Simple 5-Year Plan To Buy a House

Written By Michael Rosenthal

Reviewed By Taylor Garvey

By learning each step of the homebuying process and diligently planning, you can make progress toward owning a house. Here’s a five-year plan to finally get the keys to a new home.

How To Buy a House in 5 Years

Timeline	Homebuying Step	How To Prepare
The first year	Estimate how much house you could afford in five years	If you don’t know where to start, think about where you want your five-year plan to end. Determine a price range of homes that’s realistic for your budget, and break down the full costs of buying a home into upfront costs and ongoing costs. This will help you understand what you can afford. Upfront homebuying costs include your down payment, closing costs, and moving expenses. Ongoing costs include your mortgage payment, property taxes, homeowners insurance, and homeowners association dues. A good rule of thumb to estimate how much house you can afford is that you shouldn’t spend more than 28% of your gross monthly income on a monthly mortgage payment.
	Make a budget and start saving	To set yourself up for success, create a structured and realistic budget. The key to making a budget is to understand that it will likely change and need to be reevaluated. Nobody can perfectly control their expenses over five years, so you may need to readjust your goals if you exceed your budget. It may help to automatically deposit some of your paycheck into a high-yield savings account, which can offer significantly higher rates than a traditional savings account. As of 2023, some banks are offering high-yield savings accounts with an annual percentage yield of 4.5% and above. If you do open a high-yield savings account, it’s important to choose one that’s insured by the Federal Deposit Insurance Corp.
	Start building your credit score	You’ll want to build your credit as much as possible in the next five years. Mortgage lenders trust borrowers with high credit scores and may offer them better interest rates. If you have a low credit score, expect a higher rate and a mortgage that’s more expensive. Here are minimum credit score requirements for common loan types: — Conforming conventional loan: 620. — Federal Housing Administration loan: 500 with a 10% down payment; 580 with a 3.5% down payment. — Veterans Affairs loan: No official minimum, though lenders can set their own requirements. — USDA loan: No official minimum, though lenders can set their own requirements. You can increase your credit score by: — Paying bills in full and on time. — Lowering your credit utilization ratio, which represents the amount of available credit that you’re currently using. — Avoid applying for new lines of credit.
	Set goals to meet the financial requirements of homeownership	Figure out how much money you’d like to save for your down payment. Some loans have low down payment requirements, but there are benefits to saving for a larger down payment. For example, you can avoid private mortgage insurance on a conventional loan by making a down payment of 20% or more. In addition to your down payment, you’ll have to save for closing costs, which typically are 2% to 5% of the purchase price. You’ll also need enough room in your budget to afford the ongoing costs of homeownership. These include maintenance costs, which you can budget for by setting aside 1% to 2% of your home’s value each year. With five years to prepare, you can strategize to save for these costs of homeownership.
The second year	Check in on your savings goal	While navigating how to save for a house in five years, you’ll want to periodically check if you’re meeting your savings goals. Do the math to see if you’re growing your savings fast enough to meet your down payment target. For example, if you want to save $20,000 over the next five years, you should aim to save $4,000 each year.
	Check in on your credit	Take advantage of free credit reports from the three major credit bureaus — Equifax, Experian, and TransUnion. While credit reports don’t usually include your credit score, you can check to make sure there aren’t any errors dropping your score. You also can get free copies of your credit report from AnnualCreditReport.com.
	Readjust your goals, if needed	If you’re not hitting your goals, take an honest look at how you could change your daily habits to get back on track. Unexpected emergencies can set you back, but sometimes you’ll find your original goals were simply too optimistic. You’re now about halfway through your five-year plan to buy a house, so this can be a good time to evaluate your progress.
The third year	Outline your wants vs. needs in a home	Before looking for homes, write up a list of your wants vs. needs. Needs are features that you can’t live without, like wheelchair accessibility. Wants are features that you hope to have, like a spacious kitchen or finished basement. You could be satisfied with a home that doesn’t include all your wants. However, you’ll likely regret closing on a house that’s missing multiple homebuying needs. Listing your wants vs. needs also can help you avoid making an emotional purchase.
	Research neighborhoods	Narrow your home search by finding desirable neighborhoods. Wants and needs also apply to neighborhoods, such as the need for a close commute to work or proximity to a good school district for your kids. You can give neighborhoods a test run by visiting them. Go for a walk during different times of day, chat with the locals, and see how close the nearest grocery store is.
	Research real estate experts	Real estate agents are crucial to a positive homebuying experience. You can seek referrals from trusted friends and family members, and find reviews of local agents online.
The fourth year	Interview a real estate agent or Realtor, and hire one	You may encounter both real estate agents and Realtors in your search for a real estate professional. While they perform the same duties, Realtors are members of the National Association of Realtors and must follow NAR’s code of ethics. Here are some good questions to ask before you hire a real estate professional: — What is your commission? — How many years of real estate experience do you have? — Do you work full time or part time? — Can you provide references? — Do you work with a team? — Do you have experience helping buyers in this area?
	Make a checklist of necessary documents	You’ll need to get the appropriate documents ready when applying for a home loan. Documents you may be required to provide include: — Bank statements. — Tax returns from the last two years. — W-2 forms. — Sources of down payment funds. — Driver’s license. — Social Security number.
	Shop for a home loan	There are multiple mortgages available to qualified borrowers, including: — Conventional loan. These loans are the most common mortgage option. If you have a credit score of 620 or higher, you can put as little as 3% down. — FHA loan. This loan backed by the Federal Housing Administration has a minimum down payment requirement of 3.5%. — VA loan. This loan is backed by Veterans Affairs and is for veterans, service members, and eligible surviving spouses. VA loans have no down payment requirements. — USDA loan. This loan is insured by the Department of Agriculture and can help low- and middle-income borrowers living in eligible rural areas afford a home. USDA loans have no down payment requirements.
4 years and 6 months in	Get a preapproval letter	Lenders will look at your finances and estimate the maximum loan amount you could qualify for, and what mortgage rate you can expect. This is called getting preapproved, and it can help you adjust your budget accordingly. Plus, it shows sellers you’re ready to buy.
	Start touring desired homes	A home tour is your chance to experience a home in person. Here are some features to look for: — Location. — Size of bathrooms and bedrooms. — Condition of systems and appliances. — Style of architecture. — Signs of water damage, mold, or cracking in the foundation. It’s recommended to tour a house with your agent so you can lean on their expertise. They will know what to look for and can help answer your questions.
The finish line	Make an offer	If you find the right home, you may be ready to make an offer with the help of your real estate agent. If it’s a buyer’s market, you may be comfortable making an offer below the asking price. But if it’s a seller’s market, you may need a more aggressive offer to compete with other interested buyers. This process also will involve setting up contingencies, which are conditions that must be met before the sale is finalized.
	Apply for a home loan	After your offer is accepted, apply for a loan with a mortgage lender. Refer to your documents checklist, which will help you prepare the appropriate documents to submit. Within three days of submitting your application, you should receive a loan estimate from your lender, which is a document that includes important details about the loan you qualify for.
	Get a home inspection and appraisal	A home inspection is recommended at this stage. The home inspection is an examination of the property’s condition, which can help you decide if you want to follow through with the home purchase, renegotiate, or withdraw your offer. In addition, your mortgage lender likely will require a home appraisal. This process helps the lender assess that the value of the house matches the loan.
	Buy insurance	You’ll generally need to sign up for insurance before you close on your home. There are several types to consider, including: — Homeowners insurance, which covers your house and belongings in the event of specified disasters. — Flood and earthquake insurance, which may be recommended depending on the natural disasters common in your area. — Title insurance, which protects you if someone claims they possess rights to your property.
	Close on the home	Sign paperwork and pay the closing costs. It may take one to two months to close. In June 2021, the average closing time on a home purchase took 51 days, according to ICE Mortgage Technology. What started as a plan to buy a house in five years ends with you getting the keys to your new home!