Prepare your money situation before you buy a home

Buying a home is a dream for many families, but you might not know where to start or when you’re ready. Here are some steps to get on the path to being a homeowner. A more complete explanation is on our Buying a House guide.

Lenders decide if you have the ability to pay back the money before offering you a loan to buy a home. They can look at factors such as your income, assets, employment status, savings, and monthly payments on your debts. They also look at your credit report and credit score, to see if you have paid your debts on time.

Here’s why a bank account is important for managing your money

Here’s why your credit history is important and how to improve it

You need to know how much you currently spend, so that you can decide how much you can afford to pay each month for a new home. Create a list that shows everything you spent money on during the month. Compare your monthly spending to your monthly take-home pay.

Also, decide how much you want to set aside each month in savings, for emergencies and for other goals.

After you compare your pay to your spending, see how much you can afford to spend on your total home payments. The ongoing costs people pay when they own a home can include:

Principal and interest payments on a mortgage
Mortgage insurance
Property taxes
Homeowner’s insurance
Supplementary insurance, such as flood insurance
Homeowners’ association (HOA) fees
Home maintenance and repairs
Utilities

Some expenses, like taxes and insurance, can go up over time.

Your down payment changes how much you pay, and when.

Making a larger down payment requires more cash at first, but monthly payments are lower and your loan costs less overall. You aren’t borrowing as much money, so there’s less to pay back. You also pay less interest because you’re paying interest on a smaller loan balance. And if your down payment is 20% or more of the price of the home, you typically don’t pay for mortgage insurance. This saves you money, especially during the early years of the mortgage.

On the other hand, a larger down payment might mean you have less money for spending. You might need cash at the end of the loan process, for example to pay closing costs. And you might need to pay for moving into the new home, improvements or repairs you make, and new purchases to make your home comfortable.

Low down payment options are available

Many programs can help you buy a home with a small or no down payment. Low down payment options can mean higher costs over the life of the loan. When you meet with lenders, ask questions and ask to see multiple loan offers.

Your down payment is only one part of what you pay up front

When you sign the documents for your new home, you must pay fees and other costs to get your mortgage. These are called closing costs. Typically, closing costs range from 2% to 5% of the home purchase price (not including your down payment). However, your actual closing costs depend on the price of the home, your down payment, lender costs, type of loan, type of home, and location.

Find help buying your first home

Many states and local organizations offer programs that help first-time buyers with a down payment or closing costs. To find programs near you:

Look up a housing counselor in your area
Call the HOPE™ Hotline at (888) 995-HOPE (4673) 24 hours a day, 7 days a week

You can also ask a housing counselor to help you:

Decide on the right time for you to buy a home or how you can improve your credit to receive a better offer
Take a good look at your mortgage loan options or what other options you would have if your credit history improves
Review your credit reports, income, and additional financial information and explain how mortgage lenders evaluate your application

Spot problems that can get in your way

Discrimination is illegal

Lenders cannot deny you credit, charge you higher payments or interest rates, offer you unfavorable terms, or discourage you from applying for a loan on the basis of:

Race
Color
Religion
National origin
Sex (including sexual orientation and gender identity)
Marital status
Age
Receiving money from public assistance
Exercising in good faith your rights under the Consumer Credit Protection Act

If you have problems with a mortgage, you can submit a complaint online or by calling (855) 411-CFPB (2372).

“Contracts for deed” can spell trouble

A contract for deed (sometimes called a “bond for deed,” “land installment contract,” or “buying on contract”) is a home purchase made on an installment plan rather than through a traditional mortgage loan. Instead of going to a separate mortgage lender for a loan to pay the seller the full price of the property, you agree to pay the seller in monthly installments. The seller keeps the deed to the property until the contract is fulfilled. The deed represents legal ownership of the home.

So that you understand your rights in a contract for deed, it’s a good idea to talk to an attorney. Here are tips for finding an attorney in your state.

Under a contract for deed, you must act as the property owner during the term of the contract, even though the deed is not yours yet. In a typical contract for deed, you pay property taxes, insurance, repairs, and maintenance.

With a traditional mortgage, if you fall behind in your payments, the lender generally has to wait before starting foreclosure. With a contract for deed, the seller can often start the eviction process right away. Eviction can happen fast if you:

Miss a monthly payment
Cannot make a “balloon payment” of a large amount, if the contract requires it
Do not pay other costs spelled out in the contract, like taxes and maintenance

Also, the seller typically gets to keep all the money and work you put into the house.

Even if you make all the payments required by the contract, you might run into trouble. The seller might not have clear title to the home. For example, the seller might owe money on a lien or mortgage on the property. Or the seller sometimes simply refuses to turn over the deed. Sometimes the seller takes your money for taxes and insurance but doesn’t actually pay them, so when you finally own the home you face large bills, penalties, and other problems.

If you have a problem with a contract for deed, you can submit a complaint online or by calling (855) 411-CFPB (2372).