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 in between starting your journey and moving into a new home. Navigating these steps can feel pretty overwhelming. That’s why we’re sharing the tips below. The 4 steps below can guide you through this process.
- Decide if You’re Ready to Buy a Home
- Prepare for a Mortgage Application
- Consider your financing options
- Have a Backup Plan if Your Mortgage is Declined
Decide if You’re Ready to Buy a Home
For most people, buying a home means a commitment to live in one place for a few years and to put a huge percentage of their savings into the home. So, clearly, it’s important to know if you’re ready. Here are a few factors to keep in mind:
- Are you sure you’ll stay in the home for 5 years? Houses usually appreciate in value anywhere from 1-5 percent per year, and that is what can help offset the transaction costs. The longer you stay in your home the better your odds of making money whenever you sell it. If you use an online rent vs. buy calculator like this one, you will usually see that buying is only a better option after about 5 years.
- Do you have enough income? While you’re probably used to coming up with a monthly rent payment for your current accommodations, having a monthly mortgage payment for 30 years can be 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 like this one to see what the monthly payment would be.
- Do you have enough savings? One of the hardest things to do when preparing to buy a house is to save up enough money. Many people prefer to save up 20% of the home’s value for a down payment, because this brings 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.
Prepare for a Mortgage Application
It’s not easy to get approved for any loan, especially a mortgage. Since the lender is putting up a lot of money up front, they need to be confident that you’ll be able to pay your mortgage payment every month and you won’t default on the loan. Here are a few actions to help make it happen:
- Get your credit in shape: 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. A good tool to help you get there is the Chime Credit Builder Credit Card because it helps you build credit and potentially raise your credit score. One of the most important steps in working on your credit score is making sure that you don’t have any late bills outstanding. Once you have a strong payment history, work on reducing your “credit utilization.”
- 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 be anywhere from 2-5% of the home’s value. 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 (DTI): Your DTI is one of the first things that 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 simply add up all your monthly debt payments and divide them by your total monthly income.
Consider your financing options
The most common way that people finance their first home purchase is by getting a mortgage loan. There are multiple types of mortgages out there, but the ones below are the most common for first-time home buyers.
- Conventional mortgage: Conventional mortgages are traditional mortgages such as those offered by banks and credit unions, and will usually require a down payment of between 3% and 20%, and a credit score of 620 or higher. 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 great option for lower-income or first-time home buyers. It can be easier to get approved for an FHA loan than other types of loans. If your credit score is 580 or higher, you can get approved with just a 3.5% down payment. 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. These loans are issued by private lenders, such as banks and mortgage companies, 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.
Have a Backup Plan if Your Mortgage is Declined
If you look at your financial situation and decide you’re not ready to apply for a mortgage, there’s no harm in that. In fact, you can still move into a new home now with Divvy Homes. Divvy is not a mortgage, but it is a great option for those who are ready to take the first step toward homeownership. Here’s how the program works:
- You get to choose the home and move in immediately: Divvy’s program is unique because it’s a hybrid model that combines the benefits of renting and owning. The company actually buys the home of your choice and rents it back to you. Which means you can move in soon — as quickly as three weeks from now.
- Divvy helps you get mortgage-ready: Their mission is to make homeownership accessible to everyone. What that means is they want you to buy the home back from them within 3 years of moving in. They’re committed to helping you get approved for a mortgage in that timeframe.
- Divvy helps you save for a down payment: One thing that is different about Divvy is they put a portion of your monthly payment into a savings account that you can use to buy the home from them. That’s right — they help ensure that you’ll have funds for a down payment!
- Get access to a credit counseling program: All Divvy customers are given access to a nationally-recognized credit counseling service that can help you get your finances back on track so you can improve your credit score.
- Have 3 years to apply for a mortgage: With Divvy, you’re living in the home of your dreams. That takes the urgency out of submitting a mortgage application and gives you plenty of time to get all your finances in order so when you finally apply everything goes smoothly. Instead of stressing out, you can live in the home while you prepare.
If you are interested in learning more about Divvy’s program, you can sign up at DivvyHomes.com and get pre-qualified. Their team will be happy to answer any questions you may have and discuss the details with you.