Buying a house is a long process with many steps, and it can take years before you’re financially ready for homeownership. It might feel like an impossible task for first-time homebuyers, but with proper planning and preparation, you could be ready to buy a home in three years.
We’ll break down the process step by step. Here’s what you need to know about how to prepare to buy a house in three years:
- The First Year
- 18 Months In
- 2 Years In
- 2 Years and 6 Months In
- The Finish Line
- The Bottom Line on Preparing To Buy a House in 3 Years
The First Year
When you decide to buy a home, you’ll need some time to prepare. If homeownership is a longer-term goal, or you don’t have the resources to buy a home in the next year or two, you could choose to build a three-year plan to buy a house.
Make a game plan to boost your credit score
Step one is to check your credit score and plan to boost it.
Your credit score helps determine your ability to get a loan and the interest rate you’ll pay. You’ll want a credit score in the mid-700s or above to secure the best mortgage interest rates. That means lower monthly payments and a less expensive loan overall.
Ways to improve your credit as you plan to buy a home in three years include:
- Making sure you don’t miss any payments.
- Reducing your overall debt.
- Avoiding new loan applications.
- Keeping your credit card balances low.
- Disputing any credit report errors. You can request a free credit report from AnnualCreditReport.com.
Understand what you’re looking for in a home
Think about what you’re seeking in your future home. Consider factors like location, square footage, yard size, and whether it’s a single-family home, condominium, or townhouse. To help guide your search, take the time to figure out which features are essential and which luxuries you can sacrifice.
These decisions are important for determining the cost of buying a home. For example, the home’s size affects its cost, and desirable locations lead to higher prices. Other home improvements, like a finished basement or solar panels, also can increase the property’s value.
Find out what you can afford
You might dream of a multimillion-dollar mansion, but you need to be realistic with what you can afford.
With the average single-family home in the United States costing $542,900 in the third quarter of 2022, not many people can walk up to a home for sale and just buy it. Even with a down payment as low as 3.5%, that means having almost $20,000 on hand — plus more for closing costs, moving costs, and furnishing the home.
The mortgage payment also must be affordable. A popular rule of thumb is to keep your mortgage payment, including taxes and insurance, to a maximum of 28% of your gross monthly income. That means if you make $6,000 per month before taxes and other deductions are taken out, you should aim for a mortgage payment that’s less than $1,680.
Create a savings plan
Using the information about what you can afford, estimate the down payment and closing costs you’ll need to save up for. It’s also important to factor in the other “hidden” costs of buying a home, such as:
- Private mortgage insurance if you’re putting less than 20% down.
- Homeowners insurance.
- Title insurance.
- Moving expenses.
- Furnishing the home.
- Property taxes.
- Utility bills.
Once you have a total estimate, you can calculate how much you need to save each week or every month to reach your savings goal.
Get to know the market
In the first year of your preparations to buy a house, you should start getting to know the local housing market — especially in the area you want to buy in. Which neighborhoods are within your budget? Even better: Can you identify an up-and-coming spot with affordable homes that are likely to appreciate?
18 Months In
Halfway in, you should have a better idea of the type of home you want to buy and how much you can afford. It’s time to lay the groundwork for the official home search.
Get pre-qualified for a loan
If you’re not planning to close on a home for another 18 months, getting pre-qualified may sound premature. However, it’s a good step to take early.
Pre-qualification is a cursory step that estimates the size of the home loan you might be approved for, based on self-reported financial information. Pre-qualification isn’t a commitment to the mortgage lender, and it won’t affect your credit. The result is useful when you’re determining your price range for homes.
Partner with a real estate agent
Your real estate agent is a guide to the local housing market and can help you find neighborhoods and homes that appeal to you. Looking for an agent at this point in the process means you can get a head start and establish a good rapport early on.
Start searching for reputable real estate agents and Realtors online or through referrals from friends and family, and select a few that might be a good fit. Make sure to interview them to learn more about their experience and knowledge. Then, team up with your final choice.
2 Years In
One year out from buying a house, you should be putting the finishing touches on your preparations.
Check in on your credit score and savings
This is a good time to follow up on the progress you’ve made with your credit and your savings goal. You can request a free copy of your credit report from each of the major bureaus — Equifax, Experian, and TransUnion — once per year, so take advantage of this benefit. Check your savings balance, see if you’re on track, and make adjustments to your budget if necessary.
Shop around for mortgages
Learning more about the different mortgage options can help you prepare for shopping around with lenders to find the best rates and fees. Depending on your situation, these options may include:
- Conventional loans.
- Mortgages backed by the Federal Housing Administration, known as FHA loans.
- Mortgages backed by the Department of Agriculture, known as USDA loans.
- Mortgages backed by Veterans Affairs, known as VA loans.
- Fixed-rate or adjustable-rate mortgages.
- Loan terms of 15 years or 30 years.
Once you’re more familiar with the different options, you should start comparing lenders. Even a difference of 0.25 percentage points — or 6.75% versus 7% interest rates — can help a qualified borrower save over $40 per month on a $250,000 mortgage. That’s more than $14,000 over the life of the loan.
Another resource to explore is local first-time homebuyer grants.
“The government has many programs in place to help make housing affordable,” says Richard Harless, managing partner of Phoenix-based AZ Flat Fee, a real estate company. “There are a series of grants available in each state and federally, so it’s best you research any you might be eligible for in your area.”
Make a document checklist
Applying for a loan means having a stack of documentation ready for your lender. Putting together a mortgage application checklist will help you prepare for when the time comes.
This documentation includes:
- W-2s from the last two years.
- Recent pay stubs.
- Bank statements.
- Investment account statements.
- Credit card statements.
- Statements for other debts, such as student loans or auto loans.
- Gift letters for your down payment, if applicable.
- Social Security number.
- Driver’s license.
- Rental history and contact information for recent landlords.
2 Years and 6 Months In
When you’re six months out from your target homebuying date, it’s time to start touring properties. This means getting preapproved for a home loan.
Get preapproved for a loan
Getting preapproved for a mortgage involves more scrutiny from the lender than pre-qualification, but going through the process means you’re more likely to get final approval when you officially apply. This also gives you an update on the estimated amount you could borrow and current interest rates.
Though it can vary by lender, preapprovals usually last about 60 to 90 days. You’ll want to have a preapproval letter in hand when you’re ready to make an offer, so you can show the seller that you’re serious about buying the home and able to get financing.
Shop for homes
To check out a variety of homes, work with your real estate agent or Realtor to plan tours. Looking at multiple homes allows you to get a better sense of what’s realistic for your budget, and solidify which features are must-haves versus nice-to-haves. Your preparations up to this point, as well as the experience you’ll gain by touring properties, should eventually help you find a home that you like.
The Finish Line
Once you’ve found the home you want, it’s time to strike a deal and close on the home.
Make an offer on a home
You can work with your agent or Realtor to put together an offer. To make sure you’re protected financially, try your best to include contingencies, which are conditions that must be met for the sale to go through. Contingencies give you more options if any defects are found in the home after you sign an agreement.
Apply for a mortgage
Once the seller accepts your offer, it’s time to officially apply for a mortgage loan. You’ll receive a loan estimate within three business days that provides information on the cost of your loan, including fees, rates, and monthly payments.
Get a home appraisal and inspection
Usually, your mortgage lender will require a home appraisal, which estimates the value of the home and ensures it’s worth enough to secure your loan amount.
It’s also recommended to get a home inspection. During the inspection, a professional will examine the home to look for potential issues and identify any costly repairs.
Address any problems with the home
If the appraiser and the inspector find any problems with the home, you may want to renegotiate with the seller. This is especially true if you have an appraisal or inspection contingency. If you can’t come to an agreement or the issue is too significant, a contingency also gives you the opportunity to back out of the purchase while keeping your earnest money.
Most lenders will require that you buy some forms of insurance before you can close on a home, such as homeowners insurance and title insurance. Shop around to purchase policies at a good price before your closing date.
Close on the home
Finally, it’s time to close on the home. This means signing paperwork, and finalizing your purchase and the acceptance of your mortgage.
At the closing, you’ll want to go over all the relevant documents, including the closing disclosure. This form includes the final details on the loan term, your monthly payments, interest rates, the fees, and the total cost of the loan.
Once you close, you’ll get the keys — and the home will finally be yours.
The Bottom Line on Preparing To Buy a House in 3 Years
Buying a house is a long process and one of the most important financial decisions you’ll ever make. To achieve your goal of homeownership, you’ll need to come up with a savings plan, prepare your finances, and take the time to shop around for good deals. Knowing how to prepare to buy a house in three years can set you up for success, even if you won’t close on the home for another few years.