2. Set a Budget

To determine what you can afford, start with the monthly mortgage payment you can handle. Various factors—beyond just the home’s price—affect this payment, known as "PITI": principal, interest, taxes, and insurance.

Most lenders ask for a down payment between 3% and 20% of the home’s price.3 Remember, If you put down less than 20%, lenders will require you to pay private mortgage insurance (PMI), which increases your monthly mortgage payments and affects how much house you can afford.

Home prices vary widely across the United States. The median home price nationwide is $357,138, but that figure can translate to vastly different types of properties—from a spacious mansion in one area to a compact studio in another.

3. Find the Right Property

Finding the right property is like assembling a puzzle. After determining your budget, consider key factors such as location, proximity to work, schools, and amenities, as well as property size. 

Location is crucial; a home near frequently visited places such as work or school can save time and money. Additionally, assess the safety and potential growth of the neighborhood, as it can affect property value. 

Creating a wish list of your wants versus needs can help narrow your search. Homebuyers typically filter by home type, number of bedrooms and bathrooms, square footage, lot size, and age.

Properties needing renovations often come at lower prices. When budgeting, also evaluate how much sweaty equity you're willing to invest in improvements through renovations or DIY projects.

4. Shop for Financing Options

You have options for your mortgage, and finding the best mortgage is easier than you think. Your monthly mortgage payment will vary based on your loan type, repayment term, borrowed amount, interest rate, taxes, and insurance. 

Here are the most common mortgages to consider:

Conventional Loans: These loans are through private mortgage lenders such as banks, credit unions, or other financial institutions. Conventional mortgages require good or excellent credit and, typically, a 20% down payment. If you put down less, you may need to pay PMI, which increases your monthly mortgage costs. These loans have competitive interest rates and current 30-year mortgage rates for borrowers with good credit averages around 6.83%.

Federal Housing Administration (FHA) Loans: Backed by the Federal Housing Administration, FHA loans have lower minimum requirements and are available only for primary residences. Borrowers with a credit score above 580 can put down as little as 3.5%, while borrowers under 580 may still qualify with a down payment of 10%. These loans also may require PMI for borrowers without 20% down payments.11 Interest rates average 7.35%, which is slightly higher than conventional loans.

VA Loans: Available only to military service members, veterans, and their surviving spouses, these loans require a 0% down payment and do not require PMI.12 VA loans have competitive rates, with current rates averaging around 6.42% for a 30-year mortgage.

Jumbo Loans: For properties exceeding Federal Housing Finance Agency (FHFA) lending limits, these loans require excellent credit and a substantial down payment.13 These loans are most common in high-cost areas or for large or luxury homes. Current average rates are around 6.79% for a 30-year jumbo loan.

Renovation Loans: Ideal for buyers of fixer-uppers, these loans finance both the home purchase and renovation costs in one. Conventional renovation loans are available for well-qualified borrowers, but the government also has FHA 203(k) loans for borrowers needing extra help updating their dream home. Rates are typically 0.75-1.00% higher than FHA loan rates due to renovation risks.

5. Get Pre-Approved

Getting pre-approved for a mortgage offers several advantages. It confirms how much you can afford, narrowing your home search to properties within your budget. A pre-approval letter strengthens your offers, which is crucial in a competitive seller's market.

During the pre-approval process, lenders require proof of income (like pay stubs and tax returns), check your credit report and score, and may verify your employment for stable income. Note that pre-approval counts as a "hard inquiry" on your credit report, lasting for two years, but will not affect your score after one year. A pre-approval letter is typically valid for 60-90 days, so it’s wise to obtain one when you’re ready to seriously start house hunting.

6. Find a Real Estate Agent

Finding the right real estate agent is one of the most important steps in the homebuying process. Your real estate agent is your advocate in all things homebuying, from finding the perfect house to negotiating the best deal to walking you through all the necessary steps to secure your mortgage. 

When choosing an agent, consider their market knowledge, local expertise, experience, and communication style. Trust and reliability are also key traits; your agent should keep you informed throughout the process. To find the right fit, read online reviews, and ask for referrals from trusted friends, family, or colleagues. You may also want to interview a few agents to feel confident in your decisions before committing to an agent. 

Be clear about the agent's commission, which typically ranges from 5%-6% of the sale price and is often covered by the seller.16 Still, clarifying their commission structure upfront helps you understand how their pay may impact your finances.

7. Go House Hunting and Make an Offer

Finding your dream home can take anywhere from a few weeks to a few months, depending on market conditions. Once you’ve identified a property you love, you'll need to make a competitive offer based on a comparative market analysis (CMA), which determines a fair price based on similar homes in the area. 

After deciding on an offer price, your agent will explain the contingencies in your offer, such as an inspection contingency to ensure the home has no significant structural issues, an appraisal contingency to confirm the home is worth the amount you settle on, and a financing contingency to protect you in case your mortgage falls through before closing. 

Your agent also negotiates with the seller's agent to finalize the terms and price, which may require more volleys than a tennis match before all parties agree. Keep in mind that you might lose out to a more competitive offer during negotiations. Trust your instincts and rely on your agent’s expertise in market conditions and seller expectations to craft a standout offer without overextending your budget.

8. Get Your Mortgage

Once the seller accepts your offer, you’ll need to finalize your mortgage to continue the homebuying process. Pre-approvals aren't binding, so you can choose to proceed with your lender or shop for better rates and terms. 

After selecting a lender, you’ll need to provide various documents to verify your financial status, including W-2s, tax returns, proof of identity, proof of assets, proof of employment, and recent bank statements. Once your lender has all the necessary documents, your loan file enters underwriting, where the loan officer reviews your information and may request additional documentation. 

Final approval comes after they review your documents and verify your ability to repay the loan.   

9. Get Homeowners Insurance, a Home Inspection, and a Home Appraisal

As you near the homebuying finish line, you must clear three final hurdles to safeguard your investment: homeowners insurance, a home inspection, and a home appraisal.

Homeowners Insurance

Before closing, most lenders require proof of homeowners insurance. This insurance protects against unexpected events like fire, storms, or floods and covers liability for injuries on your property. While you can choose your insurance provider, ensure your policy meets your lender's minimum requirements. Shop around for the best rates to fit your needs.

Home Inspection

Though not legally required and typically costing between $300 and $500, a home inspection provides a clear picture of your home's condition before you buy it.17 A licensed inspector checks for safety hazards, necessary repairs, and maintenance issues, including electrical, plumbing, HVAC, and structural integrity.

If your inspection reveals significant problems, you and your agent may want to request repairs, credits, or negotiations to the purchase price before closing.

Home Appraisal

A home appraisal assesses your home based on location, condition, and market conditions to determine its fair market value, ensuring that your offer price aligns with the current value.  

As the buyer, you pay for the appraisal, but your lender will hire the appraiser from an independent pool of licensed appraisers.

If your appraisal comes in below your offer, you may need to renegotiate the price with the seller or make up the difference between the assessed and the offered value in cash.

These three items in this step of the home-buying process protect you and your investment from any problems that may arise with your property.