Dreaming of owning your own home but not sure how to get started? We break down the task of home buying into seven simple steps.
Buying your first home is an exciting journey. It can mean having your own space and building equity for your future.
But there are a lot of steps between starting your journey and moving into a new home. Navigating the home-buying process can feel overwhelming. To try and simplify the process, we're sharing our top tips for how to become a homeowner.
Here are seven steps to guide you through the home-buying process.
Decide if you're ready to buy a home
For most people, buying a home means putting a big chunk of savings into the purchase and committing to live in one place for a few years. So, you want to decide if now is the right time to buy a house for you.
On average, U.S. housing prices have appreciated (increased in price) at a rate of 4.4% per year since 1991.1 Appreciation is what can help offset the transaction costs. The longer you stay in your home, the better your odds of making money when you sell it. If you use an online rent vs. buy calculator, you will usually see that buying is only a better option after about five years.
Calculate if you have enough income
While you're probably used to paying rent every month, having a mortgage payment for the next 30 years can feel a little more intimidating. To avoid getting in over your head, look at home prices in your area and run the numbers through a mortgage calculator to see what the monthly payment would be.
Determine if you have enough saved for a down payment
One of the hardest things to do when preparing to buy a house is to save up enough money. When it comes to how much you should have saved for a home, many people prefer to save up to 20% of the home's value for a down payment.
Saving that amount can bring down the monthly payment and helps you avoid paying private mortgage insurance (PMI). However, there are other options that we'll discuss below that can allow you to buy a home with just 3.5% down.
Get your credit in shape
It's not easy to get approved for any loan, especially a mortgage. Since the lender is providing a lot of money upfront, they need to feel confident that you'll be able to pay your mortgage every month and that you won't default on the loan.
You typically need a credit score of 620 or higher to be approved for a conventional mortgage. And the better your score, the lower your interest rate will be. The secured Chime Credit Builder Visa® Credit Card can help you build credit by making on-time payments for everyday purchases. Once you have a strong payment history, work on reducing your credit utilization to continue to work on your credit score.
Calculate your down payment and closing costs
When you apply for a mortgage, your lender or mortgage broker will ask you to show proof of sufficient down payment funds in your financial accounts (checking, savings, etc). Also, don't forget that you'll have to pay closing costs which can range from 3-6% of the home's value.2 To see if you have enough, add up your current savings plus any gifts or grants you expect to receive from family or other sources.
Calculate your debt-to-income ratio
Your debt-to-income ratio is one of the first things a mortgage lender will calculate to make sure you can afford a mortgage. Luckily calculating your DTI is easy.
Knowing it ahead of time will make you better prepared once you start determining which types of financing best fit your situation. To calculate your DTI, add up all your monthly debt payments and divide them by your total monthly income.
Consider your financing options
The most common way people finance their first home purchase is by getting a mortgage loan. There are multiple types of mortgage loans to choose from, but the ones below are the most common for first-time home buyers.
Conventional mortgage: Conventional mortgages are traditional mortgages, like those offered by banks and credit unions, and usually require a down payment of between 3% and 20% and a credit score of 620 or higher.3 Conventional mortgages are backed by government-sponsored entities such as Fannie Mae and Freddie Mac, and they usually have a range of interest rates available, depending on your credit score and other factors.
Federal Housing Administration (FHA) loan: An FHA loan can be a helpful option for lower-income or first-time home buyers. Getting approved for an FHA loan can be easier than other types of loans. If your credit score is 580 or higher, you can get approved with just a 3.5% down payment.4 If your credit score is 500-579, you can get approved with a 10% down payment.
Department of Veterans Affairs (VA) loan: This program makes home loans available to veterans of the U.S. military. Private lenders, such as banks and mortgage companies, issue these loans, but the VA guarantees a portion of the loan so you can get better terms. Unlike many other programs, you do not need a down payment, and there is no requirement to pay private mortgage insurance.
Are you ready to become a homeowner?
While the question of how to become a homeowner can seem complicated, breaking the task down into steps can make the process feel more doable. Start by asking yourself if you're ready for homeownership, then move on to figuring out your finances and mortgage loan options.
It will all feel worth it when you finally move in and start building memories in your new home!
Are you feeling ready to purchase a home? Learn how to choose a mortgage lender.