How to Prepare to Buy a House

by | Jul 24, 2023 | Finance

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So, you know that someday you want to buy a house. Fantastic! Now, where do you start? 

You probably know you’ll need to save money for the down payment and get familiar with the real estate market. But just how much money should you save? What sort of research should you do?  

No matter whether your home purchase is years in the future or you’re about ready to make an offer, there is plenty you can do to set yourself up for success. That way, when it’s time to tour properties, you can focus on the fun parts, like envisioning how you’ll lay out your furniture and what colors you’ll repaint the walls. 

In this blog, we’ll cover how to prepare to buy a house even if you have no specific timeline, plus steps to take if you’re ready to buy in the next six months. We’ll also explore how much to save for a house based on national averages and a few special homebuying incentive programs. 

How to Prepare to Buy a House in the Future

For the down-the-road homeowner: When it comes to buying a house, you’ll want to have your financial situation sorted out – but the earlier you start, the easier it’ll be! Take these steps now to build good habits and you’ll set yourself up for success in the future when the time is right for you. 

Build or maintain good credit

If you want to buy a home and don’t have hundreds of thousands of dollars to spare, you’ll need a mortgage to pay for it. Building and maintaining good credit can make the loan process go smoother – and hopefully help you snag a lower interest rate for that mortgage.  
 
To work toward building a good credit score (maybe reaching the elusive 800+ club), establish a solid credit history by opening and responsibly managing credit accounts. Three important factors are: 

  • credit history (how long you’ve had credit) 
  • your history of on-time, in full payments 
  • your credit utilization (what percentage of your credit you’re using) 
     

To start, this could look like opening a credit card, or taking out a loan like a personal loan, auto loan, or student loan. But, be selective about opening and using credit, because applying for and opening multiple accounts in a short time can negatively impact your score. You’re on the hook for paying back the loan, too, of course! 
 
As you use credit, you’ll want to regularly keep an eye on your credit reports to ensure they are accurate. If any discrepancies come up, resolve them right away. Building and maintaining good credit takes time and discipline. It’s worth it though – it will greatly increase your chances of qualifying for a mortgage with a lower interest rate, which ultimately reduces the total cost of buying your home! 

Research the cost of home ownership 

A common reason why people are eager to buy a home and stop renting: so it doesn’t feel like you’re throwing money away. But hang on! Homeownership has a lot more costs and it’s less straightforward than paying a flat fee of rent every month.  
 
While the mortgage payment is likely the biggest chunk of your housing cost, other homeownership costs include other expenses such as property taxes, homeowners’ insurance, private mortgage insurance, and HOA fees. Plus, you’ll also have home repairs, and those pesky water heaters tend to break at the least convenient of times! Property taxes can also vary by location and can increase over time, impacting your monthly expenses.  
 
You don’t have to worry about the specifics if you’re still in the phase of saving up money for a future house purchase. It’s just good to remember that there are multiple line items that go into your housing cost when you own rather than rent. That way, you don’t get surprised and can search within your budget. When the home purchase gets closer and you have a solid idea of where you’ll buy, then you can dig into the specifics.

Get to know how mortgages work

What’s a fixed vs. variable interest rate? What’s a basis point? What is an FHA loan? Getting to know the definitions of these terms (and more) can help you better understand the world of mortgages, the loans used to buy property. 
 
Taking out a mortgage to buy a house is a big financial step in most peoples’ lives, so it’s important to understand what you’re signing up for. There are lots of different types of mortgages, so first familiarize yourself with the options, loan terms, and interest rates. The Consumer Protection Financial Bureau is a great place to find information about mortgages; they have a list of key terms related to mortgages and definitions that can fill you in on the lingo.

Research home buying incentives

For many potential home buyers, saving up the down payment is the biggest barrier to achieving their homeownership goal. Fortunately, there are a number of down payment assistance programs that can help make home ownership more in reach! Some programs provide grants while others are loans. The grants are usually smaller, but every little bit helps.  
 
Most down payment assistance programs are through a local housing department, so check your state, county, and city governments. Each program will have their own eligibility requirements. Prepare to jump through some hoops – many are only available if you qualify based on your income and take a home buying class. For some, you have to agree to live in the home for a certain number of years. These programs can make a huge difference if you qualify, so it’s worth pursuing. The United States Department of Housing and Urban Development has a list of resources to help. 
 
Some employers may offer their own home buying incentive program as a benefit for their employees. Ask your human resources department if that’s available. As you look for new jobs, consider if that’s part of the compensation package.

Set a savings goal

If you know your home purchase is in the distant future, your savings goal may be a bit more vague. But as the home purchase gets closer on the horizon, having a specific goal can help you feel more confident in knowing when you’re ready to make the leap. 
 
In general, you’ll need money for the down payment and closing costs. It’s also a good idea to have a strong emergency fund independent of the money you’ll use for the house just in case. Chances are, you’ll be cashing in a large portion of your savings to buy the home, and you don’t want to worry about making your mortgage payments while you sort out whatever life has thrown your way! 
 
There’s no one dollar figure that works for every future homeowner, but keep reading and we’ll provide some benchmarks to give you direction. 

"House Tops" by Mildred McMillen - Black and white art print of home roofs

Home Buying Programs for Certain Professions

Something that’s worth a quick mention: there are programs available for certain types of professionals to support homeownership. 

Are you a teacher, firefighter, law enforcement officer, or emergency medical technician? Look into the Good Neighbor Next Door program! It’s designed to help people in these vital jobs purchase homes in the communities where they are needed most. With this program, HUD sells the homes directly at a deeply discounted price. 

Are you a physician? There are special mortgages that take into account the scenario that many physicians are high earners but also saddled with student loan debt from medical school. This type of loan can overcome the challenge of not having had the ability to save up for a down payment because of the extra years of school.  

How Much to Save for a House 

So how much should you save for a house? Sadly, we can’t provide tailored recommendations since this is but a humble blog post. What we can do is take a look at some national figures as a starting point! 

The first thing you’ll save for is the down payment on the mortgage. It’s a percentage of the total home price, so let’s look at the typical home prices and down payments. 

You’ve probably heard you should aim to put down 20% of the purchase price as the down payment. If you pay less than that, you’ll need to pay for Private Mortgage Insurance until you reach 20% equity in the home. But, home buyers – especially first time home buyers – are not hitting that 20% amount. As of 2021, the typical down payment percentage was 7% for first-time buyers and 17% for repeat buyers. 

Chart showing the typical down payment among home buyers between 1989-2021 from the National Association of Realtors

Now you may ask: the down payment is 7% of… what purchase price?  The National Association of Realtors reported the median price of an existing home (not new construction) was $386,400 for 2022, and a big increase from the two prior years. But, that ranges from $278,800 in the Midwest to a whopping $601,700 in the West. California residents – how are you holding up?  

Median sales price of existing homes across the US from 2020 to 2022

 
How does that compare to what people are actually spending? LendingTree studied the down payments across the top 50 metro areas in the United States. They found that as of October 2022, the average down payment was $62,611. The real estate mantra “location, location, location” is at play here: it ranged from just over $38,000 in Oklahoma City to over $142,000 in San Jose, California. 

But in addition to the down payment, you’ll need to save for the closing costs. These are typically between 2% – 6% of the loan amount. And, don’t forget to factor in the real estate agent commission, which is a percentage of the home purchase price.

Know what homes sell for in the markets you’re considering 
 

We’ve covered some averages, but chances are your home will have a different cost. You may put a larger or smaller percentage down. So, the best way to get a more tailored savings goal is to know the purchase price of homes in the markets you’re considering for the size of home you need. 

Browse the local listings from time to time and review the purchase price of past homes. Even if your purchase is years away, it’s valuable to get a sense of how the market is moving.  

Plan when you might buy your home 

Since home prices increase each year, and have been rising sharply the last few years because of undersupply in the housing market, timing is another factor that will impact your purchase price. Whatever a house sells for today, it could cost more this time next year, or years from now. 

While you may not be able to project out the exact future cost of your home, know that the further away your home purchase, the more you’ll probably need to save. Map out how long it’ll take you to save for the initial costs based on your current income.  (If you find that you want to increase your income to help you save faster, check out our linked blog post with strategies to do so!) That can give you an idea of when it might make sense to start looking more seriously for homes. 

But, it’s not guaranteed that a future home purchase = more expensive. Another aspect at play in many markets is seasonality. When the weather is rough in many parts of the country, the market slows down. This chart shows the seasonality of home prices from 1999 to 2019. Since about 2012, you can see that the price differences between the peak in late spring and depths of winter are pretty stark, differentiating by tens of thousands of dollars. 

Chart showing the seasonality of home prices and home sales from 1999 to 2018. This can help you as you research how to prepare for buying a house by knowing when prices are lower, such as in winter.

Because of both seasonality and rising home prices, it might make sense to expedite your home purchase because it’ll save you money off the purchase price and interest. It also depends on your personal needs. Perhaps it makes sense to look at condos you can own as a single person in the near future rather than waiting until you’re settled down and buying a single-family home.  

How to Prepare to Buy a House in 6 Months 

If your home purchase is imminent, your prep work process will look a little different! It’s time to get a move on because you never know when the right house will pop up on the market, and you want to be ready to make an offer. 

Get to know the market

Like we advised for future home shoppers, it’s important to get to know the market. This is only more applicable for anyone hoping to buy in the coming months. In addition to general information about home prices, take some time to get to know: 

  • The types of homes available – size, style, etc. 
  • Age of the housing stock 
  • General property tax information 
  • If properties are receiving multiple offers 
  • How long homes stay on the market 

Having this information will help you evaluate new properties and know how rapidly you should expect to move. 

Talk with recent home purchasers

Reading blogs like this is a great start, but when you’re ready to make a purchase, get any first-hand information about home buying that you can. Talk to anyone you know who recently bought a home about how they handled the house hunting and buying experience. Their experience in your local market is going to be more valuable than general guides on the internet. Ask recent home buyers what they wish they knew beforehand and if they would do anything differently. Ask if they would recommend their real estate agent and mortgage lender as well. 

Get pre-approved before you shop

Buying a home isn’t quite as easy as walking into a store, picking an item off the shelf, and going straight to check-out. Since you probably need a loan that requires income qualification to buy the house, you’ll want to jumpstart the process by getting pre-approved for your mortgage before you start shopping.  

Research to find a lender that offers a competitive interest rate. When you’re applying to get pre- qualified, the lender will do a hard credit inquiry (which will impact your credit). So, it’s important to settle on the lender you want to borrow from so you don’t have to go through the process multiple times. 

In many markets, desirable homes go fast. Come prepared to make a competitive offer if it’s the home you really want. 

Understand the types of things you can negotiate

If you’re buying an existing home, there are a lot of elements to the home sale that you (and the seller) can negotiate. If there are conditions like a delayed move-in or repairs to the home you want completed before the property changes hands, you can ask. You might even ask for professional cleaning services before moving in, or furniture if the sellers didn’t want to take it with them (a great option if they are downsizing). 

These sorts of negotiations could make a potential property work for you, especially if the home has been sitting on the market for some time and the sellers are motivated.

Keep an open mind, and be prepared to act fast

In October of 2022, Zillow reported the median days a home was on the market came in at 54 days, an increase from a few years prior with lightning-fast sale times of less than a month. When you’re searching for a home, it’s important to keep reviewing listings and be prepared to act quickly. Fortunately, since you’ll have done a lot of the prep work, you’re ready to go! 

Another valuable tip: keep an open mind. The higher your budget, the more you can put on your wish list. If you’re shopping with a smaller budget, be realistic about the key things that are essential and the other home factors that are “nice to have.” The more open-minded and flexible you can be with your wish list, the more likely you’ll find a home that meets your needs in your budget!

Conclusion

Buying a home is a big financial step that can pay off, both financially and emotionally. Homeowners build equity and enjoy the freedom of owning their home – paint the walls whatever color you like! Preparing for your future home purchase is a smart move, and there’s lots you can do now to set yourself up for success in the future. 

Keep reading on the Milli blog:

How to Start Saving for Retirement
Does Couponing Really Save you Money? 
How to Plan a Vacation on a Budget