For most Americans, buying a home is the largest and most important purchase they will ever make. It’s also a complicated process. The more time you give yourself to prepare, the more likely you’ll be successful. Here’s how to prepare to buy a home in two years.
- To buy a home in two years, start by checking your credit score and saving up for the down payment and closing costs.
- One year in, begin looking for a real estate agent, get pre-qualified, and then decide what type of mortgage works best for you.
- The final months after making a successful offer will be busy, as you sign a purchase and sale agreement, apply for a mortgage, appraise and inspect the home, and close on the sale.
Before you can tour homes and finalize a sale, you need to lay the groundwork by assessing your finances and figuring out how much house you can afford.
Lenders place a lot of weight on your credit score, and most loans have a minimum credit score requirement, so you need to know what yours is.
“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. Keeping your credit score as high as possible should be a top priority for aspiring homeowners, Conti says.
If your score needs improving, some ways to increase it over time include:
- Using less of your total available credit.
- Avoiding applying for credit.
- Paying bills and debts on time.
- Correcting errors and inaccuracies on your credit report.
Federal law allows you to get a free annual copy of your credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion. You can contact them individually, or go to AnnualCreditReport.com to get them all at once.
The monthly mortgage payment isn’t the only ongoing cost of owning a home. You’ll also need to be prepared to pay for:
- Homeowners insurance.
- Private mortgage insurance if you buy your home with a conventional loan and a down payment of less than 20%.
- Property taxes.
- General maintenance.
- Home repairs.
Be sure to include these costs in your budget when you’re deciding how much you can afford to spend on a home.
Boost your savings
Down payment requirements vary by loan type, but in general you will need to put down at least 3% of the purchase price. Saving for a larger down payment will reduce your loan costs: You’ll pay less interest over the life of the loan and have smaller monthly payments, and you may avoid paying for PMI.
Closings costs average 2% to 5% of the purchase price, and include the fees required to set up your loan, inspect and appraise the home, and transfer legal ownership to you. You may be able to roll those costs into your loan with a no-closing-cost mortgage, but paying them over time instead of upfront likely will cost you more overall.
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 savings goal faster as you make regular contributions.
6 Months In
While you’re saving up money, start to think about the type of home you want to live in, and get to know the market where you’re looking to buy.
Figure out what you want in a home
To focus your search on homes you can afford and that meet your needs, it’s a good idea to make a list of your wants, needs, and must-haves. Location, square footage, the number of bedrooms and bathrooms, quality of the local school district, neighborhood safety, walkability, and nearby amenities are all factors to consider.
Once you know what you want and can afford, start researching desirable homes in the area you want to live in. Knowing the local real estate market will help you negotiate a fair price and land a good deal.
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 affect your purchase window because you may find that the right time to buy is when interest rates are relatively low.
By the time you reach the midway point of your two-year plan to buy a house, you should be ready to lay the groundwork for your purchase.
Teaming up with a good real estate agent can help you secure the best deal possible and make the homebuying process go more smoothly.
One of the biggest mistakes made by aspiring homeowners is that they believe purchasing a home is a do-it-yourself project, Conti says.
Take the time to find an experienced agent who knows the area and has your best interests in mind. Be sure and consider more than one agent, and ask questions. You also should check your state’s licensing agency to be sure your agent has the credentials they say they do, and to make sure their record is clean.
Get pre-qualified for a loan
Mortgage pre-qualification is an informal estimate of the loan amount a lender expects to approve you for. The estimate is based on self-provided information about your income, bank accounts, down payment, and other details. That means it’s only a rough estimate, but it’s still useful for first-time homebuyers as it gives you an idea of what you can afford.
With six months to go, it’s time to pull the pieces together.
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.
Make a checklist of the documents needed to apply for a mortgage. Lenders usually will require identification, proof of income, and your Social Security number so they can check your credit. You’ll also be asked to provide the property address, an estimate of the home’s value, and your desired loan amount.
Now is the part you’ve been waiting for: house hunting.
Get preapproved for a loan
Compared to pre-qualification, getting preapproved for a mortgage is a more accurate estimate of how much your lender expects it will let you borrow.
Preapproval still is no guarantee you’ll be approved for the loan amount stated, and it doesn’t commit you to the lender. But a preapproval letter does show sellers you’re serious about buying a home, and that you likely can afford it.
Since preapprovals typically are good for 30 to 60 days, it’s best not to get it unless you’re ready to start making offers.
Your real estate agent can find you listings for available homes within your budget. Touring a home in person gives you a sense of its condition and what it would be like to live there. It also lets you ask questions about the home that may be important factors in deciding whether to make an offer.
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.
Be ready in case the seller makes a counteroffer that you’ll need to accept, reject, or counter yourself. This is where having an agent to help you negotiate the home’s price and other terms of the deal can really pay off.
Also be prepared for rejection. If your offer isn’t accepted, be ready to move on to the next available home.
Sign a purchase and sale agreement
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 and document your finances, lenders will give you a standardized 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 mortgage payment.
- Estimated closing costs.
- Estimated taxes and insurance costs.
- Details on how your interest rate and monthly payment could change.
- Any special loan features, such as 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.
A home appraisal is an independent estimate of how much the home you’re buying 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 the home’s condition. Should the inspector find significant structural or safety problems, you might want to negotiate to have the seller pay for repairs or reduce the sale price. If you can’t reach an agreement and you included an inspection contingency in your purchase and sale agreement, you could cancel the deal without penalty.
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 have the option to buy a separate title 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 important to compare the costs in the closing disclosure vs. the loan estimate, and ask your lender questions if you have them.
At the scheduled closing, 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 a complicated project that requires time to prepare and planning to execute. Two years is plenty of time for you to take the steps needed to be ready to buy, such as evaluating your finances, preparing to get a mortgage, learning the local market, and making a successful offer on a home. Knowing how to prepare will help you follow through on your plan and give you a good shot at buying a home in two years.
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Tom McLean contributed to the reporting of this article.