Buying a home is a life-changing decision. You don’t just decide one day, “I think I’ll go buy a home.” Even when you’re car-shopping, you do the advance work to make sure you get the right vehicle at the right price. With a much bigger investment looming on your horizon, learn how to prepare to buy a home in the future.

Whether that future is foreseeable or down the road a bit, it’s a good idea to know what’s involved in making an offer and having it accepted. Let’s take it step by step.

Step 1: Review your credit report.

Unless you plan to pay cash for your new home, you’ll need to apply for a mortgage. Once you apply, lenders will first check your credit report. Before they look at your credit history, you should review it yourself.

There are three major credit reporting bureaus that lenders use: Equifax, Experian, and Transunion. Generally, a lender will request the report from just one bureau.

What does a credit report say about you? It provides information about your debt and how you manage it. Based on your activity, the credit bureau determines a credit score for you, between 300 and 850. The higher the score, the better your creditworthiness. Here’s what the scores mean:

Less than 500 High risk

500 to 579 Bad

580 to 619 Poor

620 to 679 Average

680 to 719 Good

720+ Excellent

Your credit report shows the following information:

Personal information: Name, address (current and former), date of birth, social security number, and phone number(s) are in your report.

Credit accounts: Current and past accounts, including credit cards and loans (student, car, home, personal) are listed. This section of the report lists the name of the creditor, the date the account was open and closed (if applicable), your current balances, payment history, and account limit.

Collection items: The information in this category shows if you’ve defaulted on a debt or made late payments, which includes child support. If you’ve been late paying rent and your landlord reports it to the credit bureau, that black mark will show up on your report. It’s important to know that ANY creditor can submit reports to a credit bureau!

Liens and judgments: Do you have public records that show current or past bankruptcy, liens, foreclosures, or civil suits and judgments? If so, a lender will see them here.

Inquiries: Every time you apply for credit, the lender accesses your credit report. It’s referred to as “pulling” your report. There are different types of inquiries: hard and soft.

A hard inquiry is made with the purpose of extending credit, which shows that you are looking to borrow money from other lenders. In some cases, that action will lower your credit score.

A soft inquiry is more of a quick look than an in-depth review with the intent to provide you with credit. A soft inquiry could be when you go shopping for an interest rate or a lender is pre-screening you but not directly planning to make a loan determination. A soft inquiry does not affect your credit score.

It’s important to know that your credit score may vary from one credit reporting agency to the next. That’s because not every creditor reports to all of them. In addition, different credit reporting agencies may use different formulas for determining your score.

Plus…never assume that your credit report is accurate! Mistakes happen. Someone else’s history could show up on your report. There could be defaults, claims, and collections you didn’t even know about. Once a year, you can get a copy of your credit report for free. Visit AnnualCreditReport.com to get yours—and review it carefully!

Step 2: Work on your credit score

What credit score do you need to buy a home? A high score (720 or above) will get you a better interest rate, but you might still qualify for a mortgage with a lower score.

As you consider how to prepare to buy a home in the future, one of the most important goals you should tackle is building your credit score.

How can you improve your credit score? Let’s look at what contributes to your score so you can see where your best opportunities lie.

Payment History: 35%

Paying on time and consistently has the most impact when you’re trying to improve your credit score. Set up autopay wherever you can to ensure that your payments don’t slip through the cracks. Every delay or default chips away at your score and puts you further behind. Black marks like these stay on your report for at least a year, so one little oversight can hurt you.

Total Amount Owed: 30%

Your total debt represents another large factor in your credit score. Lenders look at your debt-to-income ratio (DTI). This number shows how much debt you’re carrying in comparison to your income. The DTI helps a lender determine whether you can afford to make the loan payment. A high DTI means you’re carrying too much debt for the income you’re bringing in.

DTI is calculated by taking your gross (pre-tax) monthly income and dividing it by your total monthly debt (the sum of your loan payments, minimum credit card payments, and mortgage). Lenders look for a DTI around 36%. If you have excellent credit, but your DTI is higher than 36%, you might still qualify. Never guess about the lending process. Talk to a professional!

Length of Credit History: 15%

How long have you been managing your credit? People who are new to credit don’t have enough solid proof of their creditworthiness. The longer you demonstrate responsible debt management, the more points you’ll get on your credit score.

New Credit: 10%

How often have you applied for new credit? If you frequently look to add credit cards, a lender might consider that you’re experiencing financial problems. It appears that you need more money. Be careful about opening new accounts when you’re planning on buying a home.

However, here’s one reason it might help. A new credit line increases the amount of available credit. If you are a bit tight on your credit cushion, think about adding one credit card, but then don’t use it. Keep that extra credit showing as unused.

Credit Mix: 10%

The credit mix represents the types of credit. Installment credit is a loan for which you commit to a fixed payment every month. Credit cards are considered revolving credit, because the amount you pay each month varies. You should carry a mix of both installment and revolving credit.

Step 3: Save up for a down payment

You’ve probably heard that you need to pay 20% of the purchase price as a down payment when buying a home. While that might be doable for someone who is selling their current home and is carrying equity from the sale, the amount can be a challenge to a first-time homebuyer.

Luckily, 20% is not required.

On average, first-time homebuyers come to closing with a down payment of 6% to 7%—considerably less than the 20% figure, and their are options that allows less down, including some zero downpayment loans. Certainly, the more money you put down, the less you finance. In addition, with a down payment that’s less than 20% of the purchase price, the lender will require private mortgage insurance (PMI). The coverage protects the lender if you default on the loan. When you’ve paid enough to achieve 22% equity in your home, you can cancel the mortgage insurance, with a few exceptions. An FHA home loan, for example, must be refinanced to get rid of the PMI.

The premium for mortgage insurance ranges from 0.2% to 2% of the loan amount, and it’s included in your monthly mortgage payment.

How can you save up enough for the down payment on a house? Start by looking at your expenditures. Review your credit card and bank statements. How much are you spending on entertainment, including dining? Do you regularly have meals delivered? How about clothing and hobbies? What are you paying for streaming services? And could you perhaps save money by switching your phone plan or carrier?

If you’re serious about buying a home, set a savings goals and check your progress every month. Give yourself a budget for the non-essential expenses—and stick with it.

Step 4: Decide what you can afford

The next step in how to prepare to buy a home in the future is absolutely critical. How much can you realistically afford to buy and own a home? Use a mortgage calculator to get an estimate of the mortgage. Your monthly payment includes:

• Loan principal and interest: Referred to as P&I, this is the balance due on the loan amount.
• Property tax: This tax is paid to your local government and is usually included in the mortgage payment, but not the mortgage itself.
• Homeowner’s insurance: Your lender will want to know that the property they are financing is fully covered by the appropriate insurance.

If your down payment is less than 20% of the purchase price, the PMI will also be included in your mortgage payment. Homeowner’s association (HOA) fee might also be added to your monthly payment.

The mortgage, however, is just part of the cost to own a home. You’ll need to estimate utilities and maintenance (such as lawn care). Are you buying a new construction home that’s fully warrantied or a resale home that might require repairs? Don’t underestimate the expense or you might end up with a home you can’t afford to maintain.

Step 5: Research home loan programs

Home loan programs cover a wide—very wide—range of criteria and options. If you are turned down by one lender, keep looking. Some lenders aren’t willing to work as hard as others to find a mortgage program that fits your financial situation.

Maybe you don’t have a large down payment and your credit isn’t great. Look into Federal Housing Authority (FHA) home loans. With as little as 3.5% down and a credit score of 580, you might qualify to buy a home! These loans are guaranteed by the government and designed to help first-time homebuyers.

If you’re a veteran or the surviving spouse of someone who served, check out the Veterans Affairs home loan program. If you qualify, you can buy a home with NO down payment and at a competitive interest rate. You might even get the closing costs covered.

The path to homeownership might have a few detours, but don’t be discouraged!

Step 6: Get pre-approved

Imagine you’ve gone through the first 5 steps that cover how to prepare to buy a home in the future. You go house-hunting and find the perfect place! You make an offer and it’s accepted. How exciting!

But then you discover you don’t qualify for a loan to cover the purchase.

This is why Step 6 must never ever be overlooked. Getting pre-approved for a home loan is a simple step that confirms whether you qualify for a home loan and approximately how much you can expect to borrow. A short conversation with a lender and providing some basic financial information—like proof of income, bank statement, income tax returns—can get you an answer within a day or two. They’ll pull your credit report (remember Step 1?). You’ll then receive a letter that states you are pre-approved and the amount. You give this letter when submitting an offer, which tells the seller you are both serious and qualified to buy their home.

Mortgage pre-approval is a reasonable estimate but not a guarantee. It’s a snapshot of your creditworthiness at the time you requested pre-approval from the lender. Things might change, like losing your job or other source of income, or you incur an unexpected debt.

Once your offer is accepted, you go through the underwriting process for the loan, which is a more exacting examination of your financial situation.

Are you ready now?

Where are you in the process of preparing to buy a home? Are you ready to start shopping? If you’re focusing your new home search in the Raleigh area, New Home Inc. would like to take you to the next step.

We are building communities of new homes for sale near Raleigh—townhomes and single-family homes—in popular and affordable cities and towns, like Angier, Clayton, Fuquay-Varina, Lillington, Smithfield, and WIllow Spring. You can have an easy commute to Raleigh and afford more in your home and with a bigger yard in these areas!

These new construction homes also showcase our Future-Proof approach to designing homes and building communities. We’ve researched what people want in their new homes, and elevated our list of included features to a higher standard. As a result, you get more for your money: more comfort, convenience, and value.

Here are some of the features New Home Inc. offers our homebuyers.

• Smart home technology: Your home includes a smart home security system (video doorbell, smart lock), smart home network panel, and smart thermostat.
• Smart door delivery center: This fully enclosed space is between your exterior and interior front doors and secured by a smart lock to protect your packages.
• Electric vehicle charging station rough-in: Whether you currently own or plan to buy an EV, we’ve set up a charging station behind the wall so that completing the installation is simple.
• Energy efficiency: New Home Inc. builds our homes according to the high standards and requirements of ecoSelect Home Efficiency Program to earn their certification.
• Improved indoor air quality: Your home includes a whole home air filtration system, because clean air should never be an option.
• More kitchen seating: Our oversized kitchen islands provide seating on 3 sides to accommodate more people as well as more workspace.
• Extra pantry: The “messy kitchen” service pantry adds a serving, storage, and clean-up space beyond your kitchen, reducing the clutter and traffic.
• Stronger connectivity: CAT6 cabling is used in all of our homes, giving you stronger, more reliable connections throughout your home, without dead zones.

Contact New Home Inc. to explore our growing inventory of new homes for sale near Raleigh. You can choose one of our quick move-in homes, brand new and ready for you. Or choose a homesite in one of our communities and a floor plan and let New Home Inc. build your home to your every detail.