Identifying optimal experimental conditions, preferably through a simple and cost-effective method, for the fabrication of oxide-diluted magnetic semiconductors, such as Fe-doped SnO2, holds great significance in the quest for spintronic materials operating at room temperature (RT). While mechanochemical milling is a well-established technique meeting these requirements, its numerous milling variables necessitate careful consideration of restricted experimental conditions. In this study, we present some experimental mechanochemical milling conditions to prepare impurity-free iron-doped tin dioxide nanoparticles exhibiting RT ferromagnetic signal. To achieve this, we investigated the effects of milling time, the choice of the starting Sn reactant, and iron concentration on the purity of Sn1−xFexO2 (x = 0, 0.03, and 0.05) nanopowders obtained through mechanochemical milling followed by thermal treatment. Characterization through XRD, XANES, and EXAFS at the Fe K-edge, RT Raman spectroscopy, 119Sn and 57Fe Mössbauer spectroscopies, and magnetic measurements was conducted. Among the experimental techniques, micro-Raman spectroscopy proved the most effective in detecting the formation of hematite as an impurity phase. Our results indicate that extending the milling time to 12 h, as opposed to 3 h, employing anhydrous SnCl2, instead of SnCl2·2H2O and using the low iron concentration of x = 0.03, results in proper conditions for producing impurity-free samples with a robust RT ferromagnetic signal. The oxidation states for iron and tin ions were determined to be 3+ and 4+, respectively, with both occupying octahedral sites, suggesting iron’s replacement of tin. Our findings propose that both the bound magnetic polaron and RKKY models offer potential explanations for the origin of the ferromagnetic signal observed at room temperature in Sn0.97Fe0.03O2 sample milled for 12 h.