4 Tips To Starting Your Home-Buying Journey

Buying a home can be the most expensive, confusing and scary process you’ll ever go through. It’s hardly something you dive into overnight.

Even if you’re not ready to put in a bid — or even get preapproved for a mortgage — there are plenty of things you can do to put yourself in a good position when you are ready to pull the trigger.

Compare mortgage lenders

Even with the help of a mortgage loan, purchasing a house requires a lot of upfront costs. You’ll have to come up with a down payment and closing costs. At a minimum, a down payment requirement is usually 3% to 5% of the purchase price (although there are no down payment loans), and closing costs can run an additional 3% to 6% of the purchase price. On top of that, it’s a good idea to set aside money for moving expenses and build up your emergency fund to handle the surprise repairs that come with homeownership.

When saving for a home purchase, you’ll typically want to put it somewhere it will earn a healthy return, avoid volatility and be accessible in an emergency. Some High-yield savings accounts have APYs of over 4%, and your money isn’t locked up like it is in a CD. A Western Alliance Bank High-Yield Savings Account has an uncommonly high yield and no monthly fees. There’s no cap on how much your balance can earn the high yield and the balance minimum couldn’t be lower.

Growing your savings doesn’t just help with upfront costs, it can make you more attractive to lenders.

Carrying a lot of debt can make it difficult to buy a home. The best thing you can do is work on paying down your existing debts and avoid taking on new ones. Mortgage lenders prefer to see a debt-to-income ratio (DTI) that’s 45% or lower. That means your monthly debts (including the future mortgage payment) cannot exceed 45% of your monthly gross income.

Depending on your situation, it could make sense to consolidate your debt, by trading multiple credit card bills with high interest rates into one monthly payment with a lower rate. Upstart and Upgrade are two of CNBC’s top debt consolidation loan providers — both approve borrowers with fair credit (a FICO score between 580 and 669) and have flexible repayment schedules.

One of the best ways to lower your mortgage interest rate is to improve your credit score. For certain types of mortgages, having a higher credit score can lower your mortgage insurance payment (if you’re required to have it). Even if you feel like you’re not saving fast enough, raising your credit will bring your homeownership dreams closer to reality because you’ll have to spend less on monthly mortgage payments.

Start by reviewing your credit reports and disputing any errors, which can hurt your credit score. You could use a service like Experian Boost™* or eCredable Lift® to add additional activity to certain credit reports, such as utilities, rent or insurance premium payments. Keep in mind, that not all lenders will take scores improved by these tools into account. Also, Experian Boost only affects your Experian credit report and eCredable Lift affects your TransUnion report. It’s also possible to lower your credit with eCredable if you add accounts with a negative payment history.

The FICO scoring model, used in most lending decisions in the U.S., is based on factors such as on-time payments, the average age of your accounts, your credit mix and your credit utilization ratio. The FICO Scores most commonly used by mortgage lenders heavily rely on your payment history and the total amount you owe to generate your score. So chipping away at your debt and paying bills on time is crucial.

For a conventional mortgage, lenders typically want to see a score of 620, though you may get approved for an FHA loan or other government-backed loan with a score in the 500s. Don’t just aim for the minimum, though — a higher score will get you a more attractive interest rate.

To learn the basics of home buying, meet with a housing counselor approved by the U.S. Department of Housing and Urban Development. They can help you understand industry jargon and walk you through the mortgage application and home purchase processes. They can also point you toward homebuyer assistance programs, which help with down payment and closing costs in the form of grants, no-interest loans and forgivable loans.

It’s also important to learn about the housing market where you want to live. Local real estate professionals, like an agent or mortgage lender, can get you up to speed on the rules and norms in your area. This knowledge could give you an edge in finding opportunities or avoiding costly mistakes.

Your biggest upfront expenses will be your down payment and closing costs, so you’ll want to understand your options. Getting a mortgage preapproval letter will give you an idea of how much house you can afford and make you more desirable to sellers. Be sure to talk to multiple lenders, since the types of loans they offer and their rates and fees vary. Some mortgage lenders may work with specific first-time homebuyer assistance programs.

Even if you can’t find a home you want at a price you can afford right now, there are steps to get you closer to becoming a homeowner. Saving money and paying down debt are important, but building your credit score and educating yourself can be just as valuable.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every real estate article is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select’s in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.

*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.