Turning a homeownership goal into reality takes time, money and significant planning — you don’t just wake up one morning and decide to go out and buy a house.
Nearly one-third (32%) of Americans plan on purchasing a home in the next five years, according to the 2018 NerdWallet Home Buyer Report, and the costs associated with buying are among their top concerns. By knowing exactly what to expect in those costs and starting your savings plan well in advance, you can ensure you’re well-prepared for the homebuying process.
5 years out: Make a plan and start saving
Chart your course and get started.
- Calculate how much house you can afford given your current income. Use a home affordability calculator to help determine a target price.
- Determine a down payment savings goal and how much you’ll have to set aside each month to get there
- Automate your savings by having a certain portion of each paycheck earmarked and deposited into a savings account set up specifically for this purpose
If you haven’t already begun saving for your home, now’s the time to start. The more you’re able to put down on a home, the lower your monthly payments will be.
A 20% down payment on a $250,000 home, for example, would require you save approximately $830 per month for the next five years, an amount that could be tough to stash away. A 20% down payment is not required, but anything less could leave you with a higher interest rate and mortgage insurance tacked onto your monthly bill.
4 years out: Clean up your credit
If your credit history is less than stellar, lenders will know it, and bad credit could mean a higher interest rate or even denial of your home-loan application. It takes seven years for marks like charge-offs, collection accounts and even late payments to fall off your report, and it can take months or even years for your credit score to recover. You can’t speed up this process, but you can take steps to ensure the most recent years on your report are spick-and-span.
From here on out:
- Pay all of your bills on time, every time
- Pay down existing debt to reach less than 30% credit utilization
- Regularly check your credit report and work with reporting agencies to resolve any errors
3 years out: Reassess and stay the course
A lot can happen in a few years’ time — you may have added a family member or gotten a promotion. If everything’s consistent, stay the course with your monthly savings goals. If your anticipated home budget needs to be adjusted either up or down, revisit how much you’re setting aside each month to stay on track.
“By reassessing your goals three years out, you’ve given yourself ample time to adjust your savings, or rethink the type of home you need,” says Tim Manni, NerdWallet mortgage expert. “If you’re planning to purchase a home with a partner, be sure they’re saving and being responsible with their credit. Lenders always judge couples on their lowest credit score.”
2 years out: Narrow the focus
Your vision of homeownership has thus far been only that: a vision. Now it’s time to begin narrowing your focus, creating your list of wants and needs in a home, looking at potential neighborhoods and talking with friends and family about their experiences with local real estate agents.
The closer you get to homebuying time, the more important it is you understand the extent of your upcoming expenses. Not only will you need your down payment, you’ll also need closing and moving costs. Get quotes from local movers now so the cost doesn’t surprise you when it’s time to pack up. At this point, you may need to further tighten your purse strings to reach your savings goals.
1 year out: Get ready to shop
You have many things to do this year, culminating with the purchase of your home:
You don’t need to begin actively looking for your home until you’re completely ready to find the right place and make an offer, with a preapproval and agent in place. Single-family existing homes were on the market for an average of just 40 days in December, according to the National Association of Realtors, a time span that typically shortens in warmer months and could be much, much shorter in areas with low inventory.
Buying a home is a long process, and stretching it to five years may make it even longer than you anticipated. You could fast-track your homebuying venture, but stretching out how much time you have to save up and improve your credit beforehand can save you time, money and headaches in the long run.