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Buying a home is probably one of the biggest financial commitments many people make in their life, and so it stands to reason that the process can be complex and lengthy. From figuring out how much you can afford to learning how mortgages work to getting preapproved to determining where exactly to live…it’s a lot!

But by learning about the usual flow before you begin hitting the open houses, you can be well-prepared to dive into homeownership. Below, the eight steps to follow that will help make purchasing a home a smooth process.

8 Steps to Prepare for a Home Purchase

Here are the moves that will help you get ready to buy your dream property:

1. Determining Credit Score

A homebuyer’s credit score can impact their ability to secure a mortgage loan with a desirable rate. It can also affect how much they’ll be required to pay as a down payment when it’s time to close.

Credit score can be influenced by a variety of factors, from payment history to amount of debt (aka credit utilization ratio) to age of credit accounts, mix of credit accounts, and new credit inquiries.

Payment history is the main factor that affects a person’s credit score, accounting for 35% of an overall FICO® score. Missing a payment on any credit account — from unpaid student loans to credit cards, auto loans, and mortgages — can negatively impact a person’s credit score.

On the other hand, positive habits can include making on-time payments, limiting the number of new inquiries on their credit file, and working to pay down outstanding balances.

Is There a Credit Score “Sweet Spot?”

Many buyers wonder whether there’s a desired credit score range or “sweet spot” to obtain a mortgage. Typically, a credit score of 740 or higher will get the best deals (meaning lowest rates).

Credit scores can also affect the amount of the down payment itself. Some mortgage lenders require at least 20% of the house’s sale price be put down, but might offer more flexibility if the buyer’s credit score is in the higher range. A lower credit score, on the other hand, could call for a larger down payment.

Whether homebuyers have debt or not, checking credit reports is still a recommended first step to applying for a mortgage. Understanding the information on credit reports can be invaluable in knowing where you stand when qualifying for a mortgage loan rate.

2. Deciding How Much to Spend

Deciding how much to pay for a new home can be based on a variety of factors including expected and unexpected housing costs, upfront payments and closing costs, and how it all fits into the buyer’s overall budget.

Calculating Housing Costs

There are several housing costs for home purchasers to consider that might affect how much they can afford to offer for the house itself. The costs of ongoing fees like property taxes, homeowner’s insurance, and interest — if the loan isn’t a fixed-rate mortgage — can all lead to an increase in the monthly mortgage payment.

Closing costs are fees associated with the final real estate transaction that go above and beyond the price of the property itself. These costs might include an origination fee paid to the bank or lender for its services in creating the loan, real estate attorney fees, escrow fees, title insurance fees, home inspection and appraisal fees and recording fees, to name a few.

Typically, closing costs are between 2% and 5% of the loan’s amount. To get an idea on how this can impact your budget, use this home affordability calculator to estimate total purchase cost.

In addition to closing costs, expenses that potential homebuyers might want to consider are repairs and updates they might want to make to a home, new furniture, moving costs, or even commuting costs. If you are considering buying in a community with a homeowners association, factor those costs in as well.

Finally, unforeseen costs of a major life event like a layoff or the birth of a new child might not be the first expenses that come to mind. However, some buyers could find themselves making a potential home-buying mistake by not getting their finances in order to prepare for the unexpected.

Making a list of these estimated expenses can help homebuyers calculate how much they can feasibly afford. It can also help them create a budget that could help them avoid being overextended on housing costs, especially if they might be paying other debt or saving for other financial goals.

3. Saving for a Down Payment

Saving money for a house is one of life’s biggest financial goals. And how much they’re able to offer as a down payment can significantly impact the amount of their monthly mortgage payment.

A larger down payment can also be convincing to sellers who see it as evidence of solid finances, sometimes beating out other offers in a competitive housing market.

The typical down payment on a house varies depending on the type of buyer, loan, location, and housing prices. Most recently, the median down payment was 18%, although it was 9% for first-time buyers.

For first-time homebuyers, 18% or even 9% of the price of the home can seem like a daunting figure. Many buyers find that cutting spending on luxury or non-essential items and entertainment can help them save up the funds.

Other tactics could include getting gifts and loans from family members, applying for low down-payment mortgages, withdrawing funds from a retirement account, or receiving assistance from state and local agencies.

For buyers who are also sellers, proceeds from another property could also fund the down payment.

4. Shopping for a Mortgage Lender

There are many mortgage lenders competing for the business of homebuyers who finance their home purchases. These lenders offer a variety of mortgages to apply for, with a few of the most common being conventional/fixed rate, adjustable rate, FHA loans, and VA loans.

Buyers might not realize they can — and should — shop around for a lender before selecting one to work with. Different lenders offer different variations in interest rates, terms, and closing costs, so it can be helpful to conduct adequate research before landing on a particular lender.

Mortgage lenders must provide a home mortgage loan estimate within three business days of receiving a mortgage application. The form is standard — all lenders are required to use the same form, which makes it easier for the applicant to compare information from different lenders and make sure they are getting the best loan for their financial situation.

When comparing loan offers, don’t just look at the interest rate. Examine the annual percentage rate (APR), which factors in costs.

5. Getting Preapproved for a Loan

While it might seem like a bit of a nuance, getting prequalified for a loan vs. preapproved for a loan are two different things.

When a buyer is prequalified for a loan, their mortgage lender estimates the loan amount they are qualified for, based on financial information they provided.

When a buyer is preapproved, the lender conducts a thorough investigation into their finances that includes income verification, assets, and credit rating. Preapproval is not a guarantee but tells a buyer that a lender is likely to approve them for a certain amount, as long as they clear the underwriting process.

Having a preapproval letter in hand can help some buyers get ahead in a competitive home market. It shows the would-be owner’s intent to purchase and a lender’s guarantee to back that purchase up.

6. Finding the Right Real Estate Agent

While the internet and popular real estate search websites have made it easier for homebuyers to hunt for a house online, most buyers still solicit the help of a real estate agent to find the right home and negotiate the price and purchase.

Also, many realtors are experts in their particular housing market, so for buyers who are searching in a specific location, a real estate agent may be able to offer valuable insights that might not be revealed online.

7. Exploring Different Neighborhoods

By researching neighborhoods where they might want to purchase a property (both in-person and online), homebuyers can get a better sense of what living in their future community could look like.

Many real estate websites provide comparable listings to help determine a reasonable offer amount in a given neighborhood.

They may also highlight nearby school ratings, price and tax history, commute times, and neighborhood stats like home value fluctuations or predictions, and walkability ratings.

All of this information can help paint a picture of life in the area a homebuyer chooses to settle in. Doing a deep dive into a desired neighborhood can help inform a more realistic decision on where to buy a house.

8. Kicking off the House Hunt

Once the neighborhoods are whittled down, the loan is preapproved, the real estate agent has been signed, and the savings are set aside, the official house hunt can begin.

With the help of a trusted real estate agent and a housing market with adequate inventory, most homebuyers can begin to book showings, attend open houses, and formally put down an offer on a house they like.

In particularly “hot” markets, houses could receive several offers, so homebuyers might want to be prepared to go through the bidding process with a few properties before they get to that glorious final sale.

Are You Ready to Buy a Home Quiz

The Takeaway

A home may well be the biggest purchase you make and the biggest asset you ever own, so it makes sense to spend some time on the home-buying process. From checking out different mortgage options to getting preapproved for a loan to attending open houses, the process is a valuable one that brings you closer to your dream home.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What is the 20% rule when buying a house?

The 20% rule typically refers to the idea that a homebuyer should make a 20% down payment. This percentage allows the buyer to avoid paying for private mortgage insurance (PMI) as part of their monthly mortgage payment. It’s hard to come up with that much cash upfront, especially for first-time buyers, and it’s not unusual to see buyers put down less. In fact, eligible first-time homebuyers can purchase with as little as 3% down with some lenders. And some government-backed loans require no down payment at all.

How large a down payment do I need for a $350,000 house?

If you want to put down 20% and avoid paying for private mortgage insurance, you will need to come up with a down payment of $70,000. This may be difficult for some buyers, and it is certainly possible to put down less. Eligible buyers may be able to put down just 3.5%, which on a $350,000 house would be $12,250. And if you buy with a government loan, you may be able to avoid a down payment altogether.

What do I do now if I want to buy a house next year?

Preparing to buy a house one year from now is primarily about strengthening your financial situation. Check your credit score and practice good credit hygiene: Pay your bills on time and clear up any blemishes on your credit report. Try to pay down debt and also to save some money for a down payment and the expenses that come with a home purchase. If you have a particular neighborhood or city in mind, begin to follow listings and local news in the area.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Fractional reserve banking is an economic system that goes on behind the scenes at the institutions where you keep your money. It allows the bank to keep only a fraction of the money you deposit as cash for withdrawal.

The rest of the funds may be loaned out for other purposes. This allows the bank to make money and stay in business, and it can also help keep the economy humming along.

Here’s a closer look at fractional reserve banking, its history, and its pros and cons.

What Is Fractional Reserve Banking?

The system of banking used most widely around the world today is called Fractional Reserve Banking (FRB). In this system, only some of the money that exists in bank accounts is backed by physical cash that people can withdraw. Banks can then take the extra money and lend it out, which theoretically helps to expand the economy.

In simpler terms, if someone goes to the bank and deposits money into their account, the bank only holds on to a certain amount of that cash, and they lend the rest of that out to individuals and businesses. This encourages spending and investing and puts more money into the economy as a whole.

Fractional reserve banking is also one of the main ways that banks make money, as they can see earnings from the difference between any interest they pay to customers and the interest they charge borrowers for taking out loans.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

The History of Fractional Reserve Banking

The origins of fractional reserve banking aren’t entirely clear, but the system is generally believed to have been created during the Middle Ages. At that time, more and more people began storing their money in banks, and the banks wanted to be able to transfer coins between customer accounts, rather than storing the exact coins that were deposited until the future time when the customer wanted to withdraw them. This evolved into deposits being treated as a sort of IOU, and the system continued to develop from there.

Requirements of Fractional Reserve Banking

In the past, the Federal Reserve (aka “the Fed”) required banks of a certain size to have a set percentage of funds tied up in reserves. Prior to March 2020, large banks (whether traditional vs. online) with more than $124.2 million in assets were required to keep 10% in reserves, but smaller banks had different requirements. Banks with assets between $16.3 million and $124.2 million were required to hold 3% in reserves, and banks with under $16.3 million in assets were not required to hold any reserves.

These reserves could be held by the bank itself or put into an account at the Federal Reserve, known as a reserve balance.

However, in March 2020, the Federal Reserve Board lowered the reserve requirement to 0% across the board and replaced it with Interest on Reserve Balances (IORB) as an incentive for banks to maintain reserves, which banks continue to do. Typically, banks have enough money in reserve to accommodate everyday business, including all withdrawals.

💡 Quick Tip: Make money easy. Open a bank account online so you can manage bills, deposits, transfers — all from one convenient app.

The Fractional Reserve Multiplier Equation

Though it’s not relevant with today’s 0% reserve requirements, the multiplier equation has been used in the past to estimate the impacts of fractional reserve banking on the economy. This equation helps figure out how much money can potentially be created in the financial system from bank lending, which sets off a chain reaction of economic activity.

For example, let’s say you deposit $1,000 in a bank and the bank keeps $100 and lends out the remaining $900 to John who needs money to pay for a home repair. John pays the contractor, who then deposits that $900 in another bank, which then keeps $90 and lends out $810, and so on. This pattern continues, effectively multiplying the original deposit.

The fractional reserve multiplier equation is:

Initial Deposit x 1/Reserve Requirement

So if a bank has $500 million in total assets and it was required to hold 10% in reserves, that would be $50 million. Using the multiplier equation, the calculation would be:

$500 million x 1/10% = $5 billion

This means that $5 billion can potentially be created in the economy through the system of fractional reserve banking. This is different from printing new money and is simply an estimate of the impacts of FRB.

Recommended: Federal Reserve Interest Rates, Explained

Pros of Fractional Reserve Banking

There are both upsides and downsides to the fractional reserve banking system. Some of the pros are:

•   Banks can use most of the money that gets deposited to grant loans and earn interest on those loans.

•   Banks also earn interest on the reserves they hold.

•   The system helps grow the economy.

Most of the time the system works well. Banks make money on interest, money gets released into the economy, and much of the time that money helps borrowers to earn money as well. The idea is that borrowers invest money into their home, business, or other activities, which in turn helps them grow their wealth. They then pay the bank back for the loan and the cycle continues.

Recommended: The Difference Between a Checking and Savings Account

Cons of Fractional Reserve Banking

However, some of the cons of fractional reserve banking are:

•   Banks don’t keep 100% of deposits on hand, which can be a problem if there is a bank run. During the Great Depression, a significant number of banks had to close because too many people were trying to take cash out and the banks didn’t have enough. (These days, the government insures deposits of up to $250,000 per depositor, per institution and account ownership type, which means you can’t lose your money — up to the insured limit — in the rare event of bank failure.)

•   If the bank creates too much money and lends it out unwisely, it can lead to economic instability, inflation, and financial crises.

•   Banks can respond to higher reserve requirements by increasing interest rates on loans and paying lower annual percentage rates (APYs) on deposits.

The Takeaway

The fractional reserve banking system is an economic system that typically requires banks to keep a certain amount of cash on hand for withdrawals. The rest of the money may be loaned out and used for other purposes, which helps the bank earn money and the economy grow.

This is going on behind the scenes when you bank. Many people are interested in finding a bank that suits their financial and personal needs, however, with features such as a competitive interest rate and rewards.

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Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is fractional reserve banking in simple terms?

Fractional reserve banking is a system where banks are only required to keep a small portion of customer deposits in reserve — usually to meet withdrawal demands — and can lend out the rest. The money banks loan to individuals and businesses then gets deposited back into other banks, repeating the process, and creating more money in the economy.

How do banks create money from a $1,000 deposit?

When you deposit $1,000 in a bank, the bank may keep a fraction — say 10% or $100 — and lend out the remaining $900. That $900 might be spent and redeposited in another bank, which then keeps $90 and lends out $810, and so on. This cycle continues, essentially multiplying your original deposit. Through this process, known as the money multiplier effect, banks create money by expanding the money supply beyond the original deposit.

How much money are banks required to have on hand?

Historically, banks have been required to keep a certain percentage of customer deposits in reserve, known as the reserve requirement. This percentage is set by the Federal Reserve (aka “the Fed”) and was generally around 10%, meaning banks had to keep $100 on hand for every $1,000 in deposits. However, in March 2020, the Fed reduced the reserve requirement to 0%.

While banks don’t currently have a specific minimum requirement, they still maintain reserves for operational needs and to comply with other regulations.

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

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