How To Prepare To Buy a House in 5 Years 

Preparing to buy a home doesn’t happen overnight. It’s a major financial goal, but it’s manageable when you give yourself a long enough timeline — like five years. Getting a clear understanding of how to plan to buy a house in five years can help you stay on track.

The First Year: Budget and Research

If you’re thinking, “I want to buy a house in five years,” then you have an extended timeline to create a smooth path to homeownership. The first year in your five-year plan will be dedicated to financial planning and educating yourself on the complete costs of buying a home. 

Know the costs of buying a home

It’s no secret that buying a home — and homeownership in general — is expensive. Understanding the different types of costs can help you get prepared.

Here are some of the costs to expect:

• Down payment. The average down payment for first-time buyers is 6%, according to a 2022 report by the National Association of Realtors.[1]Estimate your down payment based on home prices in the area you want to live. 
• Closing costs. Closing costs include title insurance, appraisal fees, and more. The exact costs vary, but you can expect to pay between 2% and 5% of the loan amount. 
• Property taxes. As a homeowner, you’ll be on the hook for property taxes. Your state or local government sets these rates.
• Homeowners insurance. If you’re taking out a mortgage for your home purchase, your lender will likely require you to purchase homeowners insurance. Costs vary, and these premiums are on the rise.
• Homeowners association dues. If your property belongs to an HOA, expect to pay a monthly or annual fee.

Set savings and credit score goals

When you apply for a mortgage, lenders will pay close attention to your credit score and down payment. That’s why it’s helpful to set savings and credit score goals. 

Setting a savings goal

Create a rough estimate of how much you’ll need to put down. Nowadays, it’s possible to purchase a home with less than 5% down, but it can be beneficial to put down more money.

Don’t forget to factor in closing costs as well.

“You will need funds to close, and the sooner you can start saving that up the better,” says Chuck Vander Stelt, a real estate agent in Indiana and founder of Quadwalls, a real estate company.

With your goal in mind, set up an automated savings strategy. Each payday, allow an automatic transfer to push funds into your savings account. Streamlining the process can help you build savings more easily.

Setting a credit score goal

Most mortgage lenders require prospective borrowers to have a relatively good credit score. In many cases, a credit score of at least 620 is required for taking out a mortgage. 

As you begin the homebuying journey, check out your credit score. If your credit score isn’t where it needs to be, start making changes. A few strategies include committing to on-time payments, avoiding new credit accounts, and keeping your credit-utilization ratio low.

Create a budget

A budget is a basic building block for a strong financial foundation. Within your budget, you should include your expenses, savings goals, and some buffer for emergencies. 

“This doesn’t mean you can’t have any fun, but it does take a lot of careful planning,” says Tomas Satas, founder and CEO of WindyCityHomebuyer.com, a Chicago-based real estate company.

It’s natural to encounter trial and error when building a budget. Be forgiving of yourself as you get into a groove, and don’t give up on it.

Explore alternative income sources

When your income is fixed, there’s only so much you can save. One way to save more is to find additional income sources. Though this might not be an option for all homebuyers, increasing your income can greatly boost your savings. 

The Second Year: Stay On Track

If the first year of your homebuying journey is about getting comfortable with your financial situation, then the second year is about evaluating your progress toward your goals and adjusting as needed. 

Check on your credit score and budget

You can’t just set and forget your homebuying plan. Be intentional about staying on track.  

Assessing your credit score

Look at where your credit score currently stands. Compared to last year, can you see progress?

If you’re moving in the right direction, then you can keep up the good work. But if you aren’t seeing progress, then take a closer look at your credit report to root out potential problems. For example, a mistake on your report could be what’s dragging your score down.

Evaluating your budget

As you move through life, it’s natural for your budget to change with you. But since you’re aiming to buy a house, it’s important that you remain focused on saving for a down payment. Confirm that your spending choices align with the goals you’ve set for yourself. If you don’t like what you see, be honest with yourself about making a change.

Reassess if you aren’t where you need to be

For many prospective homeowners, life will produce roadblocks in their plans. If you’re facing unexpected expenses, take the time to reassess how these new costs will affect your path to homeownership. If you aren’t on track with your savings strategy, consider boosting your savings rate or adjusting your goal to stay within the five-year timeline.

The Third Year: Narrow Your Focus

Making it to the finish line of a five-year plan to buy a house is a marathon, not a sprint. As you hit the midway point, it’s time to set your sights on the final half.

Review your progress

It’s a good time to check in again on your progress toward your savings and credit score goals. If you’re not on track, you still have time to adjust your finances before approaching the finish line.

Research neighborhoods

Start doing your research on the specific neighborhoods you want to live in. As you conduct your search, be realistic when it comes to your financial situation and personal preferences.

Understand your wants and needs

To make shopping for a home feel more manageable, create a clear list of your wants and needs. Needs might include a short commute to your office, a backyard, an accessible bathroom, or enough space for your family members. Wants might include a pool or stylistic details. Generally, your list of needs should be shorter than your list of wants.

Start talking to experts

At this stage, it’s not necessary to secure a real estate agent. But it’s a good idea to start seeking them for advice regarding your situation and asking questions to lenders, especially if you’re a first-time homebuyer.

The Fourth Year: Shop and Prepare

The finish line is coming up. It’s finally time to start house shopping.

Partner with a real estate agent

A real estate agent can help you navigate the home purchase process. Without a real estate agent, it’s easy to make a big mistake like overpaying for a home. That’s why it’s important to find a real estate agent you can trust to keep your best interests at heart. 

Asking questions

Here are some questions to ask real estate agents whom you’re thinking about partnering with:

• How long have you been an agent?
• How often do you help buyers purchase a home?
• Are you a full-time or part-time real estate agent?
• Do you usually work with buyers or sellers?
• Do you have any references?
• What areas and price points do you usually work within?
• Do you have a team?
• What is your commission?

Make a document checklist

Getting a mortgage involves a lengthy paperwork process. It helps to have a document checklist for your mortgage application. Start putting together these documents:

• W-2 forms.
• Tax returns from the last two years.
• Bank statements.
• Sources of down payment funds.
• Driver’s license.
• Social Security number.
• Certificate of homebuyer education, if required.

Shop for mortgages

Buyers have many mortgage options available, depending on their qualifications:

• Conventional loan. Conventional loans aren’t part of a specific government program. Buyers with at least 3% down and a good credit score can pursue a conventional loan. 
• FHA loan. FHA loans are backed by the Federal Housing Administration, which has less stringent credit requirements. With an FHA loan, you must put down at least 3.5%. 
• VA loan. VA loans are backed by the Department of Veterans Affairs. Qualified borrowers can apply for these loans with 0% down. 
• USDA loan. USDA loans are backed by the Department of Agriculture. Qualified low- and moderate-income borrowers in designated rural areas can tap into a USDA loan with 0% down.

4 Years and 6 Months In

It’s the final countdown to homeownership. With your finances in place, this part of the process can go quickly.

Get preapproved for a mortgage

It’s time to get preapproved for a home loan. A preapproval letter doesn’t guarantee that you’ll get the financing you seek, but real estate agents and sellers will treat you more seriously.

In most cases, a preapproval letter is valid for 30 to 60 days. Keep this timeline in mind while house shopping. 

Zero in on your options

Refer to your lists of needs and wants throughout your search for the right home. If a property doesn’t suit your needs, then you can move on quickly. But if you have several candidates, then you should make a list of pros and cons for each home. This exercise can help you identify your top option.

The Finish Line

You’ve almost made it to the end of your homebuying journey. But like with any marathon, you’ll need to stay focused for the final stretch.

Make an offer

When you find a home that you want to purchase, work with your real estate agent to make an offer. A competent real estate agent will help you include the appropriate contingencies to make sure you’re protected throughout the process. 

Apply for a mortgage

If your offer is accepted, it’s time to submit a formal application to your mortgage lender. In most cases, you’ll receive a loan estimate within a few business days. The loan estimate will include information about fees, rates, and other costs tied to the loan. 

Schedule a home inspection and appraisal

Your mortgage lender will likely require a home appraisal, which estimates the value of the home. Lenders want to confirm that they aren’t lending more than the home is worth. 

Beyond an appraisal, it’s helpful to get a home inspection. The inspection can shed light on the condition of the home, including details like:

• Plumbing.
• Electrical systems.
• Heating and cooling systems.
• Roof condition.
• Attic.
• Walls, floors, windows, and doors.
• Structural integrity.
• Foundation.

A complete inspection can help you root out any issues with the home. If an issue is discovered, then you might have the chance to renegotiate or back out of the sale.

Keep in mind that the inspection is different from the final walk-through of the home.

Shop for insurance

Most lenders require you to finalize your insurance before closing. A few different kinds of insurance you might need include:

• Homeowners insurance.
• Flood and earthquake insurance.
• Title insurance.

Close on the home

With all the pieces in place, it’s time to close on the home. You’ll walk away from this process with the keys to your new home.

Be prepared to sign a lot of paperwork and pay closing costs to finalize the sale. Before closing day, you should receive an estimate of how much your closing costs will be.

FAQ: How To Prepare To Buy a Home in 5 Years

You have questions about buying a house in five years, and we have answers. 

The Bottom Line on Preparing To Buy a Home In 5 Years

The sooner you start planning for a home purchase, the better. Five years can give you plenty of time to make progress toward your goal. Take advantage of the extended timeline to thoroughly educate yourself about the homeownership process and set yourself up for success.