So you’re ready to buy a home—congratulations. You’re about to begin a significant financial journey with many steps and potential pitfalls. Done correctly, however, buying a home can be an organized, manageable process. Below are 17 practical financial steps, from checking your credit to preparing funds for closing, that will help make your home purchase smoother.
Looking to buy a home? Check out BEX Realty to search listings, find condos and houses for sale, and work with experienced realtors and concierge services throughout the buying process.
1. Check Your Credit
Your credit score and history will be the first items lenders review when considering a mortgage. Pull your credit report and an estimated score from a reputable service to see where you stand. Scores typically range from 300 to 850; many lenders look for at least a 600–640 score, though exceptions exist. Keep in mind lenders use different scoring models, so your exact qualifying score may vary.
After checking your score, review your report for unpaid or old debts and any accounts you don’t recognize. Old collection accounts, even years old, can affect lender decisions. Dispute any fraudulent accounts promptly.
2. Resolve Issues on Your Credit Report
If you find outstanding debts, contact the creditor or collector. Ask for details—what the debt is for, the amount owed, and whether they’ll accept a settlement to mark the balance as paid. If they offer a full-pay settlement that brings the balance to zero, accept it. Avoid payment plans that could refresh the account on your credit report and appear more recent. Even after paying, the account may remain on your report, but a zero balance is less damaging to lenders.
Also prepare brief written explanations for collection accounts: underwriters are human, and clear context can help their evaluation.
3. Determine What You Can Afford
Know the difference between what you want and what you can realistically afford. Financial experts often recommend limiting your monthly mortgage payment to about 25 percent of your take-home pay. For example, with $4,000 net monthly income, target a mortgage payment around $1,000. Use mortgage calculators that include taxes and insurance to estimate monthly payments and compare options like 15-year and 30-year loans.
Be prepared to make trade-offs if your ideal home exceeds your budget. Prioritizing needs over wants will help you avoid taking on unmanageable debt.
4. Calculate Your Required Down Payment
Down payment requirements vary by loan type. FHA loans may require as little as 3.5 percent down, while conventional loans often require 10–20 percent. If you expect to use a conventional loan with a 10 percent down requirement, estimate the minimum cash you’ll need and plan accordingly. This helps you avoid last-minute surprises when applying for financing.
5. Set a Household Budget
Create or update a household budget listing income and all expenses. If your budget shows a surplus, earmark part of it for down payment savings. Multiply your monthly surplus by the months until you plan to buy to estimate how much you’ll save. If you’re short of your down payment target, either cut expenses to increase monthly savings or extend your timeline.
6. Consolidate Savings and Gift Funds
Gather any savings, gifted funds, or retirement distributions you plan to use and deposit them into a single account well before applying for a mortgage. Lenders scrutinize large, recent transfers; consolidating early reduces the need for time-consuming explanations and keeps your finances transparent.
7. Gather Tax Returns
Lenders often request the last two to three years of tax returns to verify income, especially for self-employed individuals, contractors, or business owners. If you don’t have printed returns, request transcripts from the IRS to demonstrate consistent income and support your mortgage application.
8. Prepare a Year-to-Date Profit-and-Loss Statement
If you run a business, you’ll likely need a year-to-date profit-and-loss (P&L) statement to prove current profitability. Use available templates or accounting software and gather receipts and invoices. A simple P&L is YTD revenue minus YTD expenses, yielding YTD profit or loss. This helps lenders assess your ongoing income.
9. Print Bank Statements and Explain Any Irregularities
Lenders typically require several months of bank statements and will review them closely for large or unusual transactions. Print statements in advance and prepare short explanations for any significant deposits or withdrawals, such as selling a car or receiving a gift. Providing explanations proactively speeds the underwriting process.
10. Explore Loan Types and Get Prequalified
About two to three months before buying, research loan types—conventional, adjustable-rate, VA, USDA, FHA—and speak with a mortgage professional to identify suitable options. Apply for prequalification so lenders can estimate how much you might borrow. A prequalification helps guide your search, but it does not guarantee final approval. Stay within the budget you set rather than relying solely on the maximum amount a lender offers.
11. Satisfy Prequalification Conditions
Conditional prequalification means you qualify provided you meet certain requirements, such as paying off old bills or reducing your debt-to-income ratio. Address these conditions promptly—failure to do so may prevent final loan approval.
12. Continue Saving
With an estimate of down payment and closing costs, keep saving toward the exact amount you’ll need. Revisit your budget and make additional temporary cuts if necessary to reach your target on time.
13. Check for Grants, Assistance, and Low-Interest Loans
Explore local, state, and nonprofit homebuying assistance programs that offer grants or low-interest loans for qualified buyers. Real estate agents often know of regional programs that can reduce your upfront costs. Investigate these opportunities early to include them in your plan.
14. Choose a Lender and Get Preapproved
About 30 days before closing, select a lender. Compare rates, closing costs, and the total cost of financing. Rate-shopping within a 14–45 day window typically counts as a single credit inquiry, minimizing score impact. Request full loan estimates to compare overall costs, then apply for preapproval—this is a stronger commitment from the lender and indicates you’re closer to final approval.
15. Avoid New Debt
Do not take on new major debts after getting preapproved. Large purchases on new credit accounts or financing can change your debt-to-income ratio and jeopardize loan approval. Small purchases on existing accounts usually won’t hurt, but avoid significant buys until after closing.
16. Arrange Homeowners Insurance
Lenders require homeowners insurance to protect the property that secures the loan. Shop multiple insurers for comparable coverage and deductibles, get written quotes, and decide whether to pay the premium yourself or have it included in your escrow account. In certain areas, options may be limited due to natural disaster risk; plan accordingly.
17. Prepare Cash to Close
When you receive the “clear to close,” you’ll also get a final statement showing the cash required at closing. This includes your down payment, initial escrow amounts, closing costs, and any outstanding fees. The lender will specify acceptable payment methods—cashier’s check, certified check, or wire transfer. Consolidate the exact funds into one account ahead of time to simplify transfers and avoid last-minute questions from the lender.
Looking to buy a home? Check out BEX Realty to search listings, find condos and houses for sale, and work with experienced realtors and concierge services throughout the buying process.