Work backward from the offer: a year out fix the credit reports and stop opening accounts, six months out get the cash into one account and leave it there, three months out gather the documents and get pre-approved, and only then start looking, because a pre-approval letter is what turns a nice house into an offer.
Preparation is mostly the removal of surprises. A lender is going to read your credit, your income and your bank statements, and every one of those improves with a few months of leaving it alone. The people who have a hard time buying are usually the ones who did the right things in the wrong order.
The sequence below assumes about a year, and compresses to three months if the credit and the cash are already in decent shape. General information rather than lending advice.
Twelve months out: credit and debt
Pull all three credit reports, free at annualcreditreport.com, and read them for errors rather than for the score. A collection that is not yours, an account showing as open that you closed, a late payment that was not late: disputes take thirty to forty-five days each, which is why this is the first thing and not the last. The score itself moves slowly and mostly through paying on time and lowering the balances on revolving accounts.
Then stop opening things. A new card, a financed sofa, a car loan and a credit inquiry all move the debt-to-income ratio, and that ratio is what most declines are about. Lenders commonly want all debts including the new housing payment under about 43 to 45 percent of gross income on a conventional loan, with some programs going higher with compensating factors. Paying off a small installment loan lifts the ratio more than paying down a large one, because it removes a monthly payment rather than a balance.
Six months out: the cash, in one place
Underwriting reads two months of statements on every account you use for the purchase. Money that has been sitting in one account for those two months is seasoned and needs no explanation. Money that arrives in the middle of it, from a relative, from a sale, from a second job paid in cash, needs a paper trail, and assembling one after the fact is the most common cause of a delayed closing.
So decide early which account is the buying account and move everything into it now. Sell what you are going to sell now, and take the gift now, with the letter. The target is four piles: down payment, closing costs, prepaids and a reserve, plus about $1,000 for the earnest money and inspection spent before closing.
Three months out: documents, pre-approval, and the market
The document set barely changes between lenders: two years of W-2s or 1099s, two years of tax returns if you are self-employed or commissioned, the last thirty days of pay stubs, two months of statements on every asset account, photo identification, and an explanation for any gap in employment. Scan them into one folder before you talk to anybody.
- Get a written pre-approval, not a prequalification. A pre-approval means a human has read the documents; a prequalification means a form was filled in. Sellers can tell the difference and so can their agents.
- Compare at least three lenders on the same day, using the loan estimate each one issues. All credit pulls for a mortgage inside a short shopping window count as one inquiry.
- Learn what your number buys where you are actually looking, by watching sold prices rather than asking prices, for four to six weeks before you need to decide anything.
- Choose the agent while you have time to be picky, and be direct about the price range and the parts of the process you want explained.
- Keep the file frozen from here to closing: no new accounts, no large deposits, no job change, no paying off a collection without asking the lender first.
The parts people skip
Budget the ownership, not the purchase. Maintenance commonly runs one to two percent of the home's value a year averaged over time, arriving in lumps rather than monthly. Association dues, where there are any, are part of the payment a lender counts and part of the bill forever. In the Las Vegas valley property tax is low relative to most of the country, but a buyer's first bill is commonly higher than the seller's last one because the abatement cap resets on sale.
And decide how long you plan to stay before deciding what to buy. Selling costs commonly take eight to ten percent of the price, so a home held two years usually has to appreciate to break even. That number settles more buy-or-rent arguments than any of the others.
Questions people ask
How long before buying a house should I get pre-approved?
About sixty to ninety days before you want to be writing offers. A pre-approval is commonly good for sixty to ninety days and can be refreshed, but getting one earlier tells you what to fix while there is still time to fix it.
What should you not do before buying a house?
Open a credit account, finance a car or furniture, change jobs, move large sums between accounts without a record, or let a payment go late. Each one either raises the debt ratio or creates a document the underwriter has to chase.
What credit score do I need before I start?
There is a floor and there is a price. FHA lends well below 600 and VA sets no program minimum, but the rate and the mortgage insurance both improve as the score rises, so the months spent lifting it are paid back monthly.