How To Become A Homeowner In 4 Steps

Buying a home is arguably one of the most exciting decisions you will ever make. Homeownership allows you to have your own space and the opportunity to build equity for the future. In 2020, the homeownership rate in the US stood at 65.8%. (This rate refers to the proportion of homes occupied by their owners.) However, navigating through the process of how to become a homeowner can be overwhelming.

Whether it is your first or a second home purchase, there are crucial and well-established steps that will help you avoid typical mistakes that can turn your homeownership journey into a nightmare.

1. Deciding If You're Ready to Become a Homeowner

The first step to becoming a homeowner is determining if the time is right for you to invest in a home. Beyond external factors such as low interest rates and competitive pricing, you should also carry out an objective analysis of your current debt situation. If you currently have low debts and fewer bills that can diminish the available funds for a mortgage, it may be the right time to buy a home. Other signs you are ready to buy a house include:

Higher credit score: A higher credit score can help you qualify for a better interest rate, which ultimately translates to a lower monthly mortgage payment.

Steady income: A steady job or other sources of revenue can go a long way in backing up your homeownership efforts. Lenders typically want to know the stability of your income before they consider your mortgage application.

Solid savings and emergency funds: Healthy savings and emergency accounts can help cover the unexpected once you commit a portion of your income to mortgage repayment. The general rule of thumb is to have income set aside equivalent to at least a year of monthly bills before buying a home. See what your emergency fund amount should be.

Healthy down payment: If you have at least 10% saved separately from your emergency and savings funds, you may also be ready to buy a house

Homeownership is one money goal that you want to have a plan of attack for.

2. Prepare for a Mortgage Application

Getting approved for a mortgage loan is never easy. Mortgage lenders typically put up a massive amount of funds upfront, and they need a lot of assurance you will pay your mortgage on time and you won't default on the loan. Here are helpful tips to prepare for a successful mortgage application:

Start with your credit report: Your first step is to get your credit score in shape. Usually, you would need a score of 620 or higher to get your conventional mortgage approved.

Get your down payment ready: Calculate your down payment and closing costs and determine if you have enough funds. The down payment may range from 10 to 20%, while the closing costs can be anywhere from two to five percent of the home's value. Usually, your lender will ask for verification of sufficient down payment funds, and it is wise to have everything documented.

Calculate your debt-to-income ratio (DTI): A DTI is an essential tool that lenders use to determine whether you can afford a mortgage.  Knowing your DTI ahead of time can help you decide the financing options that best fit your situation.

3. Consider Your Different Financing Options

There are various types of mortgages offered by banks and credit unions. Therefore, having a comprehensive review of each option is crucial to making wise financing choices. Some common financing options include:

Conventional mortgage: Conventional mortgages are the traditional financing offered by credit unions and banks. They may need a down payment between three percent and 20 percent and a credit score of 620 or higher. Conventional mortgages have several types of interest rates available depending on your credit score, among other factors.

Department of Veterans Affairs (VA) loan: The program is designed to help US military veterans purchase homes. The loans are issued by private lenders like banks and mortgage companies. However, the VA must guarantee a portion of the loan for you to get better terms. These loans typically don't need any down payment. You will not also be asked to pay private mortgage insurance.

Federal Housing Administration (FHA) loan: An FHA is typically easier to get approved than other options. It is, therefore, ideal for first-time or lower-income homeowners. All you need to get approved for an FHA is a credit score of 580 or higher accompanied by a 3.5% down payment. Also, homeowners with a credit score of 500 to 579 can receive approval for an FHA with a down payment of 10%.

4. Have a Backup Plan

Lenders typically have specific criteria for approving loans, and if you don't meet them, your loan may be declined. However, having your mortgage application declined is not the end of your journey towards the necessary steps to becoming a homeowner. Start by addressing the potential reasons for the denial to improve your chances of approval next time. You can also consider other alternatives to a mortgage, including a home loan with terms that differ from conventional fixed-rate mortgages.

Now That You Know How to Become a Homeowner, Take Action

The journey towards homeownership involves making intentional financial decisions and following them through. And once you land your home, there are plenty of best ways to save money when moving, too.

Create your homeownership goal and take the necessary steps to prepare for your future today.

See how the Monorail savings app can help you get started.