Buying a home is different from most other purchases you’ll make in your life—for one, it’s likely the biggest, and it also requires significantly more lead time and preparation. When I bought my home in San Francisco, it was the culmination of roughly two years’ worth of prep work. And looking back now, I know there’s even more I could have done.

Even if you’re not ready to take the plunge just yet, there are steps you can take today that will put you in a better position to buy a home in the future, whether you’re a couple years away from buying or just a few weeks.

Here’s how to get ready to buy a home.

Build up your down payment

When to start: Several years before you buy a home

Long before you actually buy your home, you’ll want to start saving for your down payment. This is your initial, up-front investment in the home. The median first-time home buyer’s down payment is about 9%, but it’s common to put down more or less than that amount depending on your personal situation. Many people decide to put down 20% to avoid the need for private mortgage insurance (PMI). 

To get a rough sense of the down payment you’ll need, you can multiply your anticipated home price by the percentage you plan to put down. So, if you want to buy a $500,000 house and put 20% down, you’ll need to save up $100,000. (You should also save enough cash to cover your closing costs, which can be around 2% of the total home price. In this example, that would mean you would save another $10,000.) 

If you expect to buy a home in the next couple of years, it’s smart to keep your down payment in an account where it won’t be exposed to much risk. The Wealthfront Cash Account is a good option for this—it offers an industry leading annual percentage yield (APY) of 4.00% and up to $8 million in FDIC insurance ($16 million for joint accounts) from our program banks. Plus, when you’re ready to wire your down payment to the title company, you can do so for free. You can also consider transferring funds from the Cash Account and  investing your down payment in low-risk US Treasuries. If you decide to do this, Wealthfront offers an Automated Bond Ladder, which is a ladder of US Treasuries with different maturities, designed to help you earn a steady yield on your extra cash with zero state and local income taxes. In many cases, it can help you earn more—and keep more—than you would with most savings accounts and some CDs.

Pay down any debt

When to start: Several years to several months before you buy a home

When you’re shopping for a mortgage, one of the major things a lender will look at is what’s known as your “DTI,” or debt-to-income ratio. DTI comes in two flavors. While your “front-end DTI” only looks at the total monthly cost of housing (including principal, interest, taxes, and insurance) relative to your income, your “back-end DTI” includes other debts like minimum monthly payments for any credit card debt, student loans, and auto loans in addition to your mortgage expenses. Because of this, paying down your debt can improve your back-end DTI and make it easier to get approved for a loan. 

A good rule of thumb is to try to keep your back-end DTI below 43%. Lower is even better. For help calculating your DTI, you can use an online calculator like this one from Freddie Mac. Note that you’ll need to estimate your monthly mortgage costs in order to calculate your DTI. That said, this exercise can help you understand what size payment a lender is likely to approve you for. 

Take steps to improve your credit score

When to start: Several years to several months before you buy a home

Your credit score is a snapshot of your credit usage and payment history. It gives lenders an indication of your ability to repay loans and it impacts the interest rate a lender will offer you on a mortgage. As a result, there can be a real benefit to improving your credit score before you start shopping. The Consumer Financial Protection Bureau has a good explainer about how to do this, but here are a few of the high points:

  • Pay your bills on time. 
  • Don’t max out your credit cards. Keeping your utilization below 30% of your credit limit can help improve your score.
  • Resist the temptation to close old cards, even if you don’t necessarily need them. This helps demonstrate that you have a long history of paying off your debts.
  • Don’t apply for new credit or take out/cosign new loans.

What score should you be targeting? You’ll likely have the best loan terms available with a 780 or above. If your score is in the 500s, it might be difficult for you to get a loan. 

Think twice about changing jobs

When to start: Several months before you buy a home

When you take out a mortgage, lenders will want to see your employment history. Generally, they’ll look at a period of two years and it’s to your advantage to be able to show stable employment over that time. Depending on how you’re paid (salary, commission, etc), a lender might request additional information related to your earnings. 

This isn’t to say you can’t change jobs in the months leading up to a home purchase. Moving from one salaried position to another is unlikely to be an issue, provided your new salary still supports the size loan you are trying to take out. If you have questions about this, it’s smart to talk to your loan officer—they’ll be able to provide much more detailed guidance. 

Organize your documents for preapproval

When to start: A month or less before applying for preapproval 

One of the milestones you’ll hit early in the homebuying process is getting your preapproval letter. This is a document from a lender that tells you (and a seller) that they’re conditionally willing to loan you up to a certain amount of money to buy a home. It isn’t a guarantee, but it does make a seller more likely to accept your offer. 

If you’re within 30 days of applying for preapproval, you can start gathering the necessary documents. (It doesn’t make sense to start much earlier, because lenders will want your paperwork to be current.) The list of documents below is not exhaustive, but it can help you get a head start:

  • 2 most recent statements for all of your bank/investment/retirement accounts
  • 2 most recent paystubs 
  • W-2s for the past two years or two most recent business tax returns (if self-employed)
  • 2 most recent personal tax returns

Once you have your preapproval letter, it will typically be good for anywhere from 30-90 days, depending on your lender, assuming things don’t change in your personal financial situation. 

Key takeaways

Buying a home is an exciting milestone, but it also requires significant preparation. To recap, here are some steps you can take to get ready:

  • Build up your down payment.
  • Pay down any debt to help lower your back-end DTI.
  • Take steps to improve your credit score and target a score of 780 in order to get the best terms.
  • Be careful about changing jobs. Lenders value steady employment and income. 
  • Gather your documents shortly before applying for preapproval. There isn’t really any benefit to doing this months in advance.

Finally, after you buy your home, keep in mind that many of the same steps apply if you decide to refinance in the future. Lenders will still care about your credit score, employment, and DTI and will likely require many of the same documents. 

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About the author(s)

Michael Young is a Director of Product at Wealthfront. He studied Economics at Stanford University.