (PMI). This adds to your monthly payments. FHA loans also require an upfront mortgage insurance fee in addition to the monthly fee.
Private mortgage insurance protects your lender in the event of default.
If youre having trouble saving for a down payment, its possible to use gift funds or down payment assistance to help you qualify.
You’re also responsible for closing costs — which are roughly 2% to 5% of the loan amount (or $4,000-$10,000 on a $200,000 loan).
When applying for a mortgage loan, your lender will ask for copies of your bank statements to confirm you have enough cash reserves for your down payment and closing costs.
If you don’t have enough cash, some mortgage programs allow borrowers to use gift funds to cover all or a percentage of their mortgage-related expenses.
There are also multiple down payment assistance programs (DPAs) in every state. These offer grants or loans — often, forgivable loans — to qualified homebuyers who need help with their down payments.
So if you need a little extra help with the out-of-pocket costs, DPA is definitely worth looking into.
4. Determine your budget
Before meeting with a mortgage lender, use an online mortgage affordability calculator to figure out how much house you can afford.
Once you know what your home purchase price range will be, you can then estimate how much to save for your down payment and closing costs.
For example, if an affordability calculator says you’re likely to afford a $250,000 home, aim to save a minimum $12,500 for your down payment, and perhaps another $5,000 to $7,500 for closing costs.
- Estimated home purchase price: $250,000
- 5% down payment (typical for a conventional loan): $12,500
- Estimated closing costs (about 3% of loan amount): $7,500
- Minimum amount to save: $20,000
Mortgage calculators vary. Some estimate your monthly payment based on the home price, down payment amount, interest rate, loan term, and other monthly mortgage expenses like homeowner’s insurance and property taxes.
Other mortgage calculators, however, estimate affordability using information you provide about your income and current debt payments.
But remember that this is only an estimation. You’ll still need to contact a mortgage lender to learn how much you really qualify for.
How to prepare to buy a house when you’re ready now
These are steps everyone can and should take before buying a house, especially first-time buyers.
But even if you found your dream home out of the blue, and you feel rushed to buy, a little preparation will position you to get the best financing available and make a competitive offer.
Heres what to do.
1. Research loan programs
Even though your mortgage lender will discuss different home loan solutions, do your own research before meeting with the loan officer.
Once youre ready, the home buying process is going to move fast. It can be difficult to digest everything your lender says — and you might not feel like you have time to explore financing options.
Once youre ready, the home buying process is going to move fast. You might not feel you have time to explore all your financing options.
If you settle for the first loan youre offered, you might miss out on lower rates or a more affordable loan program.
So take your time and educate yourself on different types of loans. Think about what you really want in a mortgage. Is it:
All these things are possible. But a loan officer can only help you find the right match if you know what your priorities are.
Knowledge is the best tool to make an informed decision and choose the best home loan for your situation.
2. Get pre-qualified/pre-approved
A mortgage pre-qualification and mortgage pre-approval can jump-start the home buying process. But while both steps sound similar, there are a few differences.
A pre-qualification is a preliminary step where you provide the mortgage lender with basic information about your financial situation via an online form. The lender doesn’t verify this information, but uses it to determine whether you might qualify for financing.
The lender might offer you a preliminary approval letter after getting pre-qualified, but it typically doesn’t carry as much weight as a pre-approval letter.
Getting a pre-approval letter is the most important step before house-hunting. Some Realtors and sellers will only work with pre-approved buyers.
Getting a pre-approval letter involves submitting a mortgage application and providing your lender with supporting documentation. This includes tax returns, paycheck stubs, W2s, financial statements, and a credit check.
The underwriter reviews this information and determines how much you can afford to spend on a property.
A pre-approval letter doesn’t guarantee financing, but it’s a lender’s way of saying they will likely approve you, provided you meet other loan conditions.
A pre-approval is the most important step before house-hunting.
Youll know what you can afford before searching for a home — plus some Realtors and sellers will only work with pre-approved buyers.
3. Find a real estate agent
Buying a home can be a complicated, intimidating process, so you’ll need a professional on your side to answer questions and look out for your best interests.
Don’t rely on the seller’s agent to provide advice and guidance. It’s their job to advise their client, not you.
To find a good real estate agent, get recommendations from friends and family. You should also read online reviews, and interview two or three agents before making a final decision.
4. Be ready to pay an earnest money deposit
Make sure you have liquid cash for your earnest money deposit. Once you find a property, you’ll need to submit an earnest money check with your offer. This is good faith money that says, “I’m a serious buyer.”
Earnest money deposits vary but typically range from 1% to 2% of the purchase price — usually a minimum of $500 to $1,000.
The seller doesn’t pocket the money, though. Funds are held in an escrow account, and either returned to you at closing or applied to your closing costs and/or down payment.
How to prepare to buy a house FAQ
Home buyers can purchase a new home with as little as 3 to 5 percent down on a conventional loan and 3.5 percent down FHA loans. Government-backed mortgages programs, such as FHA loans and USDA loans, require no down payment at all. So if your price range maximum is $300,000, then plan on saving at least $9,000 for your down payment.
The time it takes to find your dream home varies depending on the housing market in your area, the amount of open houses you attend, and the type of home youre looking for. However, closing on a home takes an average of 30-45 days once you are under contract. Closing can take even longer when negotiations and counter offers are involved, and sometimes closing will take less than 30 days when both the buyer and seller are motivated for a speedy sale.
The home buying process is different for everyone, but generally, first time buyers should focus on determining how much house they can afford, getting multiple rate quotes on their mortgage loan, taking advantage of first-time home buyer programs and making a down payment that is the right size.
Common first-time home buyer mistakes include getting only one rate quote, not checking your credit history, not researching different types of loans, and not being honest with yourself about how much house you can afford.
Preparing your credit before buying a new home involves reviewing your credit reports and credit scores from the three major credit bureaus: Equifax, Experian and TransUnion. Be sure to contest any errors, pay off past-due debts and then request that the creditor delete them from your record, and avoid applying for new loans or lines of credit. Also, if you have any high-interest credit card debt, then pay those balances off immediately.
Experts recommend getting multiple mortgage quotes before you buy a home. This should help you find the lowest rate and save money month to month. As long as you get all your rate quotes within a two-week window, multiple credit pulls shouldn’t hurt your score. But you can also protect yourself by asking lenders to provide a rate quote without a hard credit inquiry. This should be relatively accurate, as long as the credit information you provide is true.
The home buying process moves fast, so dont rush your preparation
Buying a house is a huge decision, so it’s important that you don’t rush.
Some eager buyers act too quickly and end up skipping vital steps such as a home inspection and comparison shopping.
In a worst-case scenario, you could end up with a fixer-upper when you thought you were buying a turn-key home, or end up spending thousands extra in mortgage interest.
On the flip side, a little savvy can save you tens of thousands over your mortgage term and even boost your home buying budget.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.