How Buying a Home Works, Step by Step

Published 2026-11-08 · eLoanTree Blog

Two example prices run through this guide, and both are stated up front. Case A — the U.S. median: $417,500, the median price of an existing home sold in September 2026 (National Association of Realtors, Existing-Home Sales, released October 13, 2026). “Median” means half of homes sold for more and half for less. Case B — a $1,000,000 house, because in California — where the statewide median single-family home price was $899,720 in September 2026 (California Association of Realtors, released October 19, 2026) — a million-dollar home is an ordinary purchase, not an extreme one.

1. Step 1: Check your budget, credit, and DTI

Before you look at a single listing, find out what you can actually afford. Lenders look at three things first: your income, your credit, and your debt-to-income ratio (DTI).

DTI is simple: your total monthly debt payments divided by your gross monthly income. If you earn $6,000 a month before tax and pay $2,000 a month on debts — car loan, student loan, credit cards, plus the housing payment you are applying for — your DTI is 33%. That is the CFPB’s own example.

How high can DTI go? It depends on the loan program. Conventional loans (Fannie Mae) commonly approve up to 45% total DTI, and up to 50% through automated underwriting when the rest of the file is strong. FHA loans use 31% for housing costs and 43% for total debt as the standard, higher with compensating factors such as reserves or strong credit (Fannie Mae Selling Guide B3-6-02; HUD Handbook 4000.1, checked October 2026).

One thing to unlearn: the old “43% is the legal maximum” rule is gone. The CFPB’s Qualified Mortgage rule used to cap DTI at 43%, but the CFPB replaced that cap with a price-based test, mandatory for applications from October 1, 2022. Lenders still use their own DTI limits — the number is a lender and program rule now, not a federal cap.

Credit matters too, and not just for approval. A higher score usually means a lower rate, and the rate decides your monthly payment. For FHA loans, a score of 580 or higher qualifies for 3.5% down; 500–579 requires 10% down (HUD Handbook 4000.1). Conventional loans have no single published minimum, and individual lenders add their own overlays — many want 620 or higher.

Do this first: pull your credit reports, list every monthly debt, and compute your DTI. If the number is above 45%, paying down a card or a car loan before you apply can matter more than saving a little extra for the down payment.

2. Step 2: Save for the down payment — and the costs after it

The down payment is the part of the price you pay yourself. The rest is the loan. Here are both example prices:

Case A — U.S. median home, $417,500 (NAR, September 2026):

Case B — a $1,000,000 house:

Note the FHA case for the $1,000,000 house: the $965,000 loan is below the 2026 FHA high-cost ceiling of $1,249,125 (HUD Mortgagee Letter 2025-23), so it works in high-cost counties. But in most counties, where the FHA floor is $541,287, the minimum down payment on a $1,000,000 house would be $458,713 — because the loan cannot exceed $541,287.

The 20% figure is famous, but it is not a requirement. Less than 20% down on a conventional loan usually means private mortgage insurance (PMI) until you build 20% equity. On an FHA loan, mortgage insurance (MIP) works differently: an upfront premium of 1.75% of the loan amount plus an annual premium of 0.55% for most 30-year loans with less than 5% down (0.50% with 5% or more down), under HUD Mortgagee Letter 2023-05, effective March 20, 2023 and still in effect in October 2026. With less than 10% down, annual MIP lasts for the life of the loan.

The mistake first-time buyers make is saving only for the down payment. You also need closing costs and a cushion. The CFPB says closing costs typically run about 2% to 5% of the purchase price — on the $417,500 median home, $8,350 to $20,875; on a $1,000,000 house, $20,000 to $50,000. That is on top of the down payment, not part of it.

Do this second: save the down payment, plus closing costs, plus a few months of payments as a reserve. Lenders check reserves, and life after closing still has bills.

3. Step 3: Get preapproved (not just prequalified)

A prequalification and a preapproval sound alike. They are not the same, and the CFPB warns that lenders use the two words differently — always ask what a letter is actually based on.

A prequalification is a quick estimate based on what you tell the lender: your income, debts, and savings, unverified. A preapproval usually means the lender has checked documents — pay stubs, bank statements, tax returns — and pulled your credit. Sellers take a preapproval more seriously, because someone has actually verified the numbers.

Neither letter is a guaranteed loan. Final approval still depends on the appraisal, a final review of your finances, and the specific home. Preapproval letters also expire, typically in 30 to 60 days (CFPB).

One useful CFPB rule: mortgage credit checks within a 45-day window count as a single inquiry on your credit report. So shop around in a short window instead of spreading applications over months.

Do this third: get preapproved before you start touring homes seriously. It tells you your real price range, and it tells sellers you are a real buyer.

4. Step 4: Find a home and make an offer

With a preapproval letter in hand, you tour homes and, when you find one, you make an offer. An offer is not just a price. It includes the earnest money deposit, the closing date you want, and contingencies — conditions that let you walk away, such as financing, inspection, and appraisal.

Earnest money is a good-faith deposit that shows the seller you are serious. It is typically 1% to 3% of the purchase price — $4,175 to $12,525 on the $417,500 median home, $10,000 to $30,000 on a $1,000,000 house — though the amount is negotiable and varies by market; the National Association of Realtors notes deposits can range from 1% to 10%. The money is held by a third party, usually a title company or escrow agent, and it is credited toward your down payment and closing costs if the sale goes through. If you back out for a reason your contract allows, you usually get it back. If you back out without a permitted reason, you can lose it (CFPB, Mortgages key terms).

Your offer competes on more than price. A larger earnest money deposit, fewer contingencies, and a flexible closing date can all make an offer stronger — but each one also raises your risk. Waiving the inspection contingency, for example, means you buy the home’s problems too.

Do this fourth: decide your walk-away price before you offer, and read the contingencies before you sign. The offer is a contract.

5. Step 5: Under contract — inspection, appraisal, and title

Once the seller accepts, you are under contract, and three checks run in parallel.

Home inspection. You hire an inspector to look for problems the tour did not show: roof, foundation, plumbing, electrical, heating. Your contract usually gives you 7 to 14 days for this. If the inspection finds something serious, you can ask the seller to fix it, ask for a credit, or walk away under your inspection contingency.

Appraisal. Your lender orders an appraisal — an independent estimate of what the home is worth. This protects the lender, and it protects you: if the home appraises below your offer price, the lender will only lend based on the appraised value, and you have to cover the gap, renegotiate, or walk away.

Title search. A title company checks that the seller actually owns the home and that there are no unpaid liens, claims, or ownership disputes. You will usually buy lender’s title insurance; owner’s title insurance is optional but common.

All three cost money, and most of it is paid during this stage, not at closing. If the deal falls apart here, the inspection and appraisal fees are usually gone — another reason not to waive contingencies lightly.

6. Step 6: Underwriting, the Loan Estimate, and the Closing Disclosure

While the inspection and appraisal run, your lender underwrites the loan: verifying your income, assets, debts, and employment, and checking the property. Two documents matter most here.

The Loan Estimate. Once you formally apply — name, income, Social Security number, property address, estimated value, and loan amount — the lender must send you a Loan Estimate within 3 business days (CFPB, Regulation Z). It shows the rate, the monthly payment, and every estimated closing cost in a standard format, so you can compare lenders line by line. The lender may charge only a reasonable credit report fee until you say you want to proceed.

The Closing Disclosure. This is the final version of the same numbers. By federal rule, your lender must make sure you receive it at least 3 business days before closing (CFPB). Compare it with the Loan Estimate. If the numbers moved, ask why before you sign.

Underwriting is where deals most often stall: a job change, a new credit card, a large unexplained deposit, or a document that does not match. The practical rule is simple — do not change your financial life between application and closing. No new loans, no big purchases on credit, no moving large sums without a paper trail.

7. Step 7: Closing day — and your first payment

Closing day is the signing. You review the Closing Disclosure one more time, sign the loan documents and the deed, pay the remaining cash to close, and get the keys. The money moves by wire or cashier’s check — never by a last-minute email instruction to wire funds somewhere new. Wire fraud in real estate is real, and the CFPB and FBI both warn buyers to verify wiring instructions by phone using a number they already have.

What does the monthly payment look like? Take the two worked examples, both at the Freddie Mac PMMS average 30-year fixed rate of 7.18% on November 5, 2026, with 10% down. Case A — the $417,500 median home: a $375,750 loan, principal and interest about $2,545 a month. Case B — a $1,000,000 house: a $900,000 loan, principal and interest about $6,097 a month. Taxes and insurance sit on top of that — usually collected monthly into an escrow account and paid by your loan servicer — so the total is higher. The rate is a national average for prime conforming borrowers, not a quote and not an APR; your rate will differ.

Your first mortgage payment is usually due on the first of the month after a full month has passed since closing. Close in mid-November, and the first payment is typically January 1. Interest from the closing date to the end of that month is prepaid at closing — that is one of the closing-cost line items.

8. Step 8: What can go wrong, and how long it all takes

Most purchases close. Some do not, and the reasons repeat: the appraisal comes in low, the inspection finds a major problem, underwriting finds an issue, the buyer’s financing changes, or the title has a problem. Each of these is exactly what the contingencies in step 4 exist for.

How long does the whole process take? Two different clocks:

• From an accepted offer to closing: plan on 30 to 45 days for a financed purchase. ICE Mortgage Technology reported the average purchase loan closed in 36.8 days in March 2026 (ICE Mortgage Monitor, May 2026 edition) — the fastest average since ICE began tracking in 2019. FHA loans often take longer than conventional, because of stricter property standards. Cash purchases can close in one to two weeks.
• From deciding to buy to holding the keys: usually 3 to 6 months, including saving, shopping, and the contract period.

A realistic timeline for the contract period:

The single biggest delay is usually underwriting — and the single biggest cause of underwriting delay is a slow response to document requests. Answer your lender the same day.