Home Buying 101

Home Buying 101: Your Path to Buying a House

How to buy a house

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.

  1. Budgeting to buy a house

  2. Deciding how much home you can afford

  3. Setting a home buying timeline

  4. Pick a mortgage program

  5. How to negotiate

Learn more about how we can guide you on your home buying journey.

Join us 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:

  1. How much home should you budget to buy

  2. How to budget to buy a home

  3. How soon you may be able to afford a home

  4. Preparing for your closing costs

  5. Your mortgage loan options

And more!

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.

Student loan 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:

  1. Identify and cancel unused subscriptions

  2. Track your monthly expenses

  3. Link your financial accounts to receive live time analysis

Follow this link and connect a financial account to get started.

Rocket Money website

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 towards 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 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 a 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:

  1. Take a Conventional mortgage and pay PMI

  2. Take a federally-backed loan with lower down payment requirements

  3. 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:

  1. Loan origination fees

  2. Loan application and underwriting

  3. Prepaid property taxes and homeowners insurance

  4. Title search and fees

  5. Land survey

  6. Home appraisal

  7. Other miscellaneous fees

We've also written some state specific closing cost guide 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.

Download our mortgage calculator

Our mortgage calculator will project your monthly payments based on your purchase price, loan rate & term, down payment, property taxes, and homeowners insurance premiums.

Student loan mortgage calculator

Now that you have a rough idea on 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 less 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 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 cost 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 awhile 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:

  1. At least two years of W-2 information

  2. Two or more recent paystubs

  3. Account statements from all of your major financial accounts

  4. More information as requested