What You Need to Do Before You Buy Your First Home

Start with your finances and credit

Before you look at a single house, know your credit score and check your credit report for errors. You can get your report free once a year from annualcreditreport.com, the official site run by the three major credit bureaus. Your score affects the interest rate you'll pay — a difference of even one percentage point costs tens of thousands of dollars over a 30-year mortgage.

Pull together proof of income for the last two years: W-2 forms if you're employed, or tax returns if you're self-employed. Lenders will ask for recent pay stubs and bank statements too. Start saving for a down payment now if you haven't already. First-time buyer programs exist that require as little as 3 percent down, but the more you save, the lower your monthly payment and the less interest you pay overall.

Write down all your debts — credit cards, car loans, student loans, anything with a monthly payment. Lenders calculate your debt-to-income ratio, which is the total of all monthly debt payments divided by your gross monthly income. Most lenders want this below 43 percent, though some first-time buyer programs go higher. Paying down debt before you apply for a mortgage improves your ratio and your approval odds.

Key Takeaways

• Check your credit score and report before you talk to a lender, because errors on your report can lower your score and cost you thousands in interest.
• Gather two years of tax returns or W-2 forms, recent pay stubs, and bank statements — lenders will ask for these to verify your income.
• Calculate your debt-to-income ratio by adding up all monthly debt payments and dividing by your gross monthly income; most lenders want this below 43 percent.
• Get pre-approved for a mortgage before you start house hunting, because pre-approval shows sellers you can actually close and tells you your real budget.
• Budget for closing costs, which typically run 2 to 5 percent of the home price and cover appraisals, inspections, title insurance, and lender fees.

Get pre-approved for a mortgage

Pre-approval is different from pre-qualification. Pre-qualification is a rough estimate based on what you tell a lender. Pre-approval means a lender has actually looked at your credit, income, and debts and committed to lending you a specific amount. You need pre-approval before you make an offer on a house.

Contact banks, credit unions, and mortgage brokers. Shop at least three lenders — rates and fees vary significantly. When you apply, the lender will pull your credit report (this counts as one inquiry and won't hurt your score if you do it within 14 to 45 days, depending on the credit scoring model). They'll verify your income and employment, check your bank balances, and review your debts.

Pre-approval typically takes three to five business days. You'll get a letter stating the loan amount, the interest rate, and any conditions (like a final verification of employment before closing). This letter is what you show to real estate agents and sellers to prove you're a serious buyer.

Understand what you can actually afford

Your pre-approval amount is not the same as what you should spend. Lenders are willing to lend more than is wise for your actual situation. A common rule is that your monthly housing payment — mortgage, property taxes, homeowners insurance, and HOA fees if applicable — should not exceed 28 percent of your gross monthly income.

Factor in property taxes, which vary wildly by location. In some states, property taxes run under 0.5 percent of home value annually; in others, they're over 2 percent. A $300,000 home in a high-tax area can cost $6,000 a year in property taxes alone. Ask a local real estate agent or check your county assessor's website for the tax rate in neighborhoods you're considering.

Homeowners insurance is required by lenders and typically costs $800 to $2,000 per year depending on the home's age, location, and your coverage level. Get quotes from at least two insurers before you buy. If you're putting down less than 20 percent, you'll also pay private mortgage insurance (PMI), which protects the lender if you default. PMI typically costs 0.5 to 1 percent of the loan amount annually and can be removed once you've built 20 percent equity.

Save for closing costs and reserves

Closing costs are the fees you pay at the end of the purchase process when you sign the final paperwork and receive the keys. These typically run 2 to 5 percent of the home price and cover the appraisal, title search, title insurance, lender fees, attorney fees (in some states), and property taxes and insurance prorated to your closing date.

On a $250,000 home, closing costs could range from $5,000 to $12,500. Some first-time buyer programs allow the seller to pay part of your closing costs, which can reduce what you need to bring to closing. Ask your lender and real estate agent whether this is an option in your area.

Beyond closing costs, lenders typically want to see cash reserves — money left in your accounts after down payment and closing costs. This shows you can handle unexpected repairs or a job loss. Many conventional loans require one to three months of mortgage payments in reserves; some first-time buyer programs require less or none.

Get a home inspection and appraisal

Once your offer is accepted, you'll order a home inspection. This is different from the appraisal — the appraisal is for the lender to confirm the home is worth what you're paying. The inspection is for you, to find out what's actually wrong with the house.

A home inspector walks through the property and checks the roof, foundation, plumbing, electrical, HVAC, and major appliances. The inspection report lists what's in good condition, what needs maintenance soon, and what's broken or unsafe. Inspections typically cost $300 to $500 and take two to three hours. You have the right to be present during the inspection.

After the inspection, you can negotiate with the seller to fix major issues, lower the price, or credit you money at closing. If the inspection uncovers something serious — like foundation damage or a roof that needs replacement — you may decide to walk away. Your purchase agreement should include an inspection contingency that lets you cancel if major problems are found.

Finalize your mortgage and prepare to close

Once your offer is accepted and the inspection is done, your lender will order the appraisal. The appraiser determines the home's market value. If the appraisal comes in lower than your offer price, you have a problem — the lender won't lend more than the home is worth. You'll need to renegotiate the price, increase your down payment, or walk away.

Your lender will also order a title search to confirm the seller actually owns the property and there are no liens or claims against it. Title insurance protects you if someone later claims they have a right to the property. This is standard and required by lenders.

A few days before closing, your lender will send you a Closing Disclosure form, which lists all the final loan terms, interest rate, monthly payment, and all closing costs. Review this carefully and compare it to the pre-approval letter. If anything has changed, ask your lender why. You have the right to see this document at least three business days before closing.

Understand what happens at closing

Closing is the final meeting where you sign all the paperwork and the money changes hands. You'll meet with a closing agent (an attorney or title company representative), the seller or their agent, and possibly your real estate agent. The lender does not attend — they're represented by the closing agent.

You'll sign the promissory note (your promise to repay the loan), the mortgage or deed of trust (which gives the lender a claim on the property if you don't pay), and the Closing Disclosure (which you already reviewed). You'll also sign the deed, which transfers ownership from the seller to you. The closing agent will collect your down payment and closing costs, pay the seller, pay off any liens on the property, and record the deed with the county.

Closing typically takes one to two hours. Bring a photo ID and a cashier's check or arrange a wire transfer for your down payment and closing costs — most lenders won't accept personal checks. After you sign, the closing agent records the deed and you receive the keys.

Frequently Asked Questions

What's the difference between a mortgage pre-qualification and pre-approval?

Pre-qualification is an estimate based on information you provide — no verification required. Pre-approval means a lender has checked your credit, income, and debts and committed to lending you a specific amount. Pre-approval is what sellers take seriously.

Can I use a gift for my down payment?

Yes, but lenders require a gift letter from the person giving you the money stating it's a gift, not a loan you have to repay. The gift giver typically cannot be the seller or anyone with a financial interest in the sale. Some programs have limits on how much of your down payment can be a gift.

What if the home inspection finds problems?

You can ask the seller to fix them, ask for a credit at closing, or renegotiate the price. If the problems are serious and the seller won't budge, you can walk away if your purchase agreement includes an inspection contingency.

How long does the whole process take from pre-approval to closing?

Typically 30 to 45 days from offer acceptance to closing, though it can be faster or slower depending on the lender, the title search, and any issues that come up during inspection or appraisal. Start the process early if you have a specific move date in mind.

What happens if I can't afford the closing costs?

Ask your lender about seller concessions — the seller can agree to pay part of your closing costs. Some first-time buyer programs also offer down payment and closing cost assistance. Your real estate agent can tell you what's common in your area.