Buying a home is different from most other purchases you\u2019ll make in your life\u2014for one, it\u2019s 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\u2019 worth of prep work. And looking back now, I know there\u2019s even more I could have done.<\/p>\n\n\n\n
Even if you\u2019re 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\u2019re a couple years away from buying or just a few weeks.<\/p>\n\n\n\n
Here\u2019s how to get ready to buy a home.<\/p>\n\n\n\n
When to start:<\/strong> Several years before you buy a home<\/p>\n\n\n\n Long before you actually buy your home, you\u2019ll want to start saving for your down payment. This is your initial, up-front investment in the home. The median first-time home buyer\u2019s down payment is about 9%<\/a>, but it\u2019s 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). <\/p>\n\n\n\n To get a rough sense of the down payment you\u2019ll 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\u2019ll 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.) <\/p>\n\n\n\n If you expect to buy a home in the next couple of years, it\u2019s smart to keep your down payment in an account where it won\u2019t be exposed to much risk. The Wealthfront Cash Account<\/a> is a good option for this\u2014it offers an industry leading annual percentage yield (APY) of 3.30% and up to $8 million in FDIC insurance ($16 million for joint accounts) from our program banks. Plus, when you\u2019re 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<\/a>, 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\u2014and keep more\u2014than you would with most savings accounts and some CDs<\/a>.<\/p>\n\n\n\n When to start:<\/strong> Several years to several months before you buy a home<\/p>\n\n\n\n When you\u2019re shopping for a mortgage, one of the major things a lender will look at is what\u2019s known as your \u201cDTI,\u201d or debt-to-income ratio. DTI comes in two flavors. While your \u201cfront-end DTI\u201d only looks at the total monthly cost of housing (including principal, interest, taxes, and insurance) relative to your income, your \u201cback-end DTI\u201d 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. <\/p>\n\n\n\n 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<\/a>. Note that you\u2019ll 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. <\/p>\n\n\n\n When to start:<\/strong> Several years to several months before you buy a home<\/p>\n\n\n\n Your credit score<\/a> 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<\/a> about how to do this, but here are a few of the high points:<\/p>\n\n\n\n What score should you be targeting? You\u2019ll 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. <\/p>\n\n\n\n When to start:<\/strong> Several months before you buy a home<\/p>\n\n\n\n When you take out a mortgage, lenders will want to see your employment history. Generally, they\u2019ll look at a period of two years and it\u2019s to your advantage to be able to show stable employment over that time. Depending on how you\u2019re paid (salary, commission, etc), a lender might request additional information related to your earnings. <\/p>\n\n\n\n This isn\u2019t to say you can\u2019t<\/em> 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\u2019s smart to talk to your loan officer\u2014they\u2019ll be able to provide much more detailed guidance. <\/p>\n\n\n\n When to start:<\/strong> A month or less before applying for preapproval <\/p>\n\n\n\n One of the milestones you\u2019ll hit early in the homebuying process is getting your preapproval letter<\/a>. This is a document from a lender that tells you (and a seller) that they\u2019re conditionally willing to loan you up to a certain amount of money to buy a home. It isn\u2019t a guarantee, but it does make a seller more likely to accept your offer. <\/p>\n\n\n\n If you\u2019re within 30 days of applying for preapproval, you can start gathering the necessary documents. (It doesn\u2019t 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:<\/p>\n\n\n\nPay down any debt<\/h2>\n\n\n\n
Take steps to improve your credit score<\/h2>\n\n\n\n
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Think twice about changing jobs<\/h2>\n\n\n\n
Organize your documents for preapproval<\/h2>\n\n\n\n