Key Takeaways
- Your budget must account for more than the purchase price — closing costs typically run 2–5% of the loan amount.
- Mortgage pre-approval signals to sellers that you are a serious, financially qualified buyer.
- A buyer's agent works on your behalf and is generally compensated through the transaction — clarify this arrangement upfront.
- Earnest money is a good-faith deposit that goes toward your purchase, but can be forfeited if you back out without a valid contingency.
- Home inspections are optional but strongly advisable — they reveal issues that are invisible during a showing.
- Down payment requirements vary widely by loan type; 20% is common but not the only option.
Start here
Know Your Numbers Before You Shop
Next
Getting Pre-Approved for a Mortgage
Then
Finding the Right Home and Making an Offer
Final step
From Accepted Offer to Closing Day
Know Your Numbers Before You Shop
Before you tour a single property, spend time understanding what you can realistically afford. Start with your gross monthly income and recurring debt obligations. Lenders use a metric called the debt-to-income ratio (DTI) — the percentage of your gross income consumed by debt payments — and most conventional loan programs prefer a DTI below 43%.
Your budget isn't just the purchase price. Factor in:
- Down payment: Ranges from 3% (some conventional loans) to 3.5% (FHA loans) to 20% or more. A larger down payment lowers your monthly payment and may eliminate private mortgage insurance (PMI).
- Closing costs: Typically 2–5% of the loan amount, covering lender fees, title insurance, and prepaid expenses.
- Cash reserves: Most lenders want to see you have funds remaining after closing.
- Ongoing ownership costs: Property taxes, homeowners insurance, HOA fees, and maintenance.
Misconceptions about down payments trip up many first-time buyers — the 20% figure is a guideline, not a universal requirement. For terminology you'll encounter throughout the process, our homebuying vocabulary reference is a useful companion.
Debt-to-Income Ratio (DTI)
The share of your gross monthly income that goes toward debt payments. Lenders use this to assess whether you can comfortably manage a mortgage payment alongside existing obligations.
Private Mortgage Insurance (PMI)
Insurance that protects the lender — not you — if you default. It's typically required when your down payment is less than 20% of the purchase price and adds to your monthly payment.
Earnest Money
A good-faith deposit submitted with your offer to show the seller you're serious. It's held in escrow and credited toward your purchase at closing, but may be forfeited if you back out without a valid contingency.
Contingency
A condition written into the purchase contract that must be satisfied for the sale to move forward. Common examples include financing, inspection, and appraisal contingencies.
Escrow
A neutral third-party arrangement where funds or documents are held until the conditions of a transaction are met. Earnest money and closing funds are typically held in escrow.
Loan Estimate
A standardized form lenders must provide shortly after you apply for a mortgage. It outlines the projected interest rate, monthly payment, and closing costs so you can compare offers.
Closing Disclosure
A final document provided before closing that details your actual loan terms, monthly payment, and all closing costs. It should be compared carefully against your original Loan Estimate.
Appraisal
An independent assessment of a property's market value, ordered by your lender. The lender won't loan more than the appraised value, so a low appraisal can affect the deal.
Getting Pre-Approved for a Mortgage
Pre-approval is the step that transforms you from a casual browser into a credible buyer. A lender reviews your credit report, W-2s or tax returns, pay stubs, and bank statements, then issues a letter stating the loan amount they're prepared to offer. This letter typically remains valid for 60–90 days.
When comparing lenders, look beyond the interest rate. Request a Loan Estimate — a standardized three-page document lenders are required to provide within three business days of your application. It details the estimated rate, monthly payment, and closing costs, making comparisons more straightforward.
Check Your Credit Before Applying
Request your free credit reports from AnnualCreditReport.com before you apply for pre-approval. Look for errors — incorrect balances, accounts that aren't yours, or payments incorrectly marked late — and dispute any inaccuracies with the reporting bureau. Correcting errors takes time, so check your reports several months before you plan to buy.
Your credit score meaningfully affects your interest rate. Even a modest improvement in your score before applying — by paying down revolving balances or correcting reporting errors — can reduce what you pay over the life of the loan. Avoid opening new credit accounts or making large purchases between pre-approval and closing, as these actions can alter your credit profile and jeopardize the loan.
Finding the Right Home and Making an Offer
Once pre-approved, you can search with a defined budget. A licensed buyer's agent represents your interests during negotiations and is generally paid through the transaction — though ask your agent to explain the compensation structure upfront, as industry practices have evolved. Understanding the current housing market in your target area helps you calibrate expectations around competition and pricing.
When you find a property you want to pursue, your agent will help you draft a purchase offer. Key elements include:
- Offer price — informed by comparable recent sales in the area
- Earnest money deposit — typically 1–3% of the purchase price, held in escrow
- Contingencies — conditions that must be met for the sale to proceed (financing, inspection, appraisal)
- Proposed closing date
Contingencies are your primary safeguards. A financing contingency protects your earnest money if your loan falls through. An inspection contingency gives you the right to negotiate or withdraw based on the inspector's findings. Our pre-purchase checklist walks through the due diligence steps worth completing before you submit.
From Accepted Offer to Closing Day
An accepted offer opens a busy 30–60 day period. Schedule a professional home inspection promptly — inspectors examine the structure, roof, electrical, plumbing, and HVAC systems. The written report becomes a negotiating tool: you can request repairs, a price reduction, or a seller credit, or you can walk away if the findings are serious enough.
Simultaneously, your lender orders an appraisal to confirm the home's market value supports the loan amount. If the appraisal comes in below the purchase price, you'll need to renegotiate, make up the difference in cash, or exercise your appraisal contingency.
Don't Make Big Financial Moves Before Closing
After pre-approval, avoid opening new credit accounts, taking on new debt, or making large cash deposits that can't be easily documented. Lenders re-verify your financial profile close to closing, and significant changes can delay or derail final loan approval. Discuss any planned financial decision with your loan officer before acting.
In the final days before closing, you'll receive a Closing Disclosure — a document detailing your final loan terms and all fees. Compare it carefully against your original Loan Estimate. You have the right to ask questions about any line item. On closing day, you'll sign a substantial number of documents, pay your down payment and closing costs, and receive the keys.
Ownership brings new responsibilities. Our guide on maintaining a home when you've never owned one before covers the upkeep priorities that new owners often underestimate. For a detailed walkthrough of the contract-to-closing period, see The Homebuying Process from Offer to Closing, Explained.