The homeownership rate ticked up more than 2 percentage points in the last year, to 67.4 percent. And there are many renters eager to join the club, especially since mortgage interest rates dropped to all-time lows during the coronavirus pandemic.
For first-time homebuyers, the process of becoming a homeowner can be intimidating. It’s a big purchase that comes with a host of responsibilities and costs. But, it’s also a long-term investment that can help secure your financial future.
For some, it might take longer to achieve the American dream — especially if you have existing debt, live in an expensive area or are just starting your career — whereas others may have all the pieces in place to buy a home already. Regardless of how much you earn or what you have in the bank, it’s always a good time to start thinking about buying a home.
Becoming a homeowner is one of the most important decisions people make in their lifetime. It's not easy, but it can be done with some hard work and dedication. In this article, we will discuss how to become a homeowner from finding an affordable home to finally signing on the dotted line.
Here we break down what you need to do to achieve homeownership in 2024 or beyond.
How Much Will a Mortgage Cost You?
Every major purchase should begin with a carefully-constructed budget, which should include your debt, income and assets. You should include how much you need to bring to the table in order for this purchase to make sense.
First-time homebuyers often have more debt than they do income, which makes it necessary to start with a “bare bones” plan of how money will be spent on housing and other expenses before jumping into homeownership. Having a plan to get out of debt is often necessary.
You’ll also want to realistically assess costs associated with homeownership. For example, how much will it cost to maintain your home?
Make sure you have enough available monthly income so that your mortgage payments, property insurance, taxes and homeowners association fees are manageable.
To get a clear picture of what you can afford and how much you have available for a downpayment, select the mortgage amount you're likely seeking to determine your monthly payment using a mortgage calculator:
- How Much a $200,000 Mortgage Will Cost You
- How Much a $300,000 Mortgage Will Cost You
- How Much a $400,000 Mortgage Will Cost You
- How Much a $500,000 Mortgage Will Cost You
- How Much a $550,000 Mortgage Will Cost You
- How Much a $600,000 Mortgage Will Cost You
To help you choose the best mortgage lender, Credible offers an online easy application to help you get a home loan with the best terms.
With Credible's lending marketplace, you can fill out a simple, streamlined form, and instantly see which lenders you prequalify for and at what rates. These are personalized, prequalified rates based on your credit history. Checking your prequalified rates with Credible will not affect your credit score.
- Credible makes getting a mortgage easy. It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter.
- Get prequalified in just 3 minutes without impacting your credit score.
- Compare rates from multiple lenders without your data being sold or getting spammed.
How to Find an Affordable Home
Would-be buyers in expensive areas may need to think creatively about how to buy a home. For example, if you live in a high-cost area and are planning to buy a home for your family you can try getting an FHA loan or find a seller willing to do a ‘rent to own'.
A rent to own is when a tenant rents the house for an extended period of time and then, after all those months are up they can purchase it. You'll still need to make monthly payments on rent as you would owning your own home but how much is different depending on how many years you're renting the property before the home purchase.
It's often less expensive than buying up front, or you can also find a seller willing to give a private mortgage. Or you may have to look for a smaller home in a more affordable area or a condo.
Related: How to Live Mortgage Free
The Ideal Credit Score To Buy a House
In order to qualify for a mortgage, you have to show the lender how your credit score stands. Your credit score is based on how well you handle managing debt and how much of it you have outstanding at any given time.
In general, in order to obtain a mortgage to purchase a house, you'll need a credit score of at least 620. That's the minimal credit score requirement that most lenders demand for a conventional loan. It is still possible to acquire a loan despite having a lower credit score, such as having a credit score in the 500s.
If you don't know your credit score, you can request a free credit report from each of three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228.
It's important that these numbers are good in order to get approved for a mortgage so make sure there are no late payments on your credit report and that you're paying off any balances as soon as possible.
How to Improve Your Credit Score
First of all, start by checking for errors on your credit report before applying for loans or mortgages. You can get one free copy from each of the three bureaus once every 12 months so you can face any looming obstacles head on.
If you want to improve your credit score, there are a few things you can do:
- Make certain you pay your bills on time, even if that means making minimum monthly payments.
- Reduce your credit card debts to keep your overall credit use low.
- Don't close old credit card accounts or apply for too many new ones.
But there are also steps you can take to establish credit history and improve your credit score, by getting out of debt or building your credit with a debit card like Extra.
Common Misconceptions about Homeownership
There are many misconceptions about how difficult it is to become a homeowner. It's important to understand the facts before you start and how they apply to your individual situation so that you don't get overwhelmed or discouraged.
If you have less than 20 percent saved for a down payment, you should add private mortgage insurance, also called PMI, to the list of housing costs when you’re figuring your budget.
Low income families can get down payment assistance from the government and non-profits. Before you go all-in with your house hunting. Decide if now is the right time for you to buy a home.
In any event, mortgage rates are currently at a historic low, the average rate on 30-year mortgages stood at 3.04 percent this week, unchanged from last week, according to Bankrate’s weekly survey of large lenders. If you’ve been thinking about becoming a homeowner, it may be time to take the plunge and buy now before interest rates rise again.
Most first-time buyers have to dip into savings or investments to have enough for a down payment or earnest money. And if you have credit card or student loan debt, be aware that some lenders may not approve your mortgage application because of how high the total monthly payment is.
Don't wait to start saving for a down-payment on your home. The sooner you begin cutting expenses and putting money towards this goal, the easier it will be for you to become a homeowner.
How to Choose the Best Mortgage for You
It’s important to determine the kind of mortgage you want as well as what you qualify for especially as a first-time buyer.
There are several types of mortgage programs available, but most people go with a fixed-rate loan that offers lower rates than variable-rate mortgages in the long run.
You also need to decide whether or not you want a conventional loan or an FHA loan. Here are some of the most popular homeowner programs:
Best for borrowers with a good credit score.
Best for borrowers who want the predictability of the same payments throughout the entire loan.
Best for borrowers who do not plan to stay in the home for a long time, and are comfortable with the risk of larger payments down the road.
Best for buyers with weaker credit.
Best for no down payment loans for borrowers with a military connection.
Best for 100% financing on rural properties.
The most popular type of mortgage is the fixed-rate, 30-year — but that's not always right for everyone.
For example, if you’re self-employed and want to take out $200K to invest — it will be impossible with this kind of loan because they require borrowers to be able to show how they will make their mortgage payments in the long term.
You should also keep in mind what kind of property you’re looking for and how much money you want to spend on a home, as well as other factors like how often you plan on moving or how many people are living with you.
For new homebuyers, finding the right mortgage can be a challenge. Having a real estate agent or mortgage brokers help you navigate the process of finding loans is an excellent way to get started.
Buying A House: A How-To Guide in 9 Steps
Buying a house is likely to be the biggest financial commitment that you will make for your entire life, and while the experience can be both exciting and nerve-wracking, it’s important to get it right in order to avoid excessive extra costs in the future. Don’t buy a home without reading this.
When it’s your first time buying it can be a little overwhelming, with lots of unknowns, legal wranglings, and lists of things to do in order to get the keys to your first home.
A few essentials you’ll want to do straight off include:
- Check your credit and strengthen your credit score
- Find out how much you might be able to borrow
- Save for down payment, closing costs
- Build a healthy savings account
- Get preapproved for a mortgage
- Start speaking to realtors and finding one you like and is recommended
- Find suitable mortgage lenders
- Buy a house you like
Luckily, when you’re ready to make your first move, we’ve got this extremely thorough home buying guide to walk you through the must-do’s of your first purchase.
The History Of American Mortgage
Before the subprime mortgage crisis of 2008-2009, just about anyone could get a mortgage (or two or three). Lenders pushed “sub-prime” loans on people with poor credit knowing they probably could not keep up with the payments and would default on their loans and lose their homes.
The lending habits were not healthy and this led to a sharp increase in those high-risk mortgages ending up in default. This contributed to the most severe recession in decades. Some have blamed lenders for inappropriately approving loans for subprime applicants, despite signs that people with poor scores were at high risk for not repaying the loan.
By not considering whether the person could afford the payments if they were to increase in the future, many of these loans may have put the borrowers at risk of default.
Nowadays, it is important to do your research first and make sure you’re financially prepared to take on a mortgage payment.
In order to get a solid grasp on the terms and processes of buying a home. Take the time to understand the process and requirements of being a first-time homebuyer:
1. Do the research
Getting approved for a mortgage you want is primarily staying within certain ratios underwriters use to determine how much you are able to afford for a mortgage payment. Large monthly debt payments such an auto loan or student loans will generally limit the amount of the mortgage approval you are qualified for. It is smart to pay these debt payments off first or avoid taking any new loan payments prior to applying for your first mortgage.
Your credit score and any credit issues in the past few years:
In order to get approved for a mortgage loan, you should have a good credit score. Need to fix your credit score? It takes a few seconds to pull your credit report and order your credit score. A low credit score can prevent you from being approved for a mortgage loan. It goes without saying that credit scores and credit activity play a major role in your application being approved.
Let’s talk figures: According to the HLLC (Home Loan Learning Center), many mortgage lenders require a minimum credit score of 680 (620 for FHA mortgage loans) – and if your score is below 680, mortgage lenders can easily deny your request for a conventional mortgage loan.
How much cash you can put down:
You will also need a down payment and the amount usually varies depending on the type of loan and the mortgage lender. Each lender has its own requirements, but on average, you’ll need at least a 3.5% down payment. So if you are buying a $200,000 home this would be $7,000. Typically you would want to aim for a higher down payment though, if possible.
If you are not able to pay 20% down, ask your lender if you qualify for assistance from the FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services. A 20% down payment would allow you to not only have a lower mortgage balance, but could forego having to pay private mortgage insurance (PMI).
This is important because if you have PMI then your monthly mortgage payment would be higher. PMI guarantees your lender will get paid if you are unable to pay your mortgage payments and you default on your loan.
Shop for loan programs:
Wait — why would I shop for a mortgage before deciding on a house? Isn't that totally backward? Not necessarily. Shopping for a mortgage before you decide on a house can be beneficial for one overriding reason:
- You'll know exactly how much you can borrow before you buy your home. Too many people fall in love with a home that they — well — can't afford. They struggle to find a mortgage that covers the cost of the home. Finding a mortgage first and a home second is decidedly less sexy, but it's twice as smart. You'll immediately be able to tell whether a home is in your price range or out of it.
- Think about the sort of down-payment you'll be able to afford. This should be part of your mortgage calculations, although you don't need to know for sure when shopping for a mortgage. Have a general idea in mind. More on this later in the article.
- Want to see what rates are available to you in a matter of 2 minutes? You can easily compare offers from up to 5 mortgage lenders by visiting our best mortgage lenders page.
2. Prepare the paperwork
Get all the necessary documents like work history and gross income details together before applying for pre-approval to help expedite the process. I used to compile all these documents so I know them by heart. These include:
- W-2 forms from the previous two years, if you collect a paycheck.
- Profit and loss statements or 1099 forms, if you own a business.
- Recent paycheck stubs.
- Most recent federal tax return, and possibly the last two tax returns.
- A complete list of your debts, such as credit cards, student loans, auto loans and child support payments, along with minimum monthly payments and balances.
- List of assets, including bank statements, mutual fund statements, real estate and automobile titles, brokerage statements, and records of other investments or assets.
- Canceled checks for your rent or mortgage payments.
3. Find a lender
Talk to your bank or credit union. If you have a good relationship with your current financial institution, it makes sense, to begin with, a quote from them. If you have a long relationship with them, you should know whether they are a reputable institution.
However, it is important to shop around for other options. A good place to start is with friends and family. Ask who they received their mortgage from and if their experience has been good. If so, talk to the lenders that they work with and ask about their rates. Tip: Generally credit unions have the lowest interest rates.
4. Get pre-approved
Apply for a pre-approval for your loan. Make sure you do this before you start looking at homes so that you're prepared to make a purchase. The pre-approval process is fairly simple: Contact a mortgage lender, submit your financial and personal information, and wait for a response.
Pre-approvals include everything from how much you can afford, to the interest rate you’ll pay on the loan. The lender prints a pre-approval letter for your records, and funds are available as soon as a seller accepts your bid. Though it’s not always that simple, it can be.
5. Find a realtor
Seek out a realtor who is familiar with the area you're looking to buy in and who can help you prioritize your search and visit homes that match your desires and budget. Be sure to be aware of slimy tricks real estate agents use and use referrals from your colleagues.
6. Search for a home
You're officially ready to hit the pavement in search of the perfect home. Narrow down your search by cost, location, and other desired amenities. Figure out if you want to build your home or find one selling on the market.
7. Make an offer
When you find a home you want to buy, submit an offer. Your first offer may not be accepted, and you may have to negotiate.
8. Finalize the loan
If your offer is accepted, your Loan Officer will work to finalize your loan. Be prepared with the required documentation ahead of time.
At this point, the sale is complete, and the seller turns over the property title. There are fees associated with the closing.
Work with your Realtor to manage your costs. You may be asking yourself, “Long Does It Take to Close on a House?” You can learn more about the closing process here.
Mortgage Guide Closing Thoughts
Buying a home can take as fast as a week or on the longer end 35-60 days once you find the right home. Getting prequalified a few months in advance is always a smart decision.
That gives you time to clean up your credit report if any, pay down student loans or credit card debt, and save for a down payment, closing costs, and then start checking out general areas, commute times, neighborhoods, etc.
You should find a well-reviewed real estate agent who can help you through the buying process so you have a better understanding of your purchase. Best of luck to any millennials getting ready to become first time homeowners!