How to Prepare to Buy a House in Five Years

1. Understand the Cost of Buying a House

First, get clear on the expenses you'll have to cover when buying a home. These include:

• Down payment
• Monthly mortgage payment
• Closing costs
• Property taxes
• Homeowners insurance
• Furniture
• Appliances
• Ongoing maintenance
• Utilities
• Moving costs

The down payment is often the biggest barrier first-time buyers encounter. When determining the size of your down payment, know that paying 20% of the home's purchase price will save you money on interest and will help you avoid paying private mortgage insurance.

But there are plenty of no- or low-down-payment mortgage options. For comparison, the average first-time buyer made a down payment of 8% in 2023, according to the National Association of Realtors. The housing market, your finances and any gift money from loved ones will affect the down payment you'll have to save for.

Plan to maintain a robust emergency fund, too, when buying a house to cover closing costs, moving costs and other expenses.

2. Calculate How Much House You Can Afford

Starting with an estimate of your down payment and other housing costs, plus the average home price in the market you're looking in, determine how much house you can afford.

Example: If the average home in your area sells for $400,000 and you plan to make a 10% down payment, you'll need $40,000.

Use a mortgage calculator to get an idea of how much you'll pay altogether for homes you're considering now based on the down payment you'll make and other factors. Know that your credit will influence the size of the mortgage and the interest rate you qualify for.

Depending on the outcome, you may find that your budget simply won't accommodate the total monthly payment calculated. Play with making a larger down payment or choosing a lower-priced home and see where that lands you.

3. Make a Savings Plan

Next, evaluate your current finances and come up with a plan to save up the amount you need.

• List the sources of income and savings you already have. Include your current after-tax income, cash savings, investments, gifts from family and inheritances. Remember that it's important to leave retirement accounts alone rather than cashing them out.
• Track your spending. Look at your online accounts via your bank or credit card and take note of any trends in your spending. Are you spending more than you expected on discretionary items, like restaurant meals? Are there subscriptions you could cancel or suspend?
• Consider ways to increase your income in the next five years. That could include planning to ask for raises at your company, moving into a new role or picking up side gigs or consulting jobs.
• Reduce big-ticket expenses. Avoid the temptation to buy a new car, for example, if yours is almost paid off, or replace it with a used one rather than a new one.
• Choose a budgeting method. Explore various budget plans, such as the 50/30/20 rule, zero-based budgeting or pay yourself first, and pick one that appeals to you. Then set aside an appropriate amount per month exclusively for buying a home.

4. Automate Savings

Now it's time to put the pieces together. If you've decided that a $40,000 down payment is feasible, and that you'll need an extra $30,000 for other expenses and an emergency fund when you move in, that's $70,000 total. You know you'll receive a gift of $20,000 from your family. So you have $50,000 to save over five years. You've looked for ways to cut back on spending and earn more income, and you've set a budget that allows you to save that $833 per month.

Next, transfer that amount automatically to a dedicated account. A high-yield savings account is a good choice. While investing the money in stocks may be tempting, five years is not a long time horizon to bounce back from potential losses.

5. Plan to Pay Off Existing Debts

When applying for a mortgage, lenders will want to see that you don't already have monthly debt obligations that could impact your ability to pay your mortgage. This includes credit card and student loan debt, which could increase your debt-to-income ratio. DTI measures the amount you earn compared with the amount you owe to creditors each month. Mortgage lenders generally prefer a DTI of 43% or less, though it depends on the type of mortgage you want.

Aim in the next five years to bring your DTI below 43%. That means you don't have to pay off all your debt in that time, but bringing it down as low as possible will benefit you.

6. Improve Your Credit Score

Paying down debt can also help boost your credit score before buying a house, which will qualify you for a wider range of mortgage options at lower interest rates. You'll need a credit score of at least 620 to qualify for most conventional loans, but certain types require a credit score of at least 660 and the higher your credit score, the better terms you'll likely qualify for.

Prequalifying with a lender can tell you more about the mortgage amount you could secure with your current credit and income. Five years is a long time to increase your credit score if it's not already in the good-to-excellent range, so try to boost your credit over time to access the lowest rates possible. Pay all bills on time, avoid taking on new credit and keep your oldest credit accounts active to keep your score strong.

The Bottom Line

There are plenty of ways to prepare your finances for homeownership in the next five years. Come up with a savings goal, put a plan in place to save automatically each month and work on building credit and reducing debt year by year. Starting now can increase the odds that your mortgage application will stand out once it's time to buy.

Consider signing up for free credit monitoring from Experian to make it easier to track your progress toward a solid credit score. You'll receive alerts when there are any changes, and insights about ways you can improve your credit may prove helpful in charting your path toward your home purchase.