Buying a home is no simple task. It takes time to choose and apply for the right mortgage, let alone to find an affordable house that you want to buy. While it can’t be done overnight, it is possible to buy a house in a year — if you understand the process and prepare for it.
Here’s how to prepare to buy a house in one year:
- Getting Started
- The First 3 Months
- 6 Months In
- 9 Months In
- The Finish Line
- The Bottom Line on Preparing To Buy a House in a Year
The first step toward successfully buying a home is building a strong financial foundation. You do that by improving your credit score, building your savings, and paying your bills on time, says Glen S. Phillips, CEO and chief economic analyst for Lake Homes Realty in Birmingham, Alabama.
“The biggest mistake people make when preparing to buy a house is lack of financial discipline,” Phillips says. “People often improve their credit score, but can’t resist the ‘I want it now’ temptation. They then buy on credit, and fail to put aside enough money for buying a house.”
Calculate your credit score
If you’re thinking about buying a home, start by checking your credit score. This three-digit number — the range is 300 to 850 — tells lenders how well you’ve managed your credit. If your score is lower than you’d like, it will take time to build healthy credit and raise your score.
Lenders use credit scores to decide everything from if and how much you can borrow to the interest rate and terms on your new loan. Your credit score is calculated based on factors such as your payment history, your debt burden, how long you’ve been managing your accounts, and the different types of debt you’ve held over the years.
A higher score will earn you better terms from your mortgage lender, while a lower score will make it more difficult to get a loan. If your score is on the lower end of the spectrum, you may want to look at government-backed loan programs offered by the Federal Housing Administration, Veterans Affairs, or Department of Agriculture. FHA loans, for example, let borrowers with a 10% down payment qualify for a mortgage with a credit score of 500, while conventional lenders require a score of 620 or higher.
When you check your credit report, look for any errors and report them immediately to the credit reporting bureaus. Other ways to improve your score include paying down high balances, handling any accounts that may have gone to collections, and avoiding applying for more credit-based accounts.
Bolster your savings
Even with a mortgage, you still need cash to buy a home. There is a down payment to make, closing costs to pay, repairs that may be needed, as well as the “hidden” costs of buying and owning a home. At the end of the day, how much cash you have will directly affect how much house you can actually afford.
For instance, closing costs — including lender fees, prepaid taxes, homeowners insurance premiums, and more — usually total 2% to 5% of your home’s purchase price. This means if you’re buying a $400,000 home, you should expect to pay between $8,000 and $20,000 in closing costs — in addition to your down payment.
Unless you’re buying a brand-new home with a warranty, the home inspection likely will find something that needs an upgrade or repair. Negotiating with the seller to account for those repairs often just means a slight reduction in the purchase price, and you’ll need to pay for those repairs out of pocket.
And while planning for the down payment, closing costs, and repairs is important, you shouldn’t neglect your everyday savings in the process.
Determine how much you can afford
Buying a home involves more than just making the monthly mortgage payment. You also need the financial bandwidth to pay for:
- The down payment.
- Homeowners insurance.
- Property taxes.
- Unexpected repairs.
- Homeowners association fees, if applicable.
- General maintenance.
A down payment usually is not required with VA and USDA loans, and both FHA and conventional loans require as little as 3% to 3.5% down. According to recent data from the National Association of Realtors, the average first-time homebuyer makes a down payment of 7%.
But a smaller down payment can cost you more money in the long run. If your down payment is less than 20% of the sale price, your lender likely will require you to pay for private mortgage insurance. PMI protects your lender in case you default on the loan, and can cost hundreds of dollars per year, increasing both your overall loan cost and your monthly payment. PMI payments typically end when you have more than 20% home equity, or when you reach the midpoint of your amortization schedule.
Another important factor is your debt-to-income ratio, which shows how much of your income is taken up by your debt obligations. Most loans will have a maximum DTI ratio for loan applicants. You can use our DTI ratio calculator to check how yours stacks up.
Make a down payment plan
Planning and saving for the down payment on a home can take years of dedication. Having a strategy in place early on is the best way to ensure that you have the cash needed to qualify for a mortgage and be a competitive buyer in the real estate market.
Creating a budget is a key first step. This tells you how much you can afford to set aside each month, as well as how long it’ll take you to save for a down payment.
You also will want to ensure that your savings are earning the best returns possible. If you don’t plan on touching this money for a few years, consider a certificate of deposit or other investment. If you want to buy sooner, a high-yield savings account can help you maximize your yield while keeping your money accessible.
It may help to use a mortgage calculator to figure out how much you can afford.
The First 3 Months
So, it’s been decided: “I want to buy a house in a year.” Your finances are in good shape, and you have an idea of what you can realistically afford. It’s time to get started.
Get familiar with the market
Learning about the real estate market can help you decide where and when to buy, as well as what to watch out for throughout the process.
In a competitive housing market, it can be tempting to jump on a property that is overpriced or fits your needs poorly just to get into the game. Researching the market will help you better evaluate homes as they come up for sale.
Find an agent
A real estate agent can be an invaluable asset throughout the homebuying process. They can help you shop for a home and choose a neighborhood. A good agent will help you make a competitive offer, walk you through the negotiation process, and advocate for you if issues arise.
You can find real estate agents by researching online or asking for referrals from people you know. Look for ones who are familiar with the area where you’re looking to buy, who work with homes in your budget, and who feel like a good fit. Interview a few candidates before choosing an agent.
Make a list of ‘wants’ and ‘needs’
Unless you have an unlimited budget, you can’t have it all. Spend some time thinking about what you need versus what you want in a home. For example, you may want a big island in the kitchen, but you need three bedrooms and a fenced backyard no matter what.
If you don’t have a specific neighborhood in mind, spend some time getting to know the area you’re eyeing. Talk to neighbors, friends, and your agent to find out more about the local schools, property taxes, traffic, and community resources before deciding on a neighborhood.
6 Months In
It’s time to prepare to get a mortgage.
A lot of paperwork is necessary to apply for a mortgage, so preparing a checklist of documents needed to get a home loan as early as possible can make the process easier and faster. Exactly what you’ll need depends on your mortgage lender, the type of loan you’re applying for, and your financial situation. Some of the most commonly required documents include:
- Your two most-recent income tax returns.
- Recent pay stubs.
- Proof of identification.
- Statements for your bank accounts, retirement accounts, investments, credit cards, and other loans.
- A divorce agreement or decree specifying any child support or alimony payments.
If you have income from self-employment, a side hustle, or a rental property, expect your lender to ask for receipts, 1099 and K-1 forms, profit and loss statements, and lease agreements.
Know what type of mortgage is right for you
You might be surprised to learn just how many different types of mortgages are available. The right one for you will depend on your income, your credit score, the type of home you want to buy, your location, and even your occupation.
For example, eligible veterans and active service members can get a VA mortgage with no down payment, and borrowers who qualify for an FHA loan can make a 3.5% down payment — even with a lower credit score. USDA loans require no down payment on eligible rural properties, while conventional and jumbo loans give borrowers with good credit the flexibility of different loan limits and repayment options.
Part of deciding which mortgage is right for you is calculating how long of a repayment term you want and whether you prefer a fixed or an adjustable-rate mortgage. These choices affect your monthly payment, interest rate, and overall loan cost, so it’s important to weigh all options.
9 Months In
Your plan to buy a house in one year is now in the home stretch.
Get preapproved for a loan
Once you have a budget in mind, it’s time to get preapproved for a mortgage, says Mayer Dallal, managing director at MBANC, a mortgage lender based in Manhattan Beach, California.
Preapproval means that a lender reviews your credit and finances, and estimates how much it expects you can borrow. While closing on that loan is not guaranteed, it gives you a pretty good idea of the type of loan you can get, and how much you’ll be able to borrow.
Preapproval also shows agents and sellers you’re ready to buy, Dallal says. “If you find your dream home, you’re ready to pounce — and that’s important in the competitive market we have right now,” he says.
Additionally, it’s important to compare mortgages from multiple lenders to make sure you’re getting the best deal on your loan.
“Don’t just go to the first lender and accept the terms they give you,” Dallal says. “Get quotes from two or three, because what they offer can vary.”
Just keep an eye out for how long your mortgage preapproval is valid, as preapprovals have varying expiration dates. One lender’s preapproval offer may be good for a few weeks, while another could give you a few months to shop around.
Start shopping for a home
Now comes the fun part: You can start shopping for a home.
Your real estate agent can find homes for sale that match your budget and needs. And as you tour properties, you can see what you like and what you don’t — and adjust your specifications and expectations accordingly.
The Finish Line
When you first started wondering how to buy a house in a year, this moment may have seemed a long way off. Now, when you find a home you want to buy, you’re ready to make a deal.
Make an offer (or a few)
Before you can buy a home, you’ll need to put in an offer to the seller. This is done with an offer letter, which outlines how much you want to pay for the property and sets contingencies for the sale. If the seller accepts, you both will negotiate and sign a purchase and sale agreement based on that offer.
You might not get the first home you make an offer on, so be prepared to move on if your offer is not accepted. Also expect to compete with other buyers, especially in a market with lower inventory or high demand. According to the National Association of Realtors, the average home sold in 2021 received four offers. You might want to submit a higher offer on a home you really like.
Learn about the home inspection process
A home inspection evaluates the condition of a property’s major features, structures, systems, and appliances. This helps identify any damage, faults, code violations, or potential problems, so you know what you’re buying.
The buyer typically pays for the inspection, and it may take a few weeks to schedule and complete.
If the inspection reveals major problems with the home, you may be able to renegotiate the price with the seller — or even back out of the purchase if your agreement includes an inspection contingency. Either way, you’ll have a much better idea of exactly what you’re buying.
After the purchase and sale agreement is signed, an escrow account is opened, and the closing process begins. It usually takes between 30 and 45 days to close on a house.
Your mortgage lender will begin underwriting, which is the process where it verifies your financial documentation and approves the final terms of your loan. The lender likely will order an appraisal to get an independent opinion on the home’s value, and a title search to ensure there are no other claims on the property.
Do a final walk-through
Before closing on your home purchase, you will want a final walk-through of the home. This should be timed as close as possible to closing day. Some buyers do their walk-through the same day as closing.
Be on the lookout for:
- Any damage that was not present at previous showings or during the inspection.
- Agreed-upon repairs that have not been completed.
- Any of the seller’s belongings that need to be removed.
- Items included in the sale, such as appliances, garage remotes, pool equipment, furnishings, etc.
If you come across any problems, you may need to conduct last-minute negotiations with the seller or delay closing until they can be addressed.
Close on the deal
Once the required inspections have taken place, the loan has been approved, the down payment and closing costs have been paid, and the title has cleared, you can sign the paperwork that finalizes your status as a new homeowner.
The Bottom Line on Preparing To Buy a House in a Year
Preparing to buy a home can be a lengthy process, from building strong credit to saving for a down payment over the years. Once you’ve made the decision to buy a house in a year, though, there are ways you can ensure the homebuying process is as smooth and successful as possible.
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