Homeownership is among the major milestones in life. But if you’re an aspiring first-time homeowner, it can also be a confusing and frustrating process.
How can you prepare to buy a house in four years? More importantly, is setting a financial goal that far in the future even a smart idea?
Four years may seem like a long time, but it will give you a chance to create a budget, set a target price for your new home, improve your credit, and prepare for homeownership with the best possible mortgage terms.
Here’s what you need to create a four-year plan to buy a house.
- The first year of your four-year plan should focus on preparation and researching the costs of homeownership.
- The second year of your four-year plan should be dedicated to checking in on your progress and assessing your goals.
- The third year of your four-year plan should involve taking more concrete steps towards homeownership, such as finding a real estate agent and shopping for homes.
- The finish line of your four-year plan should include making an offer, applying for a home loan, and closing on the house.
The First Year: Make a Plan and Know the Costs
Understanding what goes into homeownership, setting a savings goal, and determining a target price for your future home can make your four-year plan to buy a house go smoothly.
Set goals for your savings and credit
Before you can get the keys to your new home, it’s key to properly manage your credit. Your credit score is an important factor that helps determine if you qualify for a mortgage, and how much money you could qualify for. Your credit score also affects your mortgage rate.
When setting a four-year plan to buy a house, the first step is to check your credit early. You can check your credit with three credit bureaus — Equifax, Experian, and TransUnion. Accessing this information early gives you an advantage in strengthening your credit, correcting any mistakes, and understanding where to start reducing debt.
Once you have your credit report, the next step is reducing your debt-to-income ratio. Your DTI ratio is a measurement of your monthly debt payments — such as your credit card payments and student loan debt — against your gross monthly income. Lenders consider credit and DTI ratios together to determine if they are willing to offer a mortgage, and how much a borrower can qualify for.
Once you have an understanding of your credit and DTI ratio, it’s time to set a savings goal. Start by setting a target price for your home and work backward to your down payment goal.
For example, if you want to purchase a house for around $350,000, you’ll want to save for a down payment that’s between 3.5% and 20% of the purchase price. Your goal for the next four years should be to put away between $12,250 and $70,000, depending on the mortgage program you’re considering.
“I strongly encourage setting a timeline and planning ahead prior to purchasing a home,” says Brandon Goldstein, a chartered financial consultant and financial planner at Prudential. “Think of it like a road map: your current cash flow, investment accounts, and financial situation are the starting point, and the home purchase is the final destination.”
Using automated savings through your bank or credit union can make the process simple by making regular deposits into a separate account over time.
Create a budget
With goals set for both credit and savings, it’s time to create a budget. Setting a budget requires future homeowners to understand their income, bills, and overall expenses. Using a software tool, spreadsheet, journal, or ledger can help you analyze your spending and keep you on track for your goals. The Consumer Financial Protection Bureau also offers budget worksheets to help you get started.
Find out how much you can afford
The goal of your four-year budget should be to save enough money to cover your down payment and closing costs, and set up how much you can pay each month without creating a financial burden. To understand how much home you can afford, start by working backward. Homeowners should plan for a mortgage between two and three times their yearly household income. For example, a household earning around $117,000 per year should comfortably afford a mortgage of $350,000.
The Second Year: Assess Your Progress and Narrow Your Focus
Year two should focus on ensuring you’re on track to purchase a home in your budget. This includes checking in on your credit and savings, understanding market trends, and managing your priorities.
Check in on your credit score and savings
Checking your credit report, credit score, and savings shouldn’t be a one-time event. At minimum, everyone should check their credit once per year.
It is equally important to limit the amount of credit you apply for. If you have too many credit applications on your report in the two years before applying for a mortgage, your credit score could go down, reducing your opportunity to get the best rates for your home loan.
The second year is also a good time to make sure you are on track to meet your down payment savings goal. If there are changes in your life — such as marriage, new additions to the family, or a raise at work — now is the time to reevaluate your goals and adjust your spending to ensure you can meet your savings target.
Research the market
With goals set for how much home you can afford and how much to save, the next step is to research the housing market. Using real estate websites and federal data, like the National Mortgage Database, you can get an understanding of how home prices are changing.
Outline your priorities
A key step is determining what you want in a home. Creating a wish list can help you determine which aspects of a home are nonnegotiable, and which you can live without. Your priorities shouldn’t be limited to the number of bedrooms or the kitchen size. Also consider community factors like the length of your commute and whether you want to be part of a homeowners association.
Keep improving your credit
Improving your credit score is not a sprint — it’s a marathon. By continuing to pay off debt, keeping your credit card balances low, and only applying for credit you need, you can optimize your score to get the best terms on your mortgage.
The Third Year: Shop and Prepare
The third year should be focused on getting organized to start the homebuying process. In addition to maintaining your savings and credit improvement plan, now is the time to get your documents in order, start shopping for a mortgage, and find a real estate agent to research potential homes.
Make a document checklist
Year three should start with getting your documents in order. Because most lenders will require at least two years of financial history, now is the time for future homeowners to create a mortgage application document checklist. Some of the documents you will need to start gathering include:
- Two months of pay stubs.
- Two years of tax filings.
- Between three and six months of bank statements.
- Information on savings, retirement accounts, and investments.
- Other relevant information about your financial status.
Shop for mortgages and know the cost
With your documents coming together, the next step is to understand the type of mortgage that’s right for you. There are multiple loans available for different types of borrowers, which include different programs, terms, and interest rates. Some questions about mortgages you’ll have to ask include which program is best, if you want the term to be 15 or 30 years, and if you want a fixed or adjustable interest rate.
Which type of loan is right for you?
There are different programs available for everyone from experienced homebuyers to first-timers. Popular loan types include conventional mortgages, Federal Housing Administration loans, Veterans Affairs loans, and Department of Agriculture loans.
Partner with a real estate agent or Realtor
Looking at the home market early provides valuable insight. Finding a real estate agent or Realtor you are comfortable with early can help you narrow your focus, including zeroing in on where you want to live, and what’s important to have in your new neighborhood.
Working with a real estate agent early on helps with research on what you might pay for your next home. The research process is less about touring homes and more about looking at prices and ensuring your budget is on track to get the home you want.
“Begin to familiarize yourself with the real estate market in the area where you plan to purchase a home,” says Boyd Rudy, associate broker for MiReloTeam Keller Williams Living in Brighton, Michigan. “Look for properties that are in your price range and start researching the different neighborhoods. This will help you narrow down your search and make the process of purchasing a home easier.”
With a professional team in place and an understanding of the market, it’s now time to start asking questions about where you want to live and what’s most important for your home. These questions should include:
- What type of home do I want to live in?
- Do I want to live in an urban or suburban setting?
- Is my commute important, or will I be working from home most of the time?
- Is access to public transportation important?
- How close am I to schools, parks, shopping centers, and other amenities?
3 Years and 6 Months In
At 42 months, you’re now closing in on becoming a homeowner. With the finish line in sight, it’s time to get preapproved for a mortgage and begin searching for homes in earnest.
The first step toward the official homebuying process is getting preapproved by a lender. A preapproval letter tells home sellers that a lender is conditionally ready to back a mortgage for you, up to the preapproved amount. Preapproval letters have an expiration date, usually between 30 and 60 days, giving you time to start the process and get ready to buy a home.
Start your home search
With your preapproval letter in hand, it’s now time to start your home search. This part involves touring homes, using your checklist to determine what’s most important in a home, and making sure you’re within your budget. Along with finding the right combination of bedrooms, bathrooms, and neighborhood, understanding your mortgage interest rate and total monthly payment are crucial to finding an affordable place to call home.
The Finish Line
All of your preparation comes down to this: making an offer and closing on the home. Unfortunately, it’s not as simple as picking a new house and moving in. Rather, there are still a few hurdles to clear, such as finishing your mortgage application, getting homeowners insurance, and closing on the loan.
Make an offer
It’s time to make an offer on a home. This tells the seller you’re interested in purchasing the home at the price of your bid. Submitting a bid requires the potential buyer to place earnest money down, which signals to the seller they are serious about completing the transaction. Earnest money is only paid out if the bid is accepted.
Your first bid may not be accepted for several reasons, including other buyers submitting higher bids, or the seller submitting a higher counteroffer. Until the homeowner accepts a different bid, it’s possible to negotiate to find the right number for everyone.
Apply for a mortgage
Once your bid on a home is accepted, the next step is to formally apply for a mortgage. Even though you may already have a preapproval letter in hand, it’s not the same as going through the application and mortgage underwriting process.
At this point, it’s wise to request loan estimates from several lenders. Getting different loan estimates gives you the chance to compare mortgage offers to ensure you are getting the best rate and terms for your loan. If you do your shopping within 45 days of the first application, having multiple lenders pull your credit won’t hurt your credit score.
Home inspection and appraisal
Part of the homebuying process involves getting a home inspection and an appraisal from independent experts. This step is often included as part of the closing process to ensure that the home is in good physical shape and that it is priced at an appropriate value.
To find a home inspector, ask for referrals from friends, family, or your real estate agent. Also search for reviews online, to ensure you are getting an experienced and honest inspector.
Buying insurance isn’t an optional step. In most situations, your mortgage lender will require you to hold homeowners insurance for as long as you own the property.
It’s key to contact different insurance brokers and agents to get multiple quotes and compare benefits, deductibles, and prices. Before purchasing any policy, check with your loan officer to ensure the policy meets their coverage requirements for the loan.
Close on the home
With everything in place, it’s time to close on your home and get the keys. In the days before your closing date, be sure to do a final walk-through to ensure there are no surprises that aren’t part of the purchase agreement.
At the closing table, you will be tasked with signing multiple documents required by federal, state, and local authorities, as well as your mortgage lender. Be sure you’re comfortable with what you are signing, and ask questions about anything you don’t understand. Until the paperwork is signed, you aren’t committed to purchasing the home.
FAQ: How To Prepare To Buy a Home in 4 Years
Creating a four-year plan to buy a house is a reasonable timeline if you’re able to commit to a savings and credit improvement plan. Four years allows you to determine how much house you want to purchase, where you want to buy, and what matters most in your future home.
Keeping your four-year plan to buy a house on track is all about maintaining a budget, sticking to your savings goals, and managing your spending to prioritize your goals. Before starting the plan, assess how much you can save each month to determine if your goal is realistic.
Making a four-year plan to buy a house gives you plenty of time to save for a large down payment and optimize your credit for the major purchase. Instead of settling for a higher monthly payment and less-than-ideal terms on your loan, building your down payment savings and reducing your DTI ratio over time can give you the upper hand in buying a home on your terms.
The Bottom Line on Preparing To Buy a House in 4 Years
Even though it sounds like a long time, creating a four-year plan to buy a house can help any future homeowner set themselves up for success. By managing your budget, reducing your DTI ratio, improving your credit, and determining what matters most in your next home, you can secure the right mortgage on your terms.