Buying your first house isn’t a decision made on a whim. It’s a huge moment that people spend years preparing and saving for. If you plan on buying a home within the next five years, you may be wondering what you can be doing now to put you in the perfect home buying position later on down the road.
To help you plan ahead and make the right moves now, we put together this step-by-step guide to become a homeowner in five years. We’ll show you the six steps, including how to set your budget, save for your down payment, and get your credit looking nice and sparkly for your future lender.
Let’s dive in!
Timeline for first-time homebuyers
While everyone’s timeline will look a little different, there are a few steps that are beneficial to anyone looking to purchase a home in the next five years.
It’s important to set a realistic budget for yourself.”
Step One: Determine your budget
All of us are probably guilty of browsing homes online that are far outside of our price range. This is a fun way to pass a Sunday afternoon, but when it comes time to seriously consider buying a house, it’s important to set a realistic budget for yourself.
There are a few things to consider when determining your home buying budget:
- How much you make each month: Think of your entire monthly income. Consider everything— your paycheck, any side hustles, investment profits, etc.
- Your monthly expenses: What other bills do you pay monthly? Consider utilities, other debts, food, and any other monthly costs.
- Down payment: The down payment is how much money you pay upfront for the house. The more you put down, the smaller your loan will be. A general rule of thumb is to put down at least 20% of the home’s value. If you don’t put down 20%, you’ll pay for monthly private mortgage insurance (PMI) on top of your mortgage.
- Loan term: The two most common mortgage terms are 15 years and 30 years. Spreading out your payments over a longer period of time means a smaller monthly mortgage payment— but it also means paying more over the course of the loan, thanks to larger interest payments.
- Interest rate: How much interest will you pay over the lifetime of the loan? There are a lot of online calculators that can help you look at this number, including our Home Loan Calculator.
- Other homeowner expenses: There are other expenses associated with buying a home— taxes, insurance, closing costs, HOA fees, and more. These amounts largely depend on where you plan on living.
Many financial advisors say that people should spend no more than 28% of their gross income on housing and no more than 36% on all debts (home mortgage + other debts like student loans, credit cards, etc.) combined. Luckily, there are helpful tools online like our Home Affordability Calculator that take all of these factors into account.
Once you’ve got an estimate of how much home you can afford, you’ll have a better idea of how much you need to save. This leads us to the next step: start saving as soon as possible.
Step Two: Start saving for a down payment
While there are certainly ways to purchase a house with a small down payment, most financial experts will agree that it isn’t the best option for homebuyers. Saving for a larger down payment might take some time, but you’ll reap the benefits like a smaller loan amount, less interest paid, more manageable monthly payments, and the possibility of lower interest rates.
Saving tens of thousands of dollars can seem like a daunting task, even over the course of five years. Here are a few tips to stack cash for your future home:
- Set aside a set amount of money each month in a separate savings account. To make things easy, set up automatic deposits to your savings account with each paycheck.
- Cut out any memberships or subscriptions that you can do without. Do you have a streaming service that you don’t really use? Have you only gone to the gym once this year but still see those monthly withdraws? Take a look at what is coming out of your account every month and see where you can save money instead.
- Put any windfalls you receive towards your down payment savings. Birthday gifts, tax refunds, garage sale earnings— you get the idea!
Diligence is the most important thing. You might be surprised how much you’ll find in your savings account at the end of each year.
Step Three: Work on your credit score
The next thing you’ll want to focus on is your credit score. This three-digit score is important for many reasons, the biggest being that it is one of the main factors in determining your home mortgage interest rate— or whether you qualify for a home loan at all.
First, check your credit score. If it’s already in excellent shape (781-850, according to Experian), congrats! If it falls somewhere between very poor and fair (300-660), you’ll want to work on getting that to at least a good or excellent number— anything above 661.
Once you know where you stand, you can raise your credit score by:
- Making sure there are no mistakes on your credit report.
- Paying all of your bills on time.
- Maintaining low balances on revolving credit lines.
- Paying down any outstanding debts.
- Limiting your new credit inquiries (new loans, new credit cards, etc).
When combined, all of these efforts can result in a higher credit score.
Start increasing your credit score years before you’re ready for a mortgage.”
However, it takes time. Start increasing your credit score years before you’re ready for a mortgage; it’s very difficult to raise your credit score substantially within a year or less.
Step Four: Prep for extra house costs
Aside from your down payment savings, you’ll also want to be prepared for the additional costs that come with moving and purchasing a house.
Closing costs and other fees will be tacked on to your loan. You may need to pay a realtor that helps you find and purchase the home. You’ll need to be prepared to set up utilities and foot the bill for any other moving-related expenses like boxes, a moving truck, and more. These costs add up quickly, so be prepared!
Step Five: Do your research on mortgages
As you get closer to buying a house, make sure you’re well-versed in the options you have when it comes to financing. Do some research on the different types of home loans available and find what’s best for your unique situation.
For example, did you know that first time home buyers are eligible for special loan products? With a quick search on the internet, you may find a program that benefits you.
When you do your research ahead of time, you can familiarize yourself with the language of mortgage products. If you understand specific loans and your options, you’ll be better prepared to navigate negotiations and the mortgage process in general.
Step Six: Get real with your search
You’ve done the saving, planning, and researching for nearly five years. Now it’s time to get real with your home search. During this time you’ll do things like find a mortgage lender that you trust and get pre-approved for your loan. And, of course, the fun part— looking at homes!
Tips for Your Homebuying Journey
Before you go, we want to touch on just a few things to keep in mind as you embark on the journey to becoming a homeowner.
- Reassess your situation as necessary. Over the course of five years, your financial situation is probably going to change in some ways. Some events may alter your five-year timeline completely. This is okay! Take the time to periodically reassess where you stand and make changes if needed.
- Consider consulting a financial advisor. Not everyone has a financial advisor or tax professional that helps keep personal finances in order. If you’re having a hard time navigating the homebuying process, consider consulting one! They can help ensure you make the right moves, offer additional solutions, and inform you of things like tax benefits that you may not be aware of.
- Don’t be in a rush. Buying a home is an exciting time— but it’s also a decision that can have big repercussions if you rush into things. Don’t be in a hurry to make a purchase. Take it slow and make sure you find the house that’s right for you and your financial situation.
Plan Ahead to Become a Homeowner in Five Years
Buying your first house is a big deal— but if you plan ahead, it doesn’t have to be a stressful or overwhelming experience. By following these six steps, you’ll set yourself up for success when you’re ready to make the purchase.