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What you need to do before making that first offer

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Buying a home is a huge financial decision and not something you should try to do on the spur of the moment. When you know you want buy your first homeyou should ideally start planning at least two years in advance to ensure that you are financially ready for all that this stage entails.

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Here’s what you need to do — and when — before you make that first offer.

2+ years before: save for a down payment

Although you can buy a home with less than 20% down, saving that percentage will save you money in the long run.

“Aim to put at least 20% down, even if it means delaying your home purchase, because you’ll end up paying a lot less in interest and mortgage insurance over time,” says Rachael Burns , CFP, financial planner at Meaningful financial planning.

Of course, a 20% down payment can be a lot of money, so you’ll want to start saving long before you make that first offer. The longer you allow yourself to save, the more high-yield investment vehicles you can take advantage of to grow your down payment faster.

“If you don’t plan to buy a house for at least a year or two, you may be able to earn more by investing in the market instead of holding it in savings,” Burns said. “It’s important to understand the risks that come with investing and to have a plan to convert those investments into cash as you get closer to buying a home.”

If you’re in a shorter timeframe, you’ll need to save more aggressively, but you can still benefit from keeping the funds in a high-yield savings account.

“Take advantage of high-yield savings accounts to maximize the interest earned on your savings while keeping money safe and accessible,” Burns said. “If you hold your savings in one of the big banks, chances are you’ll earn virtually no interest, so shop around for reputable online banks.”

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6 months before: Schedule a pre-qualification interview

Burns recommends scheduling a mortgage prequalification interview before you begin your home search.

“During the pre-qualification interview, the lender gives you an estimate of how much of a loan you would likely qualify for,” she said. “You are responsible for self-reporting your financial information, so no credit checks are done. This makes a pre-qualification less ‘official’ than a pre-approval, but it’s still a good first step before obtaining pre-approval.

Burns recommends doing this well in advance of house hunting for several reasons.

“It’s good to have an idea of ​​what you can afford before you even start house hunting,” she said. “It also gives you time to improve your credit or save more on a down payment.”

5 months before: start the mortgage pre-approval process

Pre-approval is the next step after obtaining pre-qualification.

“Having pre-approval will help speed up the buying process and make sellers take you more seriously,” Burns said. “It will give you an idea of ​​what your interest rate will be and in some cases may even lock in an interest rate.”

To ensure the pre-approval process goes smoothly, Burns recommends preparing by taking the following steps:

  • Check your credit. “See if there are any errors in your credit report that need to be corrected,” she said. “You may also want to pay down or pay down your existing debts to improve your debt-to-income ratio.”

  • Organize your financial information. “You’ll need to gather bank statements, investment account statements, W-2s, etc.,” Burns said. “If you are self-employed, you may need to provide more documents. Keep all of these documents organized and easily accessible so you can hand them over to your lender.

  • Track your debt repayments. “Midway through the home buying process, make all of your other debt payments on time,” Burns said. “It might not seem like a big deal to make a late payment, but it can have a huge impact on your credit score.”

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This article originally appeared on Home buying timeline: what you need to do before you make that first offer