Owning a home is a key component of the American dream, but if you want to make it a reality, you must be methodical about your preparation. And, importantly, before you get swept up in the excitement of owning your own place, you’ve got to be willing to take the emotion out and review your commitments and capabilities with clear eyes.

So, if you’re thinking about homeownership, here are eight crucial steps to help you get started before you start the official search for your first home. 

1. Am I Ready to Start My Home Buying Journey?

You may be asking yourself: How do I know I’m ready to buy a home? Before diving into the financial aspects, take a moment for self-reflection. Are you emotionally prepared for the commitment of homeownership? Consider your long-term goals, career stability, and personal relationships. Owning a home ties you to a location and comes with responsibilities beyond just paying a mortgage. 

2. Evaluate Your Financial Health Before Buying a Home

Reality check time: How are you really doing financially? Take a deep dive into the details, just like your lender will soon. Review your income (using pay stubs and recent tax returns, not estimates), expenses, savings, and debts. What does your current monthly cash flow truly look like? It’s important to get specific before moving forward.

Next, take advantage of online tools like a mortgage calculator to estimate how much you can afford to spend on a mortgage based on your current financial picture. 

Remember, just because you might be able to qualify for a large mortgage doesn’t mean you should stretch your budget to the limit. 

3. Optimize Your Credit Score Before Starting Your Search

Your credit history is one of the most significant indicators of your financial health, what size mortgage you’ll qualify for, and the interest rate you’ll pay. This is why checking your credit score is crucial to do as soon as possible. 

The good news is you’re legally entitled to a free copy of your credit report each year from the three major credit reporting agencies (CRAs): Experian, Equifax, and TransUnion. It’s easy: Simply navigate to AnnualCreditReport.com and request your free copies. 

Once you have your credit reports, take a good look to ensure there are no errors. If your score needs improvement, focus on paying bills on time, reducing credit card balances, and avoiding new credit applications. Even a small increase in your score can lead to significant savings over the life of your loan.

4. Tackle Your Debt-to-Income Ratio

One of the key indicators that lenders pay the closest attention to is your debt-to-income ratio (DTI), which compares your monthly debt payments to your gross monthly income. Aim to lower this ratio by paying down existing debts, particularly high-interest credit cards. A lower DTI can increase your chances of approval and potentially qualify you for better loan terms.

5. Build Your Down Payment Fund for Your Home Purchase

While buying a home with a small down payment is possible, having a larger one can offer benefits like lower monthly payments and avoiding private mortgage insurance (PMI). Set a savings goal based on the price of your desired home and preferred loan type. Don’t forget to factor in closing costs, which can add several thousand dollars to your upfront expenses.

6. Research Mortgage Options

The world of mortgages can be bewildering, with various loan types, terms, and features, so it’s crucial you educate yourself. While you can read this in-depth article about the various types of mortgages, here’s a quick overview:

• Conventional: The most common type; not insured by the government. Best for people with a stable financial outlook.
• Fixed-rate: Predictable; your mortgage stays the same for the term of the loan (typically 15 or 30 years).
• Adjustable-rate Mortgages (ARM) Starts with a fixed rate for a period of time and then fluctuates with the market. This is a riskier loan, best for seasoned investors.
• VA loan: The United States Department of Veterans Affairs helps make the path to homeownership more affordable for military veterans and their spouses and families.
• FHA loan, USDA loan, and other loan programs: There are a host of government-backed loans that are geared toward helping people with low or no down payments and bad credit achieve homeownership.

At this early phase, you don’t have to become an expert in which loan will be best for you—but understanding these options will empower you to make informed decisions when talking to lenders.

7. Secure a Mortgage Pre-Approval

A pre-approval is more than just a formality; it’s a crucial step that demonstrates your seriousness to sellers and helps you understand your true budget. To get pre-approved, you’ll need to provide financial documentation to a mortgage advisor or a lender, who will then thoroughly review your finances. This process results in a letter stating how much they’re willing to lend you, giving you a clear price range for your home search.

And one important note: don’t wait to get pre-approved once you’ve found the house of your dreams—get it done ahead of time. That way, you’ll know what you can afford, and house-hunting will be that much sweeter!

8. Assemble Your Home Buying Team

Navigating the home-buying process is challenging, and having the right professionals in your corner can make a world of difference. Start by finding a reputable real estate agent who understands your needs and the local market. Depending on your location and circumstances, consider also connecting with a mortgage advisor, mortgage broker, loan officer, home inspector, and possibly a real estate attorney.

Additional Considerations:

• Save for an earnest money deposit, typically 1-2% of the purchase price, which you’ll need when making an offer.
• Research first-time homebuyer programs in your area, which may offer down payment assistance or favorable loan terms.
• Familiarize yourself with the ongoing costs of homeownership, including property taxes, insurance, maintenance, and potential HOA fees.
• Stay flexible and patient. The perfect home might materialize slowly, which can take longer than expected.

By taking these steps, you’ll be well-prepared to embark on your homeownership journey. Remember, buying a home is likely the largest financial decision you’ll make, so it’s worth taking the time to do it right. With careful planning and preparation, you’ll be in a strong position to find and finance the home of your dreams.