From Renter to Homeowner: A Step-by-Step 2-Year Plan to Buying Your First Home

Today I wanted to talk a little bit about preparing a step-by-step path to obtain homeownership within two years.

Becoming a homeowner is an exciting milestone, but it requires careful planning and preparation. By starting early, you can set yourself up for success and avoid unnecessary stress. Here’s a short guide to help you prepare to buy a home in two years.

(You can also check out the video version of this article here)

Year 1: Laying the Foundation

In the first year of your plan, you'll really want to set up a strong foundation to put you in a strong place to purchase in two years time. This will involve building your network of vendor partners, such as a realtor and lender, to help set forth a plan to help realize your goals.

... but wait, I'm two years from purchasing my new home. Why would I need to talk with a realtor or a mortgage lender?

To help you lay the foundation.

Benjamin Franklin said it best with this quote:

If you fail to plan, you are planning to fail

You need a solid plan and your realtor and lender can help you develop one in your first year.

Assess Your Financial Situation

In the beginning, you'll need to take the time to properly assess where you're at financially. When qualifying for a mortgage, your lender will be focusing on three key factors: Credit, Income, and Assets.

For now, let's focus on credit.

To start, you can either obtain your credit report from a free service or ask your lender to run a soft pull on your credit. You'll want to aim for a score of 620 or higher for most mortgage options, though higher scores can secure better rates.

FHA and other government-backed loans can help those borrowers with lower scores, typically as low as the 500-580 range.

Once you've got your credit in check, it's time to focus on paying down debt. Lenders will use your debt-to-income (DTI) ratio to help determine your strength as a borrower and will want to see a DTI below 43%. So if you have outstanding credit card debt or other consumer debt, this would be a great time to pay down credit cards to improve your DTI.

You will also want to start tracking your spending and get on a budget. Create a budget that you can stick to and one that helps you understand where your money is going and identify areas to save. Budgeting apps like Rocket Money, Mint, or a simple excel spreadsheet can be helpful tools when budgeting.

I know: Budgeting is not the sexiest thing in the world. You may have to have a meal plan of "beans & rice and rice & beans" as Dave Ramsey says. But the short-term sacrifice will be worth the reward of homeownership

Create a Savings Plan

While you're budgeting, you'll want to create a target savings amount that you'll have ready once it's time to buy your new home. To help determine the amount, you'll need to calculate how much you'll need for:

• Down Payment: Typically 3-20% of the home’s price. In some instances, like a VA loan or a 100% financing loan option, you won’t necessarily have to put any money down at closing
• Closing Costs: Likely around 2-5% of the purchase price.
• Emergency Fund: Three to six months of living expenses.

To help allocate your savings into one place, you'll want to open a dedicated savings account and set up automatic transfers from your checking account to your savings account to build your funds consistently.

Some savings accounts have “bucket” features where you can segment your savings funds. This could be helpful in segmenting your target savings amount into the three categories previously described.

Research the Housing Market

While you're assessing your finances and getting your savings in order, you'll also want to familiarize yourself with the local housing market.

Identify some of the areas where you’d like to live based on factors like schools, commute times, and amenities. Reach out to friends and family to see if they know anybody in your desired areas that can give you feedback on living in the neighborhood.

You'll also want to get a sense of the typical home prices in your desired location to set realistic expectations. It's fun to daydream about the homes with the infinity pool that back up to the golf course, but if that's not in your budget right now, you need to focus on homes that are realistically in your price range.

This phase is where your realtor can really help you. Since they are in these neighborhoods constantly, they know the prices and features of the neighborhoods and can give you details and data that you may have access to on a simple internet search.

For those realtors that are neighborhood experts, they'll know which floor plans are in particular sections of the subdivision and can give you the inside scoop that a simple search online may not tell you.

Educate Yourself on Homeownership

So there are a couple of avenues you can take to educate yourself on homeownership.

You can attend Homebuyer Education courses offered by local nonprofit organizations or lenders either for free or for a nomial fee. There are opportunities to attend seminars explaining different types of mortgage loan options that may also be helpful.

My recommendation?

Just call or text your realtor and lender with any questions.

A great realtor and lender will be happy to talk you through any questions you may have. In most instances, they'll sit down with you over lunch or coffee and conduct a consultation to explain the buying process and keep you updated on the market as you get closer to making your home purchase.

Your realtor and lender are there to you as a resource. Ask them questions and utilize their services!

Year 2: Taking Action

Alright, now we're in the final stretch. You've laid the foundation in Year 1 to set you up for success in Year 2.

Now it's time to leverage all the hard work in Year 1 and stay consistent in Year 2 while taking massive action towards your future.

Strengthen Your Finances

I know... right now you're probably thinking "but I've already been improving my credit, budgeting, and increasing my savings!"

That's great, but now it's time to double-down.

Continue boosting your savings and building your down payment fund. Keep cutting non-essential expenses and consider taking on extra work to accelerate savings if needed. Revisit your budget as frequently as possible to meet your savings goals and keep you on track.

Avoid taking on any new debt at this point. Hold off on large purchases or opening new credit accounts. Buying that new car or financing the $6,000 memory-foam smart mattress you've had your eye on could throw off your DTI and put you back even further. Good things come to those who wait!

Get Pre-Approved for a Mortgage

Your lender will start out by gathering documentation such as pay stubs, tax returns, and bank statements. Your lender will assist you in determining what necessary documentation will be needed when applying for a mortgage.

Shop around to compare mortgage lenders to find the best rates and terms. While there is value in working with great local mortgage lenders, make them work for you to get the best terms and rates for you and your family.?

A pre-approval letter will help give you a clear undersanding of your purchasing power and how much home you can afford. If possible, getting conditional approval from your lender will help you better understand your buying power and potentially strengthen your offer to sellers when submitting offers to purchase your new home.

Start House Hunting

Up until this point, you may have visited an open house or two while doing your market search in Year 1. Now that you've been pre-approved for a mortgage, it's time to kick your house hunting endeavors into high gear!

Call up your realtor so you can strategize a game plan around your home purchase. They should be able to meet with you to discuss the home buying process in detail and be knowledgeable about homes in your desired area and budget. If not, you may consider hiring another realtor to help you.

Your realtor will help you set up a showing schedule to attend private showings and open houses to get a feel for the market. I also recommend you tour both resale and new construction homes with your realtor to better understand the market and what options work best for you.

Finding the right home can take time, so don’t rush the process. Depending on the market, there may be instances where your offer isn’t accepted the first time. Don’t lose hope, the right opportunity will come. Be patient!

Offer Acceptance

Once you do find the right home, you'll work with your realtor to draft up an offer and submit it to the seller. If the sellers agree to your offer, they will sign or "execute" the contract and you will be officially "under contract" on your new home.

Ok, now it's cruch time. You'll likely be in communication with your realtor, title company, lender and mortgage processor asking for a plethora of documents for you to sign and seemingly pulling you in completely different directions. After a few days, you may be ready to pull your hair out...

Take a deep breath. Don't panic!

Everything might appear hectic in the moment, but you'll get to the finish line. You have an entire team of professionals working to assist you every step of the way!

Prepare for Closing

Once you're under contract on your new home, you'll want to submit your earnest money deposit and option fee (for your buyer due-diligence option period) to the title company as soon as possible.

At the same time, you will also want to schedule a home inspection to ensure the property is in good condition before finalizing the purchase. You'll receive an inspection report from your home inspector on their findings and work with your realtor to negotiate any repairs or seller concessions in lieu of repairs during your option period.

Once your option period is complete and you've negotiated any repairs, it's time to review your budget to account for moving costs, utilities, and any minor repairs or renovations you'd like to make once you've moved in. Coordinate with the utility companies to know when they can transfer services over to you and don't wait until the last minute to schedule movers.

You'll also want to secure homeowners insurance as your lender will likely require insurance while the loan is in place. Reach out to your insurance agent during to obtain coverage for homeowners insurance. If you need help, your realtor and lender can recommend a few different insurance agents to reach out to.

Once your home appraisal comes back and makes value, you'll work with your lender to finalize the loan. Complete the final necessary steps with your lender to finalize your loan. This will typically take place a few days prior to your closing date. Once that is complete, you'll be one step closer towards closing on your new home!

Closing Day

On closing day, you'll likely attend the closing at the title company office with your realtor. Your title company representative and loan officer will provide your “cash to close” amount to bring to closing, typically in either a cashiers check or a wire transfer. Once you sign the closing documents at the title company and the purchase is funded, you'll receive keys to your new home.

Congratulations, you're now a homeowner! All of that hard work paid off!!

By following this two-year plan, you’ll be well-prepared to purchase your first home with confidence.

If you have any questions about the home buying process or anything real estate-related, feel free to reach out to me. I would be happy to help however I can.

Comment down below if you found this helpful and let me know any other topics you would like me to discuss!