How to become a homeowner
Buying a home is difficult, time-consuming, and requires months to years of detailed and advanced planning. But it is absolutely worth it. And for most of us, the allures of owning your own space and being able to build wealth at the same time are too much to pass up. So we built an easy five-step process to help anybody, regardless of income level, join the ranks of homeowners nationwide.
Budgeting to buy a house
Deciding how much home you can afford
Setting a home buying timeline
Pick a mortgage program
How to negotiate
Learn more about how we can guide you on your home-buying journey.
Join me for a home buyer 101 session
Our readers have asked, and we've listened. We're now offering home-buying 101 intensive sessions, where you'll work directly with Nate to prepare for the home-buying process. Your sixty (60) minute session will help you get the answers to all of your crucial questions, including:
How much home should you budget to buy
How to budget to buy a home
How soon you may be able to afford a home
Preparing for your closing costs
Your mortgage loan options
Plus - after your session, you'll receive thirty days of unlimited messaging support via What's App to make sure that you get answers to all of your home-buying questions! And you'll receive our customized mortgage calculator free.
Grab our mortgage calculator
Budgeting to buy a home
Budgeting to buy a home is probably the hardest part of the process. We always recommend that our readers and clients start by using an online budgeting tool of some sort. Our current favorite is Rocket Money, because of the way their tool can help you to:
Identify and cancel unused subscriptions
Track your monthly expenses
Link your financial accounts to receive live time analysis
Follow this link and connect a financial account to get started.
We also have a couple of budgeting tips to help make homeownership more attainable for Americans nationwide:
Break your budget down into major categories, such as needs, wants, and savings
Subdivide further into categories (for example, breaking your wants down into buckets such as eating out, entertainment, travel, etc.)
Finally, if you have student loan debt, you may consider whether refinancing may help you to open up some cash flow. We typically recommend you start the process by checking your rate with Splash Financial since they'll be able to quote you a new rate in less than three minutes without impacting your credit score.
Visit our student loan refinancing guide for a full list of our bonuses and cashback offers.
Know your financial metrics
An integral part of the home budgeting process is understanding all your financial metrics at any given point in time. More specifically, you need to take a look at your debt-to-income ratio, credit score, and household income to help you track your progress toward homeownership. Then, you'll want to rerun these numbers with your prospective mortgage built in.
1. Debt-to-income ratio
More often than not, mortgage lenders want to see a debt-to-income ratio below 45% at most, and ideally much lower than that. To figure out your debt-to-income ratio, you'll take all of your household debts and divide them by your household's income.
In other words, if you and your spouse collectively earn $120,000 per year, you'll need to have no more than $54,000 in debt. There is a way around this requirement via physician mortgage programs, but they are reserved for young physicians with student loan debt.
2. Your credit score
The second number that absolutely will need to keep track of is your credit score. If you are looking to take out a Conventional home loan, you'll likely need a credit score of 620-640 at a minimum. Those with scores as low as 580 may still be able to buy homes via the FHA loan program, but FHA loans generally carry expensive mortgage insurance premiums that you don't want to pay unless absolutely necessary.
The best mortgage interest rates will be reserved for the most credit-worthy borrowers, those with credit scores of 760 or above.
Your credit score is the most important metric used by lenders to evaluate your creditworthiness. Without a history of missed payments, bankruptcies, or delinquencies, you will have a much easier time qualifying for a mortgage. And once you are within 6-12 months of applying for a home loan, you'll likely want to avoid activities such as:
Applying for new credit cards or sources of credit
Avoiding charging large expenses that will mess up your utilization
Not subjecting to hard credit inquiries, which will impact your credit score for a period of time
3. Household income
You likely already know how much your household earns, but you'll want to continue to pay attention to it as you plan to buy a home. We recommend that you keep your eventual mortgage payments to less than 30% of your monthly pre-tax income.
In an ideal world, this ratio will be under 25%.
How to start saving for a house
Saving for a house can be a lengthy process for some, but it is really important. Before you start saving for a home in your area, you'll want to understand how much it is likely to cost you. Use recent comps in your area or neighborhood that match the number of bedrooms, bathrooms, and amount of land that you want to buy. Sites like Zillow and Redfin can be a great help here.
Saving for a down payment
After reviewing comparison sales in your area, your main priority is to understand how much money you will need for a down payment. Most Conventional loans will want 20% down to avoid private mortgage insurance (an additional expense each month until you reach 78-80% LTV), but unless you are selling a home, it can be really difficult to reach this 20% threshold.
If this sounds like you, you have three options:
Take a Conventional mortgage and pay PMI
Take a federally-backed loan with lower down payment requirements
Look for a lender that offers low down payment Conventional mortgages
FHA loans are a great example of a federally backed home loan that requires a down payment of just 3.5%, but lenders like TD Bank offer their own programs, such as TD's Right Step Mortgage, which also carry low down payments (3% in this case), but also have lower ongoing fees than some federally backed mortgage loans do.
Saving for closing costs
You'll also need to begin thinking about your closing costs. Your closing costs can vary widely depending on where in the country you are, how much your title costs are, when in the month you close, and other variables.
Generally, you can expect to pay about 2-6% of your home's purchase price in closing costs, including:
Loan origination fees
Loan application and underwriting
Prepaid property taxes and homeowners insurance
Title search and fees
Other miscellaneous fees
We've also written some state-specific closing cost guides for prospective buyers in California, Connecticut, Oklahoma, Utah, Massachusetts, Wisconsin, Illinois, Oregon, Ohio, Louisiana, Pennsylvania, Texas, North Carolina, New Jersey, Florida, Virginia, Georgia, and Minnesota.
Now that you have a rough idea of how much money you'll need to save to buy a home, it is time to turn your planning into execution. We recommend that you establish a new checking or savings account to save up for your home-buying expenses. You should make contributions via direct deposit right from your paycheck. Other tips that you may consider to save up some money a little more quickly include:
Utilizing a money market account or special higher-yielding savings account (we recommend CIT Bank for these purposes)
Giving up takeout or restaurant expenses for a period of time
Reworking your monthly budget to prioritize your goal of becoming a homeowner
Consider the various mortgage programs
You can't graduate from home buying 101 without thinking about how you'll finance your home purchase, so you'll also want to dedicate some time to studying the various home loan programs that you can choose from. Among the many mortgage programs you should consider include:
Conventional: Conventional mortgage loans come in both fixed and adjustable interest rate varieties, and may carry the lowest monthly payments of any mortgage program on this list. The flip side of this is that Conventional loans typically carry the highest down payment requirements. And with down payments lower than 20% of the home's purchase price, you will pay for private mortgage insurance.
Conventional 97: Conventional 97 loans carry many of the perks of the Conventional loan program, but only require down payments of 3%, making them a great option for buyers looking to get into a home more quickly. They also carry fewer fees than FHA home loans.
Federal Housing Administration (FHA): FHA loans, which are backed by the United States government, carry a low 3.5% down payment and a 580 credit score requirement. As such, they can be a good fit for first-time buyers, as well as those that have subpar credit histories. To compensate for this risk, you will be on the hook to pay costly and recurring mortgage insurance premiums.
USDA: Another federally backed option, the USDA loan program is reserved for low and moderate-income home buyers purchasing homes in rural areas across the country. As an added incentive, there are no down payment requirements.
VA: Reserved for qualifying Veterans and surviving military spouses, VA loans are another great way to buy a home without a down payment, though you will face a loan funding fee.
State/lender-specific programs: Another option you may consider is participating in a state or lender-specific program. Many state agencies offer their own mortgage programs, as well as closing costs and down payment assistance to those that qualify. Lenders oftentimes have their own programs as well, like TD Bank's Right Step mortgage that we discussed earlier.
Prequalifying for a mortgage
As you get closer to making your home-buying goals a reality, you'll want to consider whether or not you should get prequalified for a mortgage. A preapproval, as it is also known, can be a sign to a seller that you are serious about the process and likely will be able to close more quickly than other buyers.
My wife and I completed the preapproval process before we ultimately bought our home in May 2022, but whether or not you do will likely depend on the state of your finances and other variables. Whether or not to complete a preapproval is one of the most popular questions we get from first-time home buyer 101 sessions, and our answer is usually consistent: it depends on the state of your finances.
If you already have enough money saved up for a nice down payment and closing costs, and your credit score is in a good place, then it can be a good idea. Otherwise, you'll likely want to wait a while until your metrics improve. This goes back to watching your debt-to-income ratio and monitoring your account balances and credit.
Once you decide to move forward, you'll need to come up with a lot of financial documents to complete the process. Among the many documents you should be able to access include:
At least two years of W-2 information
Two or more recent paystubs
Account statements from all of your major financial accounts
More information as requested
Home buying process checklist
We've found that many prospective homeowners find it helpful to have a checklist at their disposal to help them with the home-buying process. And while every real estate transaction will be a little different, you'll generally need to check off the following boxes as part of the process (your lender will likely provide you with similar information):
Complete a mortgage prequalification (optional)
Find a home you love
Agree on a purchase price
Formally apply for a mortgage
Get home insurance
Prepare for closing
Take ownership of your new home
This may sound like a stressful process, and it can be, but we've got everything you need to check off all of these items.
1. Complete a mortgage prequalification
We've already touched upon the mortgage prequalification process, but want to stress that this is an optional part of the home-buying process. This said, being prequalified to buy a home can be a real asset, particularly in highly competitive real estate markets.
It is a great sign to home sellers that you are serious, and likely will be able to work towards a closing date more quickly than other prospective buyers.
2. Find your dream home
After you know how much home you'll be able to finance with your bank, it is time to ratchet up your home search. While you want to enter the search with a sense of urgency, you don't want to rush. Depending on how long your home search takes, you may need to renew your prequalification, as it may only be active for 30-90 days at a time.
3. Agree on a purchase price
Unfortunately, you still have work to do even after you find a home you want to buy. You'll need to agree to a sales price with the seller, which can be easier said than done. Typically, this will require multiple rounds of negotiation, though you may have to come in with a more aggressive offer from the onset if there are already multiple offers on a home.
Your goal in this step is to "get the house" and agree to a purchase price that is fair for the seller, while still in your price range.
4. Complete your mortgage application
Even if you're prequalified, you'll still need to formally apply for a mortgage. Your mortgage application is the next step in your home buyer 101 journey. Work with a loan officer with your bank or lender to help navigate the process. When my wife and I bought our house, we worked with a local bank, and our loan officer was always just a phone call away.
After you apply, your loan will be approved or denied, and then if approved, will be sent to the underwriting stage.
5. Get home insurance
After you've made progress in getting your home loan squared away, you'll next want to make progress in checking off the other boxes before you can close. One such item is your home insurance, which is a requirement from most all lenders on the market.
You may decide to shop around with different companies and insurers to see how much coverage you can get at the lowest possible cost.
6. Prepare for closing
After a few weeks have passed, you're going to get the good news you've been waiting for: you are cleared to close. Your lender/title company will give you the dollar figure regarding the amount of money you'll need to bring to your closing.
In the meantime, you'll want to prepare for this multi-thousand-dollar expenditure, which will consist of your down payment and closing costs. Transfer the money you're going to use into an account where you can get a certified bank check, which you likely will need to bring to your closing.
7. Take control of your new home
Finally, your closing day! You'll head to your real estate attorney's office, where you'll sign a bunch of legal stuff, and officially receive your keys, garage door openers, and any other access items to your new home, which is now officially yours!
Don't forget to check out our whole depth of first-time home-buying content.
First-time home buyer state guides
Mortgage lender reviews
Closing cost state guides