7 Essential Steps for Financially Preparing to Buy a House

Buying a home is one of the biggest purchases most people will ever make, which means if you are thinking about buying a house someday, you are going to want to go into the process as financially prepared as possible.

You’re going to want to start thinking about things like saving for a down payment, lowering your debt to income ratio and boosting your credit score. These are key factors to help you get the house you want, but they can take some time to prepare. That is why we always say it is NEVER too early to start thinking about buying a house.

Here are some ways to start financially preparing to buy a house, so you are making the smartest money moves to feel more on top of the home buying process.

1.Knowing your timeline and start saving (or investing)

When you plan to purchase your home determines how you will start saving up for a downpayment. If you have a shorter timeline for buying a home, then you could put the money in a high yield savings account. There are also other ways you can invest your downpayment money to get the more bang for your buck, but remember all investments come with risk. What matters most with short term savings is that you’re choosing an option that meets your needs in the smartest, safest way.

If your goal is to buy a home in more of a long term goal, then…

2.Calculate how much you need for a down payment

Traditional financial advice says that you should save up a 20% down payment. That means if you wanted to buy a house for $300,000 you would need $60,000 in cash. Though this may seem like an extremely daunting task, it is not the standard practice it once was. According to an article by Bankrate, the average down payment for first time home buyers right now is 8%, and it can be as low as 3%.

A good rule of thumb to remember when saving for a home, is to have a big a down payment as possible. The more you can put down, the better.

3.Budget for closing and home maintenance costs

Some over looked costs that are often over looked are the closing and moving costs and the home maintenance fund. When closing on your home, you will need an additional 2-5% of the house price as a one time payment. Once you own your home, it's important to budget 1-2% of the purchase price each year for regular maintenance.

4.Build a home emergency fund

Another essential home buying cost to account for is an emergency fund. You probably already have an emergency fund for personal emergencies, such as unexpected layoffs, car issues, medical bills. Once you have enough to cover any personal emergencies, add onto it or open a new account for house related emergencies.

This isn’t the same as your home maintenance fund. There is a difference between upgrading your old washer and repairing water damage caused by a leak.

5.Pay down as much debt as you can

Carrying some debt helps build a history of on-time payments, but your mortgage will likely be the biggest debt you take on. Lenders will closely review how much you owe and your payment history, focusing on your debt-to-income (DTI) ratio. Ideally, your DTI should be between 28-36%, but lenders may accept 38-45%. If it's higher, they might still work with you, but with stricter terms. Lowering your DTI takes time, so prioritize paying down high-interest debt and adjusting your spending.

6.Check your credit score

A good credit score is essential tool when it comes to buying a house. This will help you get the best interest rates and qualify for certain mortgage opportunities.

If your credit score is over 760, you’re in good shape already.

If your credit score is between 700 and 759, you might not qualify for the best rates.

If your score is under 620, you’ll face challenges getting approved, but you still have options.

7.Other than what was mentioned above leave your credit report alone

Avoid applying for any loans or new credit cards within six to 12 months before buying a home. Don’t request credit limit increases or open new accounts for things like phones or utilities if possible. These actions trigger hard inquiries, which can stay on your credit report for 1-2 years and may lower your credit score.

Overall, preparing to buy a house can be both exciting and overwhelming. Connecting with the right professionals ensures you have the guidance and support you need throughout the process, making the journey smoother and more rewarding.