Preparing for the mortgage process

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Buying a home is a big undertaking, but if you break it down into manageable steps, it shouldn’t be overwhelming.

Before you start cruising open houses and browsing real estate websites, however, you should prepare yourself and your finances for this big purchase.

Start saving early

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You already know that buying a home is expensive, but even so, the actual numbers can be jarring.

How much you’ll owe for your down payment, which serves as your first payment on the loan, depends on the loan type and the minimum your lender will require. With a conventional loan, the minimum is usually 5%, which, if your home costs $200,000, is $10,000.

Some loans will allow you to put down as little as 3%, but with a $200,000 home, that’s still $6,000.

After the down payment, closing costs will be your most expensive upfront obligation. Among the costs might be mortgage discount points, appraisal or inspection fees, title searches and insurance, as well as fees for deed-recording and credit reports, surveys and associated taxes.

Generally, these costs will add up to around 2% to 5% of your total loan amount. On a $200,000 home, that’s essentially a second down payment.

Finally, you’ll need to cover moving expenses. That includes the logistics of moving your belongings, but you may also have to make some repairs or upgrades to the home and then decorate or furnish it after.

You should also plan to have an emergency fund at the ready should anything major pop up.

The earlier you start saving for these expenses, the better.

How Much Can I Borrow for a Mortgage?

Our guide will help you find out how much you can get — and afford.

See Guide

See how much home you can afford

Knowing what percentage of the home’s purchase price you’ll need upfront can also help you sort out how much home you can afford. If the expenses on a $200,000 home are already going to be a stretch, you shouldn’t start shopping for homes that cost much more than that.

This is important because mortgage lenders will sometimes offer a bigger loan than you should reasonably take on. It’s important to know your comfort level rather than rely on the lender to inform your decision.

Take a deeper dive into your finances and put some thought into what exactly you need from your prospective new home.

How is your financial health?

You might find it an uncomfortable experience, but consider taking a hard look at your finances.

Ask yourself a few questions: How much do you have in savings? How much debt do you have? Where is your money going every month? Are you able to take on additional or unexpected expenses?

What kind of home do you need?

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Most homebuyers probably picture themselves in a single-family, detached house. But other types of housing might work, too.

If you don’t need a whole house or a yard, consider a condominium or townhouse. These options can be more affordable and can serve as great starter homes for first-time buyers.

If you’re set on a single-family home but still dealing with sticker shock, consider a fixer-upper. Buying a home that needs some work can save you money upfront, but don’t forget to factor in the cost, effort and time needed for renovations.

What features do you like?

If you decide to work with a real estate agent, this will be one of the first questions put to you. It’s not a bad idea to come up with a list in advance.

If you work from home, you’ll probably want a space that can serve as an office. If you’re a home chef with Food Network aspirations, an up-to-date kitchen might make your list. Dog owners will typically look for a yard.

You may find it hard to find a home that meets all of your wants. When you draw up your list, consider indicating what is a “nice to have” and what’s a “need to have,” so if you need to narrow your focus, you’ve got a head start.

How much mortgage can you expect?

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Before you can start making offers on homes, you’ll want to seek preapproval for a loan, because you can’t earnestly start house hunting until you know how much you can actually afford.

Mortgage lenders will scrutinize your financial records and examine your debt-to-income ratios and credit score, then come up with a loan amount they believe you’ll be able to pay back.

How much can you afford month to month?

Paying back the money you borrowed isn’t the only expense you’ll have to manage every month as a homeowner. In addition to the principal, you will need to pay interest, taxes and insurance.

Property taxes in your area will generally cost about 1% of your home’s value every year. You’ll also be expected to purchase homeowner’s insurance, and, depending on how much cash you put down upfront, you might also be on the hook for mortgage insurance, which protects the lender in case you default.

Our mortgage payment calculator can help you add it all up and determine your monthly housing bill.

Once you know the costs, make sure you’ll have enough room left in your budget for other expenses, including groceries, entertainment, clothing and travel.

Check your credit score

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Your credit score is an important factor in assessing your eligibility for a home loan. You won’t find minimum standards across all lenders, but the better your score, the more easily you’ll qualify. A better score will generally make the underwriting process smoother, too.

If you don’t already know your credit score, Credit Sesame offers free credit checks. Knowing where you stand can help prevent any unfortunate surprises during the application process.

It also gives you an opportunity to improve your score, opening you up to better loan options. Self Lender is one company that offers credit repair loans. You can use a loan from Self to help build a payment history and boost your score.

Five steps to buying a house for the first time

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Now that you’ve completed the prep work, you can proceed to the fun part: looking for a home.

Find a home

By now, you know what you want in a home and how much you can afford. You can bring in a real estate agent and start your search in earnest.

Consider driving around neighborhoods you like, or ask friends and family if they know of any homes on the market that might meet your criteria. Visit open houses and take notes of what you see, what you like and what you don’t.

Everything before this point has been about the theoretical search for a home, but now that you’re putting the plans in motion, you may have to adapt your expectations based on what you find.

Be prepared to be a little flexible, but hold the line on your must-haves.

Check out assistance programs for first-time homebuyers

Most of the national loan programs aren’t designed to cater to first-time buyers, but newbies to homebuying do have other options.

Government-backed loan programs, including FHA loans, USDA mortgages and VA loans, make homeownership more accessible by offering low- to no-down-payment options and more flexible credit score requirements.

Also, many states offer additional programs to help give first-time homebuyers with lower incomes more favorable interest rates and down payment assistance. Even some local agencies offer down payment assistance programs.

You can search through listings of all the state housing finance programs here. Most of these programs have limits on the home purchase price and the participant’s income, so be sure you qualify for assistance before banking on it.

Make an offer

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Working with your real estate agent, you’ll come to an amount you’re prepared to offer the seller. In your offer, you’ll also list any conditions, or contingencies, you want to include. Some of the common contingencies buyers list involve financing and home inspection.

At this point, the seller can either accept or counter your offer. You may find yourself in a back-and-forth through the agents until you can come to an agreement. The seller may decide to go with another offer or simply reject yours.

You can walk away from the deal if the seller won’t budge on the price or your contingencies.

If all goes smoothly and the seller accepts your offer, that will initiate the process of officially buying the home. You’ll make a deposit to an escrow account, where the money will be held by a third party until the deal is finalized.

You’ll have about 30 days during which the house will be taken off the market and you’ll be under contract for the purchase, provided no major issues arise before the sale can close.

Get the home inspected

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As a first-time buyer, you should arrange a home inspection before the sale is finalized. Even if you can’t see a single thing wrong with the home, professional inspectors are trained to spot issues you probably would not think of.

Sellers are required to disclose serious defects with the home. If your inspection finds any major defects, you can either back out of the deal and seek the return of your deposit, or ask the seller to renegotiate the price.

Either way, it’s important to know about any issues with the home before they officially become your problem.

Close on the home

If all goes well, you’re now at the final stage of the homebuying process: closing.

This is when you’ll go through the processes related to the closing costs we talked about mentioned at the beginning of this article. Your lender will ask to have the home appraised, you will need to arrange a title search to ensure there’s nothing to prevent ownership of the home from being transferred, and you’ll have to apply for your mortgage and home insurance.

Then, you’ll have a big pile of paperwork to sign. At the end, you’re officially a homeowner and you have nothing more to worry about.

The Mortgage Underwriting Process Explained

A walkthrough of proven steps to getting a mortgage approval.

See Guide

Next steps

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Just kidding. The homebuying process is over, but your work as a homeowner has just begun.

Remember that homes need maintenance. At some point, you’ll need to replace the windows, furnace or roof. Hopefully not at the same time, but who can say for sure?

Think back to that emergency fund we recommended that you establish. Keep contributing to it regularly.

While you’re setting money aside, don’t forget to put some savings toward your retirement. The housing market can be fickle, and it’s best not to rely on just your home as your sole financial cushion in retirement.

Remember that the path toward homeownership doesn’t end when you buy a home. The more you think ahead, the more pleasant you’ll find the journey.

Tip: Here are the documents you need for a mortgage

Checklist explaining the documents needed for a mortgage

The Best Lenders for First-Time Homebuyers

See Lenders

About the Author

Sigrid Forberg

Sigrid Forberg


Sigrid is a reporter with MoneyWise. Before joining the team, she worked for a B2B publication in the hardware and home improvement industry and ran an internal employee magazine for the federal government. As a graduate of the Carleton University Journalism program, she takes pride in telling informative, engaging and compelling stories.

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