8 Steps to Getting Your Finances in Order Before Buying a Home 

(9-minute read)

Buying a home usually begins long before you schedule showings or walk through an open house. One of the most valuable first steps is understanding your current financial position and determining what you can comfortably afford.

That does not mean your finances must be perfect. It means knowing where your money goes, managing your existing obligations, reviewing your credit and preparing for the full cost of homeownership—not simply the mortgage payment.

Here are eight practical steps prospective homebuyers can take in 2026.

1. Build a Budget Based on What You Actually Spend

A useful budget should reflect real life, not an ideal month in which nothing unexpected happens.

Review at least the last three to six months of bank statements, credit-card statements, payment-app activity and receipts. Looking across several months helps capture expenses that do not occur on a predictable schedule, including:

• Vehicle repairs and maintenance
• Medical and dental expenses
• Insurance premiums
• School expenses
• Birthdays and holidays
• Travel
• Pet care
• Annual memberships
• Storm preparation and evacuation costs
• Home and vehicle deductibles

Separate expenses into three general categories:

• Fixed expenses: rent, car payments, insurance and other regular obligations
• Variable necessities: groceries, utilities, fuel and medical costs
• Discretionary spending: dining out, entertainment, subscriptions and nonessential shopping

The goal is not to eliminate every enjoyable expense. It is to develop an honest picture of how much room already exists in your monthly budget.

2. Calculate Your Debt-to-Income Ratio

Mortgage lenders consider your debt-to-income ratio, commonly called DTI. This is the percentage of your gross monthly income that goes toward required monthly debt payments.

To estimate it, add your recurring monthly obligations—such as car loans, student loans, credit-card minimum payments and the proposed housing payment—and divide that amount by your gross monthly income.

For example:

• Gross monthly income: $6,000
• Monthly debt payments, including the proposed housing payment: $2,400
• Estimated DTI: 40%

There is no single DTI limit that applies to every mortgage. Acceptable ratios vary by loan program, lender, credit profile, cash reserves and other factors. The Consumer Financial Protection Bureau specifically advises that different lenders and mortgage products may use different limits.

Reducing debt can improve cash flow and may strengthen a mortgage application. However, do not automatically empty your savings to eliminate every balance. A lender can help you compare the benefit of reducing a particular debt against the value of retaining funds for closing and emergencies.

3. Track the Small Expenses Too

Large monthly bills are usually easy to identify. Smaller transactions can be harder to notice because no single purchase seems important.

For at least one month, record everything you spend. Include convenience-store purchases, delivery fees, app subscriptions, coffee, restaurant meals and automatic renewals.

Then ask:

• Am I still using every subscription?
• Could I reduce delivery or convenience fees?
• Are frequent small purchases interfering with a larger goal?
• Which expenses can I reduce without making the budget unrealistic?
• Are there annual charges I should prepare for monthly?

A sustainable spending plan is more valuable than an overly restrictive budget that is abandoned after a few weeks.

4. Strengthen and Document Your Income

The original consumer handout suggested that some buyers might need a second job to qualify for the home they want. Additional income can help, but mortgage qualification is not based solely on how much money recently began entering your bank account.

Lenders generally need to determine whether income is stable, documented and reasonably likely to continue. Treatment can vary for wages, commissions, bonuses, overtime, self-employment, retirement income, child support, rental income and second jobs.

A recent job change does not automatically prevent someone from qualifying or necessarily produce a higher interest rate. A lender will evaluate factors such as the type of employment, continuity of the borrower’s work history and the documentation available.

Before changing jobs, moving to self-employment or relying on newly established side income during the mortgage process, speak with your lender. Also begin organizing:

• Recent pay statements
• W-2s or 1099s
• Federal tax returns when requested
• Bank and investment statements
• Documentation of additional income
• Employment and business records for self-employed borrowers

Do not exaggerate income or omit debts. Accurate information helps the lender identify an appropriate and sustainable loan.

5. Save for More Than the Down Payment

A 20% down payment is not universally required.

As of 2026, qualified borrowers may find conventional mortgage options requiring as little as 3% down, while FHA-insured financing may permit a down payment as low as 3.5%. VA, USDA and certain assistance programs may offer other options for eligible buyers.

A larger down payment may reduce the loan balance and could affect the interest rate, mortgage-insurance requirement or overall borrowing cost. But using every available dollar for the down payment can leave a buyer financially vulnerable after closing.

Your savings plan should consider:

• Down payment
• Closing costs
• Earnest money deposit
• Inspections
• Appraisal or lender-related expenses
• Homeowners and applicable flood insurance
• Moving costs
• Utility deposits
• Immediate repairs or purchases
• Emergency reserves

Closing costs vary, but Freddie Mac advises buyers that they commonly fall within a range of approximately 2% to 5% of the purchase price. The actual amount depends on the property, loan and transaction.

6. Create a Dedicated Homebuying Fund

Saving “whatever is left” at the end of the month often produces inconsistent results. Instead, establish a specific monthly savings goal and treat it like a required bill.

A separate savings account can make progress easier to monitor and reduce the temptation to spend the money on unrelated purchases.

Your homebuying fund can include individual targets for:

• Down payment
• Closing costs
• Moving expenses
• Initial home repairs
• Emergency reserves

Automatic transfers scheduled shortly after payday may make the process easier.

Down-payment assistance may also be available through state, parish, municipal or nonprofit programs. Eligibility can depend on income, location, occupation, household size, prior homeownership and the selected mortgage. Freddie Mac notes that many state and local governments offer assistance to qualified buyers, but requirements vary by program.

Assistance should be researched early. Some programs require buyer education, approved lenders or applications completed before a purchase agreement is signed.

7. Protect Your Financial Stability While Applying

You do not have to remain in the same job forever to become a homeowner. Nevertheless, stability and documentation matter during mortgage underwriting.

Once you begin seeking mortgage approval, avoid making major financial changes without first speaking with the lender. This includes:

• Financing a vehicle
• Opening or closing credit accounts
• Co-signing a loan
• Making large credit-card purchases
• Changing jobs or compensation structure
• Moving large sums between accounts
• Depositing unexplained cash
• Spending funds reserved for closing

Lenders may recheck credit, employment, assets and debts before closing. A new monthly payment or reduction in available funds can change the loan calculation even after a preapproval has been issued.

If a job change or major purchase is unavoidable, tell the lender as early as possible.

8. Review and Protect Your Credit

Credit reports can contain mistakes, outdated information or accounts you do not recognize. Review your reports early enough to investigate legitimate errors before applying for a mortgage.

The federally authorized website AnnualCreditReport.com currently provides free weekly online reports from Equifax, Experian and TransUnion.

A credit report is not the same as a credit score. The reports show account and payment information used by scoring systems, while scores are calculated separately.

Good credit habits generally include:

• Paying every bill by its due date
• Keeping revolving balances manageable
• Avoiding unnecessary new accounts
• Reviewing statements for errors or fraud
• Bringing delinquent accounts current
• Communicating with creditors when financial trouble develops

Do not open a credit card simply because an old handout says every buyer needs one. If you have little or no credit history, ask a reputable lender or HUD-approved housing counselor about appropriate credit-building options for your circumstances.

Also be cautious about closing older accounts or paying collection accounts without guidance immediately before applying. Those actions may not affect every credit profile in the same way.

A Simple Homebuyer Budget Worksheet

Begin with monthly take-home income from all dependable sources.

Monthly income

• Take-home pay
• Self-employment income
• Retirement or Social Security income
• Child support or alimony received
• Disability or other qualifying income
• Interest, dividends or rental income
• Other dependable income

Monthly expenses

• Rent
• Vehicle payments
• Student and personal loans
• Credit-card payments
• Utilities
• Phone and internet
• Insurance
• Fuel and vehicle maintenance
• Groceries
• Restaurant and prepared food
• Medical, dental and prescription costs
• Childcare and education
• Clothing and personal care
• Savings and retirement contributions
• Entertainment and subscriptions
• Charitable giving
• Other recurring expenses

Subtract total monthly expenses from total take-home income. Then consider whether the remaining amount can support both the proposed housing payment and the additional costs of ownership.

Remember that a complete housing budget may include:

• Principal and interest
• Property taxes
• Homeowners insurance
• Flood insurance when applicable
• Mortgage insurance
• Homeowners association dues
• Utilities
• Routine maintenance
• Repairs and replacements

Get Guidance Before Choosing a Price Range

A mortgage preapproval can be valuable, but the maximum amount a lender is willing to finance is not necessarily the amount a household will be comfortable paying.

Before settling on a target price, consider other priorities: retirement savings, childcare, education, travel, medical needs, transportation and the emergency cushion you want to maintain.

The Consumer Financial Protection Bureau recommends reviewing credit, assessing finances, establishing a price budget and assembling loan documentation before shopping for a home.

A good home purchase should fit into your larger financial life. Getting your finances organized beforehand can help you shop more confidently, compare loan choices intelligently and enter homeownership with fewer surprises.

Source Credit and 2026 Update

This article was adapted and substantially updated from “8 Steps to Getting Your Finances in Order” and the accompanying “Budget Basics Work Sheet,” appearing on pages 4–5 of Handouts for Consumers from REALTOR® Magazine Online. The original material was shares with permission of the National Association of REALTORS® and copyrighted in 2005. (With some help form ChatGTP, I am updating materials I have shared with my Buyer and Seller clients over the years and resetting in my  real estate blog.)

The 2026 update incorporates current consumer information from the Consumer Financial Protection Bureau, AnnualCreditReport.com, the U.S. Department of Housing and Urban Development and Freddie Mac’s homebuying resources.

This article provides general educational information and is not individualized financial, credit, tax or lending advice. Mortgage requirements and assistance programs vary. Prospective buyers should consult qualified lenders, financial professionals and housing counselors about their individual circumstances.

Shared by: 

Randall C. (Randy) Anderson, REALTOR®/Agent 
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