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How To Become a Homeowner: 7 Steps to Get Started

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.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.

Ready to put your savings to work? Open a Chime high-yield savings account* to watch your money grow.

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.

FAQs

How does owning a home make you money?

As a homeowner, you can make money in several ways:

  • Home appreciation. Over time the value of a house tends to increase. The longer you stay in your home, the better your odds of making money when you decide to sell it.
  • Building equity. As you continue to pay off your mortgage, you build equity in your home. Home equity is the difference between what you owe on your home and its worth.
  • Mortgage interest deductions. As a homeowner, you can deduct the interest you pay on your mortgage debt.
  • Rental income. If you have extra space in your home, you might rent it out to a tenant to bring in some income.

Is being a homeowner worth it?

Whether or not homeownership is worth it depends on several factors. From a financial perspective, home ownership is worth it if you build up home equity and sell when prices are high. However, you could lose money if you don’t build enough equity and sell when the market is low. Homeownership may also be worth it from an emotional perspective if owning a home is something you value and have always wanted.

What to expect in the first year of owning a house?

During your first year of homeownership, you can expect to spend time unpacking, cleaning, and setting up your new space. You might take on some DIY tasks, such as painting or landscaping to personalize your home.

In your first year, it can be helpful to keep a budget and track your expenses so you have a good idea of your monthly bills. If you don’t already have an emergency fund, consider starting one to prepare for unexpected home repairs or expenses.

What are 3 disadvantages to owning a home?

  1. It’s expensive. From saving up for a down payment to paying property taxes, insurance, and maintenance costs, owning a home is expensive.
  2. It’s a big responsibility. If your fridge stops working or your toilet backs up, there’s no landlord to call. You are responsible for maintaining your home, which requires time and money.
  3. It’s a major commitment. When you own a home, you’re somewhat tied to that location. If you want to move, you must sell your home, which can be expensive and time-consuming.

What are 3 benefits of owning property?

  1. Build equity. Home equity is the difference between what you owe on your home and its worth. As you continue to pay off your mortgage, you build equity in your home. You can borrow from home equity as a loan or use it to build wealth over time.
  2. Create stability. Owning property can provide a feeling of stability and consistency. You never have to worry about your landlord selling your home or raising your rent. Plus, with a fixed-rate mortgage, you know exactly how much your monthly payments will be.
  3. Feel a sense of accomplishment. If owning a home is something you’ve always dreamed of, then one of the most significant benefits may be the pride you feel about having a place to call your own.

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1 Information from Federal Housing Finance Agency's "House Price Index (HPI) Monthly Report" as of July 15, 2023: https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA-HPI-Monthly_06272023.pdf

2 Information from Quicken Loans "Closing Costs: What Are They and How Much Will You Have to Pay?" as of July 15, 2023: https://www.quickenloans.com/learn/closing-costs

3 Information from Freddie Mac Home's "Down payments & PMI" as of July 15, 2023: https://www.quickenloans.com/learn/closing-costs

4 Information from Federal Housing Administration's "Minimum Credit Scores for FHA Loans" as of July 15, 2023: https://www.fha.com/fha_article?id=200#

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