Considering buying a home in the next 5 years? Here are 5 things to do to prepare

Buying a home is probably one of the biggest purchases you'll make in your life, so it's understandable to feel stressed or nervous about making a mistake. The good news is there are steps you can take today to set yourself up to be in the best position possible come homebuying time — even if you're still a few years away from making the move.

CNBC Select asked experts for their best advice for those who are around five years away from buying a home. Read on for their tips.

Like with any major financial move, it's important to evaluate where you are before you move forward. Purchasing a house when you aren't ready to be a homeowner can come with dire (and expensive) consequences.

"Before starting any homebuying conversation, assess how much income and savings you have," explains CFP Jay Lee, founder of Ballaster Financial. "This will provide a good starting point when estimating a target purchase price. Also, assess how much savings you have so you can start planning toward a target down payment based on the prior exercise."

Lee also explains that when figuring out a reasonable purchase price for a home, you should aim to spend no more than 28% of your income on housing payments. This is what's known as the 28% rule and it typically applies to your gross monthly income. For example, if your gross monthly income is $5,000 and you're following the 28% rule, that means you should spend no more than $1,400 on your monthly mortgage payment, including principal, interest, insurance and taxes.

Sitting down with a financial planner can be a good first step to help you both organize your numbers and better understand them.

When applying for any form of credit — mortgages included — lenders look at your credit score to determine how good of a borrower you may be; the higher your credit score, the greater likelihood in the lender's eyes that you'll pay back the loan. A good credit score will also allow you to qualify for lower interest rates on your mortgage, which can save you significant money over the loan's term.

"The number one financial move you can make in preparation for buying a home in five years is to focus on your credit score," says Kyle Simmons of Simmons Investment Management. "This is perhaps the only guaranteed way to reduce the cost of your home."

Experian is a popular service for accessing your credit score for free. It reports your FICO® Score, which is a type of credit scoring model. It's common for mortgage lenders to use the FICO Score 2, FICO Score 5 and FICO Score 4 models to assess your creditworthiness when you apply for a home loan.

Knowing your credit score is the first part, but then you have to focus on bettering it. Here are some easy tips to help raise your credit score:

1. Pay down existing debt: Paying off debt helps to keep your credit utilization rate low, which is ideal for a good credit score. Your credit utilization rate is the percentage of total available credit you've used; the lower, the better. To calculate it, you'll add up all your outstanding credit balances and divide that by your total credit limit. Then, you multiply that number by 100 to get a percentage.
2. Pay your monthly bills on time: Your payment history is the most influential factor in your credit score calculation since it conveys your ability to keep up with your debt. This typically means you should pay your mortgage and other bills on time, but you can also have some subscription payments (like streaming services), Wi-Fi bills and your phone bill factored into your credit score if you're using Experian Boost™, which is a free feature. Linking those bill payments lets you see an increase in your credit score if you've been making on-time payments already.
3. Pay attention to any negative items on your credit report: Certain negative items can make it harder for you to get approved for a mortgage, and you may spot errors that are hurting your credit score.

"Negative items such as late payments can remain on your credit report for up to seven years and Chapter 7 bankruptcies can linger for up to 10 years, so take a good look at the timing of these items," Simmons explains. You'll also want to keep an eye out for foreclosures, missed payments and closed credit accounts, which can all be seen as negative items on your credit report.

If you think you might want a house one day, the time to start saving for homeownership is now. Don't wait until you're a year out from wanting to buy a home to start scrambling for extra savings. It's better to err on the side of flexibility by starting to save well in advance — and to start saving as much as you can.

Of course, your circumstances impact how much money you can reasonably start saving. If you pay rent and are responsible for all of your other expenses, chances are you won't be able to save as much as someone who is living at home with their parents, for example. You may consider creating a more financially flexible living environment if it makes the most sense for your needs.

"Consider living with family or roommates for as long as possible," says CFP Ron Strobel of Retire Sensibly. "This is often hard to do as an adult, but it can be an immense help when saving for a down payment toward today's highly priced homes. The short-term inconvenience can put you in a position to be a more competitive buyer in the future."

If moving in with family or getting a roommate aren't the most desirable options for you, consider finding ways to increase your income or find other ways to cut back in your budget.

Where to keep your down payment funds

That money you're saving up for a future down payment should be deposited into a savings vehicle that allows for two qualities: accessibility growth.

"This could include high-yield savings accounts, money market funds, CDs or bonds," says Julia Colantuono, a financial planner and investment manager at One Financial Design. "Avoid investing that portion of your money into the stock market since you will ultimately use it in the short term, and we can't predict what the stock market will be doing in that relatively short time frame."

The Marcus by Goldman Sachs High Yield Online Savings is a top pick for no fees, offering zero overdraft fees, zero monthly maintenance fees and zero excessive transaction fees. The Ally Online Savings Account is another strong option since it offers a checking account option, which not many high-yield savings accounts have. Without the checking account option, you'd have to transfer your money between different banks, which could take a couple of days. The checking account option gives you more expedient transfers.

One of the most impactful things you can do when you're a few years out from buying a home is connecting with a loan officer. A mortgage loan officer can help you get familiar with the homebuying process and can help you foresee any major considerations you'd need to make.

"Most banks and credit unions will have loan officers in-house who will happily explain the process to you," Strobel says. "It's never too early to start educating yourself on what will be required both from a financial perspective and as far as documents are concerned when applying for a new mortgage."

What's especially helpful is if the loan officer can provide some insight into how you can start improving your financial standing to qualify for better rates and better mortgage terms when you're finally ready to buy a home. There are specific home loan programs and lenders that can suit certain needs.  

For instance, Chase Bank offers a loan option called the DreaMaker℠ loan that allows homebuyers to make a down payment that's as low as 3%. (By comparison, a government-insured FHA loan requires borrowers to make a 3.5% down payment). The DreaMaker option comes with stricter income requirements compared to other loan types, however; the annual income used to qualify the customer must not exceed 80% of the Area Median Income (AMI), according to the Chase team.

Other lenders offer specialized loan programs for certain borrowers. PNC Bank, for instance, offers a special loan for medical professionals who are looking to buy a primary residence. With this loan, medical professionals can apply for as much as $1 million and won't have to pay private mortgage insurance (PMI), regardless of how much of a down payment they make. Typically, when you make down payments of less than 20%, PMI payments are required until you've built up at least 20% equity in the home. At that point, the PMI may be waived. PMI can run you anywhere from 0.5% to 1.5% of the loan's value per year.

Remember to think about your personal needs when going into the homebuying market. This can greatly impact what your costs may look like. Do you prefer a home that's closer to the city you work in or does a longer commute not bother you? How many bedrooms is right for your family? Do you plan on being a multi-generational household?

"Ultimately, consider your personal situation and what you're looking to gain from buying a home," Colantuono says. "It's important to know the financial side of it, but it's even more important to make decisions based on what truly matters to you."

It's never too early to start thinking proactively about one of the biggest purchases you'll ever make. Even if you don't plan on buying a home for another five years, taking the above five steps will pay off when you finally do buy that home.

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