Where to Start When Buying A Home: Your First 7 Steps, Explained

The skimpy heat and dreadful-looking carpeting in your apartment have finally worn thin, and you’ve decided it’s time to buy a house. You’ve scrolled through listings and researched neighborhoods way past your bedtime. Maybe you’ve even opened a savings account and have made steady progress toward saving for a down payment.

While homebuying seems daunting, you feel ready to jump in. Your rental lease is up in four months — now is the time to begin! But, what exactly happens next? What is the first step in buying a home? In this step-by-step guide, we’ll walk you through the first 7 steps in your homebuying journey so you’ll know where to start when buying a home.

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Step 1: Save for your down payment and closing costs

While putting 20% down is known to be the standard amount for a down payment when buying a home, there are other options that allow you to put down much less or even nothing at all, with some caveats.

Regardless, plan to save more than you think you’ll need when buying a home because you’re saving for more than just the down payment — you need to consider the costs of mortgage insurance, closing costs (between 2% and 5% of the purchase price), and any unexpected homeownership costs.

Sample down payments

To get an idea of what a down payment translates to dollar-wise, we’ve mapped out down payments for three different price points.

20% down payment

$400,000 purchase price – $80,000 down

$500,000 purchase price – $100,000 down

$600,000 purchase price – $120,000 down

5% down payment

$400,000 purchase price – $20,000 down

$500,000 purchase price – $25,000 down

$600,000 purchase price – $30,000 down

For those with a conventional mortgage who do not put 20% down, they will have to purchase private mortgage insurance (PMI). In the event that the homeowner can no longer pay their monthly mortgage, PMI is a policy that protects the lender.

Lenders will choose a PMI company on your behalf (usually the most cost effective option) and will require ongoing monthly payments, full payment at closing, or a combination of both. The amount can range between 0.5% and 1% of the loan amount annually. So, for a $500,000 house with a 5% down payment, your PMI would be about $4,750 annually if your PMI is 1% of your loan amount.

The good news is that PMI won’t last forever and it can be canceled (with some qualifications) once your loan-to-value ratio, or your loan amount balance divided by your house’s market value, ends up lower than 80% of the original appraised value.

There is not a one-size fits all approach when considering whether to put down 20% or to make a smaller down payment and purchase PMI.

“The biggest pro of having PMI is that you don’t have to necessarily come in with a large 20% down payment; you can get in with less,” shares Richie Helali, a mortgage specialist from HomeLight. “A lot of times people think, ‘Let me just wait another year or two and save 20%.’ If that person does end up saving the full 20% within those few years, by then the problem is more than likely the property price is going to be so much more. What you thought was 20% was 20% three years ago, but it’s no longer 20% now. So, you’re still in the same spot but now spending more.”