Step by Step
Steps to Buying a Home
Buying a home is one of the biggest financial decisions you'll make. This guide explains the key steps in the process — from getting pre-approved to closing on your home. Whether you're a first-time buyer or returning to the market, this overview will help you understand how the home buying process works, especially for buyers in Southern California and across California.
1
Review Your Credit
Your credit score affects your interest rate and loan options. Pull your free credit report at annualcreditreport.com and review it for errors before applying.
Before applying for a mortgage, it's a good idea to:
- Address any errors or discrepancies on your credit report
- Pay down high credit card balances
- Avoid opening new credit accounts
Even small improvements in credit can make a meaningful difference in loan options and monthly payments.
2
Understand Your Budget
Before beginning your home search, consider how much home you feel comfortable affording. Beyond the mortgage payment, homeowners should also plan for:
- Property taxes
- Homeowners insurance
- Utilities
- Maintenance and repairs
- Possible HOA dues
Having a clear understanding of your budget can help you search for homes within a comfortable price range.
3
Start Thinking About Your Savings
Buying a home typically requires funds for both the down payment and closing costs. The exact amount will vary depending on the loan program, purchase price, and location.
In addition to the down payment, buyers should also plan for:
- Closing costs, which typically range from 2% to 5% of the loan amount
- An earnest money deposit, due when your offer is accepted
- Initial reserves or moving expenses
Planning ahead and setting aside funds early can help reduce stress during the purchase process and avoid surprises later.
4
Avoid Common Financial Mistakes
Mortgage lenders look for stability in employment, income, and credit activity. While preparing to buy a home, it's best to avoid:
- Opening new credit accounts
- Financing large purchases (cars, furniture, appliances)
- Changing jobs if possible
- Moving large sums of money between accounts
Keeping finances consistent helps ensure a smoother approval process.
5
Get Pre-Approved
A pre-approval is a review of your income, assets, credit, and debts that helps determine how much you may qualify to borrow. Once completed, you'll receive a pre-approval letter that shows sellers you're a serious buyer.
6
Find a Real Estate Agent
A good buyer's agent will help you find the right home, negotiate on your behalf, and guide you through the process — at no cost to you as the buyer.
7
Shop for Your Home
With your pre-approval in hand, start touring homes within your budget. Make a list of must-haves vs. nice-to-haves to stay focused and avoid overspending.
8
Make an Offer
Once you find the right home, your agent will help you submit a competitive offer. Be prepared for negotiation on price, repairs, and closing date.
9
Get a Home Inspection
Always get a professional home inspection before finalizing the purchase. It identifies any issues with the property that could affect your decision or negotiation.
10
Shop for Homeowners Insurance
Before your loan can close, your lender will require proof of homeowners insurance. This is something you arrange on your own — your lender will not select it for you. You should begin shopping for coverage once you have an accepted offer, as rates and coverage options vary by insurer and property.
- Coverage must be in place and confirmed prior to closing
- Your lender will need the insurance binder and proof of payment
- Comparing quotes from multiple insurers is recommended
11
Finalize Your Loan
After your offer is accepted, your loan goes through underwriting. You may be asked for additional documents. Stay responsive to keep things moving smoothly.
12
Close on Your Home
At closing, you'll sign the final paperwork, pay closing costs, and receive the keys. The entire process typically takes 30–45 days from accepted offer to close.
Down Payment & Closing Costs
How Much Cash Do I Need to Buy a Home?
First-time buyers are often surprised by the total cash needed at closing. Understanding the components early can help you plan and avoid surprises.
Down Payment
The down payment is the upfront portion of the purchase price you pay from your own funds. The minimum required varies by loan program:
-
VA Loans (eligible veterans & active military)
0%
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Conventional (strong credit profile typically required; PMI may apply below 20%)
3%
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FHA Loans (flexible credit; mortgage insurance required)
3.5%
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Jumbo Loans (higher-value properties; requirements vary by lender)
10–20%
Earnest Money Deposit (EMD)
What is an earnest money deposit?
An earnest money deposit is a good-faith payment made to the seller when your offer is accepted. It demonstrates to the seller that you are serious about the purchase.
- Typically around 2% of the purchase price, though the amount is negotiable
- Due shortly after the offer is accepted — usually within 1–3 business days
- Applied toward your down payment or closing costs at closing
- May be at risk if you back out of the purchase outside of contingency periods
Closing Costs
Closing costs are fees associated with processing and completing the mortgage transaction, paid out of pocket at closing when ownership of the property transfers to you. They typically range from 2% to 5% of the loan amount.
Lender Fees
These fees cover the work required to review your financial profile and approve the loan. Examples may include:
- Loan processing
- Underwriting
- Credit report
- Appraisal
Title and Escrow Fees
Title and escrow companies handle the legal transfer of the property and ensure all parties are protected. Typical services include:
- Title insurance — protects against ownership disputes or claims on the property
- Escrow services — manages the funds and documents involved in the transaction
Government and Recording Fees
Local governments charge fees to record the new property ownership and mortgage with the county. These help ensure that ownership and the loan are legally documented.
Prepaid Items
Certain costs are collected at closing to set up your escrow account and ensure taxes and insurance are paid when due. These may include:
- Prepaid property taxes
- Homeowners insurance premium
- Initial escrow deposits
Can closing costs be negotiated?
Yes — some lender fees are negotiable, and sellers can sometimes be asked to cover part of your closing costs (called a seller concession).
Estimated Cash to Close — Example
Here is a simplified example of the cash needed to close on a $500,000 home using an FHA loan with a 3.5% down payment:
| Purchase Price |
|
$500,000 |
| Down Payment (3.5%) |
Due at closing |
$17,500 |
| Earnest Money Deposit (2%) |
Paid at offer acceptance — credited back at closing |
– $10,000 |
| Estimated Closing Costs (3%) |
Due at closing |
$15,000 |
| Estimated Cash to Close |
$22,500 |
This is a simplified estimate for illustrative purposes only. Actual amounts will vary based on loan program, lender, location, and negotiated terms.
Loan Comparison
FHA vs Conventional Loans: What's the Difference?
These are the two most common loan types for first-time buyers. Here's how they compare.
| Feature |
FHA Loan |
Conventional Loan |
| Minimum Down Payment |
3.5% |
As low as 3% for qualified first-time buyers; typically 5–20% |
| Credit Score Flexibility |
More forgiving — designed for buyers with less-than-perfect credit |
Typically stricter — stronger credit profiles generally required |
| Mortgage Insurance |
MI required even with 20% down payment. If down payment is 10% or more, MIP may be removed after 10 years. Otherwise, cannot be removed without refinancing. |
MI will not be required if down payment is 20% or greater. If less than 20% down, PMI is required but can be removed once 20% equity is reached. |
| Best For |
First-time buyers with challenged credit, limited down payment savings, or higher existing debt levels. FHA programs often allow more flexible debt-to-income ratios than conventional loans. |
Buyers with stronger credit profiles who want more flexibility in loan terms and property types |
| Property Types |
Primary residence only; stricter appraisal standards |
Primary, secondary, or investment properties; standard appraisal |
FHA loans are insured by the Federal Housing Administration, while conventional loans typically follow guidelines from Fannie Mae or Freddie Mac.
Rate Lock
What Is a Rate Lock?
A mortgage rate lock allows you to secure your interest rate for a specific period of time while your loan is being processed. This protects you if mortgage rates increase before your loan closes.
Mortgage rates change daily and are influenced by economic conditions, inflation, and mortgage-backed securities markets. Rate locks typically last between 30 and 60 days, depending on the lender and the expected closing timeline.
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🔒
If Rates RiseIf market rates rise during your lock period, your locked rate does not change. You are protected from the increase and will close at the agreed-upon rate.
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📉
If Rates FallIf rates fall after you lock, you generally stay at your locked rate. Some lenders may offer a one-time float-down option, though policies and eligibility requirements vary.
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📅
When to LockMost buyers lock their rate once they are under contract on a home and the closing timeline is known. Once under contract, your lender typically gives you the option to lock your interest rate, protecting you from market changes during the loan process.
Home Appraisals
Home Appraisals Explained
When you apply for a mortgage, the lender typically requires a home appraisal. An appraisal is an independent estimate of the property's value performed by a licensed appraiser. The purpose of the appraisal is to make sure the home is worth the amount being borrowed.
Because the property serves as collateral for the loan, lenders want to confirm the value supports the purchase price. The appraised value vs purchase price relationship is one of the key factors lenders review before approving a loan.
How Is the Appraised Value Determined?
A licensed appraiser evaluates the property based on several factors:
- –Recent comparable sales in the area (comps)
- –Overall condition of the property
- –Size, layout, and features of the home
- –Local market conditions at the time of appraisal
What Happens if the Appraisal Comes in Low?
Sometimes the appraised value comes in lower than the agreed purchase price — referred to as a "low appraisal." When this happens, lenders will base the loan amount on the appraised value rather than the contract price. This can create a gap that needs to be addressed before the transaction can proceed.
Buyers typically have several options when the appraised value vs purchase price don't match:
-
1.
Renegotiate the PriceThe seller may agree to reduce the purchase price to match the appraised value. This is often the most straightforward resolution.
-
2.
Pay the Difference in CashThe buyer can cover the gap between the appraised value and the purchase price out of pocket, allowing the transaction to proceed at the original price.
-
3.
Challenge the AppraisalIn some cases, lenders may allow a reconsideration of value if additional comparable sales are available that support a higher valuation. This process is not guaranteed and varies by lender.
-
4.
Cancel the PurchaseIf the contract includes an appraisal contingency, buyers may have the option to walk away without losing their earnest money deposit.
Affordability
How Much House Can I Afford?
One of the most common questions first-time buyers ask. Lenders evaluate affordability using your income, existing debts, credit history, and down payment.
A key metric used in mortgage lending is the debt-to-income ratio (DTI), which compares your total monthly debt obligations to your gross monthly income. Most loan programs follow general guidelines established by agencies such as Fannie Mae and Freddie Mac.
✓ What counts as debt?
- Car loans or auto leases
- Credit card minimum payments
- Student loans
- Personal loans
- Other mortgages or home equity loans
- Court-ordered obligations (alimony, child support)
✗ What usually does NOT count?
- Car insurance
- Utilities (electric, gas, water, internet)
- Groceries and everyday expenses
- Cell phone bills
- Subscriptions or memberships
The goal
The goal is to ensure your total monthly housing payment — including principal, interest, property taxes, and homeowners insurance — fits comfortably within your financial picture. Use the Mortgage Calculators to estimate payments based on different scenarios.
FHA loans and DTI flexibility
FHA loans are often more accessible for first-time buyers in part because they allow for higher debt-to-income ratios than many conventional loan programs. This can make homeownership achievable for buyers who have strong income but carry existing debts such as student loans or car payments.