how can I prepare to buy a house?

Do you want to become a homeowner someday? Most of us do!

But there’s more to buying a house than just mortgage payments. Soon, the questions start to roll in: What’s a good credit score to buy a house? How do you know if you can afford it? When should you purchase?

In this post, we cover all the deets you need to prepare to buy a house – before, during, and after the process. So you can get ready, and navigate this whole journey with extra confidence when the time comes.

PS: Don’t blame us if you feel like sneaking into an open house or 2 after reading this!

👀: 9min read

how to prepare to buy a house

📸: Pinterest

Before you’re even ready to buy a house, start here.

Number 1: Every house needs a strong foundation!

Home buying is the same.

Before you start looking, here are 3 steps you can take to ensure your wallet is ready, no matter what banks, lenders, or life throw at you.

Build a solid credit score. Aim for 720 or above. The minimum is 620, but 720+ is where you get the best deals.

PS. To build a better credit score, you need to open a credit card (and manage it wisely) – so do this first if you haven’t already. It makes your home-buying experience easier in the long run!

File your taxes. You need to show 2 years of tax history to the bank or lender to get a mortgage. This is extremely important for self-employed people & those who don't get W-2s.
Save, save, save. We’re stating the obvious here, but…Your future home is a BIG investment! Are you ready to spend a hefty amount on a down payment? If your answer’s no, not really, we gotta prep your wallet first!

We’ll get into when to buy a house, and how much you need to save, in a little bit.

Right now, let’s just assume you have the money. Maybe you started looking at a house or two already (how exciting!).

This means you're ready to tackle the mortgage process.

What else do you need to prepare to buy a house?

Here’s a checklist of 8 things you need to prepare before you buy a house — plus tips for your mortgage negotiations to go extra smooth, like avocado on toast.

Know if you want a 15 or 30 year loan term. A 15 year term has much bigger principal repayments, but less interest overall – and vice-versa for 30 year! Whatever works best for your financial situation is what you should choose.
Save money with auto-pay. Most banks & mortgage providers provide a discount on your monthly payment if you set up auto-pay. It's a great way to never miss a payment!
Avoid “mortgage points”. Do they actually save you money in the long run? Unclear. Often, they're just a way for a bank to get more money from you up front. Pass.
Get a P&I Loan, aka Principal & Interest Loan. You do NOT want an interest-only loan – because you'll be paying it off forever! The "principal" payment is the money that goes towards actually cutting down on the loans (which is what you want). The interest is just extra debt that accumulates over time (keeping you in debt for longer).
Have your docs ready. On top of tax docs for the last 2 years, the bank asks for a ton of other info. Bring all of your sensitive documents with you, so it’s easier to get the paperwork done in one visit.
Prep for property insurance. It’s a must. Most mortgage providers will want to see a copy of your property insurance before the closing. Often, you get a pre-approved insurance rate that is then finalized after you sign the Purchase & Sale agreement for your home. This is normal.
Look into tax credits. You can deduct your mortgage interest, property taxes, medical-related home improvements, and green-related home improvements from your taxes – but only based on your income levels AND if you take the standard deduction.
Shop around. Like most competitive markets, banks and mortgage lenders always try to one-up each other. So don’t be afraid to look into different institutions, and what they can offer you.

Print it and frame it so you don’t forget to cover all bases! ;)

But what if you can’t afford it? Let’s get into the money piece: when do you know it’s time? And how much money should you save anyway?

When should you buy a house?

How do you know you’re ready? Are you truly prepared to buy a house?

It depends!

First, look at your income & financial health.

Can you afford it?

To calculate that, you need to know these 3 terms from the home-buying dictionary:

AGI, aka Adjusted Gross Income. aka, your salary, minus any retirement contributions. This should be at least x4 higher than your annual mortgage payment (we’ll get into this later).
APR, aka Annual Percentage Rate. aka, the interest on the mortgage. You want this number to be low and fixed. “Low” rates often fall between 3.5% - 4%. “Fixed” means it won’t change 10 years down the road. (vs. Variable, which means it could go up or down…unless another pandemic hits, it’s usually up.)
DTI, aka Debt to Income Ratio. aka, the magic number! It's the total of your monthly debt payments divided by your gross monthly income. This should be no more than 43%.

And you probably guessed it! Combine these 3 numbers, and you’ll get a good idea of how much money you have to buy your future home.

Generally, if you have:

a low DTI – your Debt to Income Ratio is 43% or less, and you’re confident it’ll stay low for a while (so you don’t get overwhelmed with mortgage payments a few years later)

AND

a significant amount of money saved up – at least enough to cover the down payment, closing, and additional charges (we’ll get into actual numbers later)

Then, YES!

You're in good shape to buy a house!

Wallet, check.

Next: is it a good time to buy?

The housing market (like any market) operates in cycles. Sometimes prices are very high; others, they're very low.

Housing typically goes through an 18-year cycle.

This means:

If you intend to keep your home for a looong time after you buy it: getting a "good price" in the market may not matter much, since your house will likely increase in value 20-30 years later.
If you plan on living in your home for only a few years, however: it might be better for you to “wait out” a period of higher prices until they lower.

Your income and the market cycle are both equally important.

If your wallet’s not there yet, don’t rush into things.

Build it up first.

Your home is a big investment, and we wouldn’t want you to stretch yourself thin without needing to.

So, the question remains: how much money is enough to buy a house?

How much money do you need to buy a house?

Short answer: A LOT.

Let’s break it down!

How much should your AGI be to buy a house?

Your AGI (Adjusted Gross Income) needs to be at least FOUR times as much as your annual mortgage payment.

On a $500,000 house this would be anything greater than an AGI of $56,000.

How much is the down payment for a house?

You'll need 20% of the cost of the home for the down payment.

If you don't have that full amount, you can usually get a mortgage with the additional cost of mortgage insurance.

Using the $500,000 house example again, this is a $100,000 down payment.

How much is a mortgage?

Your mortgage payments will depend on several factors. The 2 main ones are: your interest rate (fixed vs. variable), and the number of years on your loan (15 vs. 30 year loan).

Say your $500,000 house has a 4% fixed interest rate.

It’ll likely have a monthly mortgage payment of about $2,400/mo on a 30-year plan, while a 15-year plan might cost $3,700/mo.

How much are closing costs?

Closing costs are exactly that: charges billed at the end, to “close” the sale. They’re usually around 3-6% of the home's total value.

So, on the $500,000 house, be ready to pay $15,000 to $30,000 for closing costs.

Don’t forget about other costs!

For example, HomeOwners Associations are common in the US. Membership usually costs around $200-$300 per month. So you gotta save for that. Plus home insurance. Always insurance!

You should also think about whether you're ready (or willing) to deal with all the extra work that comes with owning your own home: maintenance, lawn-mowing, renos, etc.

We know these aren’t immediate costs, but definitely something to think about if you’re considering whether you should buy a house now.

In sum, for a $500k home you need:

at least $56k in AGI (income)
$100k for down payment
between $15-30k in closing

Plus a cushion for monthly costs around mortgage payments, home insurance, homeowners associations, etc.

This is why it’s a good idea to start saving before you think, find, or prepare to buy a house!

If you’re already a Penny member, we have great news for ya!

You have access to all of this info (and more!) inside the home buying money plan. Login to your profile, scroll down to the “home buying” module, and use it to create your personalized home buying plan in less than 1 day – with actual numbers, tailored to your wallet.

Not a member yet? Become one here to access the home buying money plan.

What should you do after you buy a house?

#1 – Celebrate! You did it!!!

Buying a home is no easy feat. It feels so good when your hard work pays off, and you have a place to call your own. Take a long bath, go out for a nice meal, or take the day off to rewatch Emily in Paris (or Bridgerton). You earned it!

#2 – Get your docs and admin in order.

Keep your homeowner and insurance docs safe. Check warranties. Ensure everything’s working. Take it one day at a time.

Don’t forget to update your address! Especially with banks, credit cards, & subscriptions. If you’re expecting snail mail, the USPS can help forward your mail from your old address to your new one for up to 1 year.

#3 – Furnish your new home.

The fun begins! Paint your walls, add new tiles, and replace the old couch. Start unpacking boxes and treat yourself to these finds:

Canningvale - affordable luxehome essentials
Bed Bath & Beyond - shop their Memorial Day sale
Calphalon - stainless steel cookware
Plow & Hearth - DIY home improvement essentials
One Kings Lane - interior design services
Aosom - backyard furniture essentials
Terrain - home & garden essentials

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Have more questions? Check out the homebuying money plan

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