For many Americans, buying a house is one of the most important financial decisions that they’ll ever make. But as with most things in life, the more time you give yourself, the more prepared you’ll be — and two years is ample time to set yourself up for success.
Here’s what you need to know about how to prepare to buy a house in two years:
- The First 6 Months
- 12 Months In
- 18 Months In
- 21 Months In
- The Finish Line
- The Bottom Line on How To Buy a House in 2 Years
The First 6 Months
Even when you’re trying to buy a home in two years, it’s not too early to research the market and different neighborhoods you might want to live in. But before you start talking to real estate agents or going to open houses, it’s important to assess where you are financially.
Saving consistently, improving your credit score, paying bills on time, and understanding how much house you can afford are all steps you should start taking now and keep up over a two-year period.
Checking your credit score is the first step of the homebuying process.
“Your credit can make or break your ability to get good terms on a mortgage,” says Kristen Conti, broker-owner at Peacock Premier Properties in Englewood, Florida. “It affects your buying power, your final rate and your payment.”
Having a credit score in the mid-700s or above will earn you the best interest rates. It’s possible to get approved for a mortgage with a lower credit score, but you’ll likely end up paying more for the loan. That’s why keeping your credit score as high as possible is the No. 1 tip for aspiring homeowners, according to Conti.
Ways to improve your score include:
- Using a lower percentage of your total available credit.
- Applying for credit only when you need it.
- Demonstrating a long history of always making your debt payments on time.
- Disputing any errors on your credit report. You can request your credit reports for free from AnnualCreditReport.com.
Know the costs of homeownership
Your monthly mortgage payment won’t be the only ongoing cost of being a homeowner. You’ll also need to pay for things like:
- Homeowners insurance.
- Private mortgage insurance if you have a conventional loan and less than 20% equity in your home.
- Property taxes.
- General maintenance.
- Unexpected home repairs.
Understanding these costs is crucial when you’re deciding how much you want to spend on a home each month.
Boost your savings
You’ll need cash on hand to cover closing costs and make a down payment. In general, saving for a bigger down payment helps you pay less for your mortgage in the long run. So, if you want to have smaller monthly payments and save money on interest over time, it helps to start your down payment fund early.
One tip is to put your money in a high-yield savings account. The higher interest rate on the account will help you reach your two-year savings goal faster as you make regular contributions.
Figure out what you want in a home
Before you can get serious about shopping for a home, you’ll need to identify your wants and needs. Location, square footage, the number of bedrooms and bathrooms, local schools, neighborhood safety, walkability, and certain amenities are all examples of factors to consider. Prioritizing your needs can help you zero in on a neighborhood that meets them.
The more familiar you are with the real estate market, the better position you’ll be in to negotiate prices and land a good deal when you buy a house in two years. Once you have a grasp of what you want and can afford, start researching desirable homes in the area you want to live in.
It’s important to keep in mind that mortgage rates affect what you can afford, and they are bound to fluctuate in the two years leading up to your planned home purchase. This could influence your purchasing window because you may find that the right time to buy is when interest rates are relatively low.
One of the biggest mistakes made by aspiring homeowners is that they believe purchasing a home is a do-it-yourself project, according to Conti.
Teaming up with a good real estate agent can help you secure the best deal possible and make the homebuying process go more smoothly. Take the time to find an experienced agent who knows the area and has your best interests in mind. You can check your state’s licensing agency for any red flags on an agent’s track record.
Get pre-qualified for a loan
A pre-qualification is an informal estimate of how much you would tentatively be able to borrow from a lender. The estimate is based on self-provided information about your income, bank accounts, down payment, and other details.
For first-time homebuyers, getting pre-qualified is useful because it helps inform your budget. However, it’s important to remember that a pre-qualification is only a ballpark figure. Getting preapproved for a mortgage, on the other hand, is a more serious step that comes later in your two-year timeline.
With six months to go, it’s time to start diving into mortgage loans.
There are different types of mortgages to consider, including conventional loans and those backed by the Federal Housing Administration, known as FHA loans. You’ll also need to decide between a fixed-rate vs. adjustable-rate mortgage and how long you want to spend paying off your loan — typically 30 or 15 years.
Each option has its advantages and disadvantages, so choosing a mortgage comes down to your personal situation and preferences.
Prepare the paperwork
Make a checklist of the documents you’ll need to apply for a mortgage down the line. Required documents include identification, proof of income, and your Social Security number. You’ll also be asked to provide the property address, an estimate of the home’s value, and your desired loan amount.
Now’s the part you’ve been waiting for during this two-year process: house hunting.
Get preapproved for a loan
Compared to pre-qualification, getting preapproved for a mortgage is a closer step to proving your creditworthiness, because it involves a lender verifying your financial information.
A preapproval letter isn’t a guarantee that you’ll end up getting approved for the loan amount stated, and it doesn’t commit you to the lender. It just shows sellers that you’re serious about buying a home, and that you likely can get financing. The letter is typically good for 30 to 60 days, so it’s best to seek a preapproval when you’re ready to start making offers.
Remember that a preapproval letter represents the maximum amount you’ll likely be able to borrow. In other words, you aren’t obligated to spend that amount.
Visit open houses
Your real estate agent can help you pull listings for homes that are within your budget. Going to open houses gives you an opportunity to inspect those homes in person, noting any details or flaws that didn’t translate in the photos.
Now that you’ve shopped around for homes, you’re ready to strike a deal. This part of the process moves fast, so be prepared.
Making an offer on a home in a competitive market means that you might not close on your first option. To show how serious you are about buying a specific home, consider offering to put down a deposit, known as earnest money. A larger deposit can help your offer stand out, and the money will be applied to your closing costs or down payment at closing.
Since you’ve already researched your loan options, gathered your documents, and received preapproval, the process of getting a mortgage should be easier.
After you apply, lenders will give you a form called the loan estimate within three business days. Some important information in the loan estimate includes:
- The interest rate on your mortgage.
- Your monthly payment amount.
- The total closing costs.
- The costs of taxes and insurance.
- How your interest rate and monthly payment could change.
- Any special loan features you should be aware of, like a prepayment penalty.
Receiving a loan estimate doesn’t mean the lender has approved your mortgage application. It just shows you what the lender expects to offer if you choose to move forward. Submitting multiple applications allows you to compare mortgage offers.
The appraisal and inspection both give you a better understanding of exactly what you’re walking into.
A home appraisal is an independent estimate of how much a property is worth. It helps your lender confirm that the loan amount is appropriate, and lets you know whether you’re overpaying for the home or getting a good deal. If the appraisal comes in low, you may have room to renegotiate the purchase price.
A home inspection is an unbiased, professional assessment of any major issues with your upcoming purchase. Should the inspector find significant problems, you could negotiate the cost of repairs, or back out of the deal if your purchase agreement is contingent on a satisfactory home inspection.
For a purchase this big, you’re going to need insurance. Homeowners insurance and title insurance are both required by mortgage lenders.
Homeowners insurance covers your home and belongings in the event of certain disasters or accidents, as well as your liability for any property damage or injuries that you cause.
Title insurance protects lenders financially from any claims against the home or other problems with your legal ownership, known as the title. You would need to purchase a separate policy to protect yourself against the same problems.
At least three business days before closing, you’ll receive a form called the closing disclosure, which contains the final details about your mortgage. It’s crucial to compare the costs in the closing disclosure vs. the loan estimate, and ask your lender questions if you have them.
At the closing table, be thorough when you’re reviewing all the paperwork. Once all the documents are signed, the deal is final — and your plan to buy a house in two years is complete.
Buying a home is lengthy process, but every step is important. Take the time to prepare, stick to your goals, and in two years you could be relaxing in your new home.