Let’s start with the biggest question. Can you afford it? The best way to tackle this question is to dig into your finances and credit so that you can accurately input numbers into an online mortgage calculator. When calculating, make sure you’re putting in estimated taxes, insurance, and homeowners association (HOA) payments.

Tip: Most online listing sites (Zillow, Redfin, etc.) will include the previous year’s property tax for the listing as well as an HOA amount. Use these for your estimates.

Start with the down payment. First of all, it’s a myth that you need 20% down for a home purchase. With a conventional loan, you can put as little as 3% down. There is a catch, of course: you’ll have to pay for PMI (private mortgage insurance), and your interest rate may be higher. A Federal Housing Administration (FHA) loan— which is a good option for those with lower credit scores— requires 3.5% minimum, while Veteran Affairs (VA) and US Department of Agriculture (USDA) loans have no minimum down payment requirement. More about those options in a bit.

If you’ve got thousands of dollars burning a hole in your bank account, there’s not much else you need to do here. You’ll simply move it to the escrow company at closing (more on that later). If the plan is to tap into your retirement accounts or the ever-popular Bank of Mom and Dad, there’s a little more to it and you should discuss these options with a lender or financial advisor early in the process.

Fun Fact: According to the National Association of Realtors, the average first-time buyer puts between 6%-7% down on their home.

Mortgage products come in a number of shapes and sizes, but here are the main ones you’ll be seeing:

Conventional loan: Any loan that is issued by a private lender and not sponsored or guaranteed by the government. These can come in different flavors:

• Fixed rate versus adjustable rate: with a fixed rate loan, your interest rate stays the same for the duration of the loan. An adjustable rate loan will change periodically, although there will be limits on how much and how often it can change.
• Conforming versus non-conforming: A conforming loan fits underwriting standards created by government-sponsored entities (Fannie Mae and Freddie Mac, to keep it simple), which makes the loan eligible to be purchased and resold by Fannie or Freddie on the secondary market. This provides liquidity to lenders so they can write more loans. A non-conforming loan (usually it’s a jumbo loan) can still be sold, but not by one of the government-sponsored entities. It will also have more conservative credit standards.

FHA loan: The Federal Housing Administration guarantees loans written by private lenders, allowing those lenders to give loans with lower underwriting standards (meaning less-qualified buyers can get an FHA loan). To pay for this, the purchaser is required to buy mortgage insurance, which can be rolled into the monthly payment.

VA loan: This is for active duty and veteran service members and their families. A VA loan has no minimum down payment and offers competitive interest rates. Like FHA loans, they are written by private lenders, and the federal guarantee is paid for by a funding fee (which is typically rolled into the loan and financed by the buyer, but will be waived if the veteran has a service-related disability).

USDA loan: In specified rural areas, the US Department of Agriculture guarantees loans for lower-income buyers. Like with VA loans, there is no minimum down payment required and the cost of the guarantee is covered by both an upfront fee and an annual fee (paid on a monthly basis).

Fun Fact: Roughly three-quarters of all home sales are done with a conventional loan.

Next, consider your credit scores. If they need improvement, it may be in your interest to work on those before starting the home-buying process. In general, you’ll want those scores to be at least 620 to qualify for a conventional loan. At 580, you can qualify for an FHA loan with a 3.5% down payment, and from 500-579 you can (theoretically) get an FHA loan with a 10% or higher down payment. That being said, the lower your scores are, the harder it will be to find a lender willing to lend to you, and the rate could be higher.

The lender is going to look at your income, employment history, assets, debts, and credit scores. They will calculate your debt-to-income (DTI) ratio by adding your monthly recurring debt payments together— such as car payments, credit cards balances, and including your expected housing costs— and dividing them by your monthly income. A good target DTI percentage is 43%, but lenders will often allow you to go higher than that.

To start seriously shopping for a house, you’ll need a loan pre-approval. This will be a cursory look at your finances to determine how much a lender is willing to lend you, and on what terms. When you’re ready to get a pre-approval, your lender will ask for your previous two years of tax returns and two of your most recent pay stubs. They’ll also want to see a minimum of two years of work history in your current job or profession. There are options available for those whose circumstances don’t fit neatly into all of these boxes, but for most borrowers, these are the requirements. Once you’re pre-approved, you’ll have a letter in hand from your lender that you can submit with any offers.

Tip: You can get pre-approved by multiple lenders without doing damage to your credit scores. There will be a credit pull for the first inquiry, but others after that won’t count against you since multiple inquiries within a 30-day window are allowed without impact to your credit scores.

How to find a lender? Mortgage lenders fall generally into these categories:

• Independent lenders: these will have a local presence and offer more hand-holding and superior customer service. Look for companies like Guild, Fairway, or others that have “mortgage” in the name of the company and an office nearby.
• Large retail lender: big banks like Chase, Bank of America, etc.
• Credit unions: since they’re non-profit, they tend to offer very competitive rates and a wider range of loan products.
• Online lenders: Rocket, Better, or any number of other companies whose name you see in TV commercials or on a stadium.
• Mortgage brokers: a broker works independently of any company and is able to shop multiple lenders to find you the best product and price.

Tip: Credit reporting agencies make money by selling you as a lead to lenders. About 30 days or so before you start loan shopping, go to optoutprescreen.com so that you don’t get flooded with calls and emails from lenders soliciting your business.

There is crossover between some of the above, and there are pros and cons associated with each type of financial source. As a first-time homebuyer, your goal should be to find the one that offers knowledge, communication, expertise, and competitive pricing. The knowledge and communication are important so that you’re comfortable asking any questions you have and getting clear, prompt answers, while their expertise means you don’t have to worry about getting to the finish line once you’re in contract on a house. For your first time out, at least, it’s advisable to deal with a real person who knows your name and details rather than a call center.

Tip: Interest rates change every day, so when comparing lender rates, try to get them all around the same time. Also, compare fees and closing costs— they might be used to cover up a low rate by tacking on higher fees. That being said, you won’t know your exact interest rate until you’re in contract on a house; everything leading up to that point is a snapshot in time.

Before you’re ready to put that pre-approval into action, your lender will give you a worksheet that details not just your estimated interest rate and monthly payment but the various fees and costs associated with your loan. These are referred to as closing costs, and most will be due at closing along with your down payment. Some are fixed costs (like appraisal, underwriting fees, and title insurance); others might be percentages of the sale price or loan, like transfer taxes, or discount points (prepaid interest); and others might be based on the time of year that you are purchasing the house and how far into the property tax year you are. In Oregon, the fiscal year runs from July 1 to June 30 and property taxes are due in November. This means that any taxes paid in advance by the seller will be rebated back to them by you. While there are too many variables to properly calculate closing costs, figure 1%-5% of the purchase price for now. Once you’ve found a house, you’ll be able to make a much more specific estimate.

Tip: Have your lender go line- by- line over the estimated closing costs so you know exactly what you’re paying for. There are plenty of samples online to use for comparison.

Part 2: Finding a Realtor