Have you ever dreamt about owning your first home? Maybe you have it all planned out in your head – what it looks like, your aesthetic, where you’ll feed your cat every morning. But when you actually start to think about the logistics and responsibilities that goes with being a homeowner you may start to get cold feet.
Did you know that, from a Freddie Mac survey, 86% of Gen Z respondents want to become homeowners at some point in their lives? However, 65% said they aren’t confident in their knowledge of the mortgage process and around 25% believe that having the money to buy a home is out of their reach.
It seems that the biggest challenge for most first-time homebuyers is simply getting started. Because once you do a little deep-dive research and review all your options, home ownership may be easier to understand – and more affordable – than you think!
Here’s a simple 7-step guide to get you from merely thinking about your dream home to taking possession of it!
Step 1: Deciding Whether Buying Makes Sense for You
To rent or to buy? That’s a question many people struggle with but, if you break it down, it really just depends on your current financial position and stage of life. If you’re still trying to figure out how to budget your weekly Chipotle visits or pay down your credit card bills after a little too fun weekend, maybe it’s best to continue renting.
Don’t fret! Purchasing a home can still be the better option for you. If you take a closer look at all the benefits of homeownership, it can make the choice a lot clearer. Here are a few advantages of owning your own home:
- Potentially lower monthly costs: Did you know that the monthly cost of owning a home (excluding the initial down payment and closing costs) can often be less than renting? Thankfully, we have a Rent vs Buy Calculator that can help you determine if that’s true for you.
- Fixed payments: Just when you thought you had your budgeting down,*bam* your apartment complex increases its prices. Instead of having to consistently alter your budget, having a ﬁxed-rate mortgage will ensure consistent payments for the duration of your loan. No surprises or shock to the budget, just a set cost you can count on until the loan is paid off.
- Your home as an investment: Depending on where you live, your home and property are likely to appreciate over time. Each month you gain greater equity in your home. Think of it like a “super savings account” with even higher potential than investing in the market.
- Added tax deductions: A lot of the expenses you have with owning a home, such as property taxes and interest are often tax deductible. All in all, it can add up to a nice break come tax time!
- Take it from “house” to “home”: It’s yours, so make your home exactly what you want it to be! From small upgrades like painting to a full-blown renovation or room addition, you can decide on the look and feel you like best – something you can’t do with an apartment. So what we’re really saying is, you can have your designated Zen room and improve the value of your home at the same time. It really is a win-win!
Sound good so far? Ready to take the next steps? Great! Let’s move on.
Step 2: Preparing for the Loan Process
Give yourself a credit check: Review your credit score and history. If your score isn’t as high as you would like or thought it would be, it’s never too late start improving!
Credit bureaus like Experian®, TransUnion and Equifax® not only allow you to check your score without hurting it, but also offer ways to increase your credit score quickly and easily. Even a few extra points on your credit report can make a big difference!
Gather the documents you’ll need: So your credit score is where you’d like it to be and you’re ready to start that mortgage loan application, but where do you begin?
You’re going to start by reaching out to a Loan Officer or, in other words, your tour guide to the wonderful world of mortgage! They’re going to need some documentation from you so it would be smart to have these on hand:
- 1-2 months’ pay stubs
- Two years of tax returns and W-2s
- Explanations and documentation for unusually high deposits or withdrawals
- Documentation and information about any additional homes or businesses you own
Step 3: Finding Your Best Loan Option
Talk to a Loan Officer: As a borrower, you have are a number of mortgage loan programs to consider. The key is to find the one that’s the best fit. That’s where your Loan Officer comes in! Once you get in touch, they’ll ask you some questions and help determine what you can afford by finding the loan option and interest rate that fits your needs.
This is definitely the time to count on the pros! So don’t be afraid to bring up any concerns or reservations you may have.
By the way, in addition to offering some of the best mortgage interest rates in the industry, First Internet Bank provides a full suite of home loan products to serve our customers. Here are some of the mortgage loan program choices:
- Federal Housing Administration (FHA) loans with low down payment options
- Conventional fixed-rate loans
- Adjustable rate loans
- Veterans Administration (VA) loans for current and past members of the military
Step 4: Getting Pre-approved
You’ve talked to your loan officer and picked the best mortgage loan option for you – great! Now it’s time to get pre-approved.
The pre-approval process: A pre-approval can provide a clearer picture of how much home you can expect to purchase and let sellers know that you’re a serious about buying a home.
Underwriters evaluate information to determine (on a conditional basis) your ability to qualify for a mortgage. The meat of the process includes them verifying your income, assets and employment history, a credit check plus some other factors.
You’ve decided you’re ready to be a homeowner and want to get pre-approved (yay!). You can start your pre-approval process with us here or keep on reading – we’re good with that too!
Step 5: Determining Your Mortgage Payment
Consider what you can afford: Owning a home is great and all, but not if your monthly mortgage payments are higher than you can or are willing to spend. Try using our Mortgage Calculator to help you determine the price that best fits your budget and, most importantly, your desired lifestyle.
Think about it, if you can’t keep your routine yoga sesh or organic eating habits your home may become more of a burden than a blessing. An easy way to apply this is to ensure your monthly mortgage isn’t greater than 30% of your pre-taxed income.
What’s in your payment: Let’s be real, you’re new to the mortgage process and you may not be 100% sure what makes up a typical monthly loan payment. It’s simple, just remember “PITI”:
- Principal: What you borrowed or financed.
- Interest: What the lender charges you to borrow the money used to purchase or reﬁnance your home.
- Taxes: What you pay in property taxes to the city, municipality or county where you live.
- Insurance: What you pay to insure your home from damage (ﬁre, natural disasters, etc.).
The “taxes and insurance” portion of your monthly payment is typically used to fund an escrow account – a separate bank account established by the lender. Money is held and paid out from the account by the mortgage lender when due. This allows homeowners to contribute a smaller amount each month as a part of their payment, rather than having a large annual or semi-annual out-of-pocket one. Escrow accounts are generally unnecessary when the borrower has at least 20% equity in the property or the Loan-To-Value ratio (LTV)* is less than 80%.
*The loan-to-value (LTV) Ratio is calculated as the amount of the mortgage loan divided by the lesser of the appraised value or purchase price of the property and is always expressed as a percentage. Lenders examine The LTV ratio before approving a loan.
Step 6: Researching Available Properties
Here’s the fun part: You’re pre-approved and feel comfortable with your price range. Now what? Hop in your car and start house hunting! As you look, begin to narrow the list of homes you’d like to live in. Make a pros and cons list based on what’s most important to you (local attractions, travel time to work, proximity to your favorite brewery, etc.).
You found a home you just LOVE, but how do you know if it’s even going to be in your price range? No fear! If you look into at what price similar houses have been selling for in the area, you’ll know if the home is financially in your reach.
Chat with your potential neighbors: If you found a home you really could see yourself living in, it’s probably a good time to do one more thing – talk to your future neighbors.
Although it can be a little awkward, ask questions. See what they like or dislike about the community. Not only will you be able to get the inside scoop of what the neighborhood and surrounding areas are really like, but it also gives you a chance to see if you’d get along.
If the neighborhood goes all out for holidays and garnish their houses with all the lights and decorations you can imagine but you’re more of a minimalist with a few seasonal items here and there, that community may not be the right fit for you.
Step 7: Going From Offer to Closing
Preparing to make your selection: It was difficult and gut-wrenching, but you’ve finally narrowed down your options to your top 3 homes. Now, it’s time to get down to business.
If you haven’t found a real estate agent yet, interview a few of them or get recommendations from friends and family (finding an agent who is very familiar with the area to make your search easier and more efficient).
Once you’ve contacted your real estate agent, it’s time to schedule a showing of your final homes! Although you may get caught up in the fantasy of owning your first home, don’t forget: whether you’re planning on putting down roots to raise a family or only staying for a couple years, your purchase is a serious commitment.
One thing you don’t want to have, especially when your time and money is on the line, is buyer’s remorse. To help you become more certain of your decision, consider these factors:
- Location, location, location: It’s not just a cliché! No matter how perfect a home may look, if it’s too distant from work, family and friends, or your go-to coffee shop, it’ll quickly lose its charm.
- Keeping it private: As you’re touring a house, make sure you pay attention to any potential privacy issues.Is there a fence? No? Then you’ll want to consider the cost of building one. Are any of your windows easily visible to neighbors or people walking by? If there are any peek-able windows, you’ll want to get thick curtains or at least keep those shades closed.
- A place to keep your stuff: You can never have too much storage space. Like, seriously. Stuff accumulates over time so if you find a home with ample storage, you’re giving yourself room for your growing Pop Vinyl collection!
- Love the natural light: Don’t overlook this! Having warm, natural light can really change the feel of a room. While touring, look to see what type of light your most-used rooms would get. Don’t forget to take note of which rooms will be most affected by sunrise and sunset. If you like your bedroom being nice and cool, you’re not going to want a toasty room where you wake up sweating because the sun’s beaming down on you.
- Form vs. function: It may be too easy to get caught up whether the home matches your aesthetics and vibes that you forget about the costs that are associated with ﬁxing the things that could (and probably will) go wrong. While 50’s wallpaper or worn-out carpeting is a relatively cheap and easy ﬁx, a deteriorating roof, old heating/cooling systems, leaky plumbing or outdated appliances can be pricey to repair or replace.Unless you’re planning on purchasing a ﬁxer-upper, let’s be real, you might not have the money, time or desire to deal with these issues. Be sure to investigate all of the home’s basic systems before you commit to buy or, even better, have an expert do it for you!
From offer to contract: You’re down to the wire; it’s time to make an offer. Your goal is to find the sweet spot between paying too much and not losing your dream home to another bidder – no pressure.
Here are some points to consider that’ll help you make a realistic offer that not only fits your budget but also makes it attractive to the seller:
- Similar sales in the area,
- When you’d like to close on your new home,
- How much money you’re putting down,
- And when the deposit money would be due.
Once you’ve decided on your best offer, sign it and send off the listing real estate agent. Now, you nervously wait.
The sellers may accept, reject or make a counteroffer – which is the most common route. Since this probably is the largest financial transaction of your lifetime *gulp*, you’ll want someone to review the contract. This is to make sure your legal rights are being protected and is not the time to consult your closest buddies but a working professional.
When the review is completed and the offer signed, you officially have a binding contract. Or, in other words, WOOHOO! You’re about to become a first-time homeowner! Even if the sellers receive another offer for more money and with better terms, they can’t take it, because you are both under contract.
It’s time to apply yourself: At this point, your deposit will be due and you’ll begin the mortgage application process – maybe you would even want to start your mortgage application with us!
Taking a closer look: This is also the time to have a home inspection. The interior and exterior of the home will be checked out carefully to give you a better idea of its condition and any concerns the home inspector has.
Upon completion, the home inspector will give you a written report of their findings. Were there any electrical issues? Insect or rodent problems (no thank you!)? If there are any concerns, go to the seller and request repairs or ask for a credit at closing so you can do it yourself.
While the seller doesn’t HAVE to make the changes, you’re not obligated to proceed with the sale either. So if you’re not 100% satisfied with the state of the home or with the seller’s response to your repair request, you can cancel the contract.
Finally…you’re about to close: Once underwriting by the lender is completed, you will be clear to close. This means that you are ready to head to the closing table and buy your first home (eek!).
Prior to closing, you can do a final walk-through to make sure the sellers didn’t damage anything while moving out, agreed to repairs have been made and that nothing else has happened since you were last in the house. This can be in as much or as little detail as you feel necessary.
And home free: All’s well? Awesome! You’re ready to go to your closing appointment, sign all related documents with clammy hands and a pounding heart and, finally get the key to your new home! You go, you homeowner.
When You’re Ready, We’re Ready!
So, think you’re set to kick off your new home search? As we mentioned, pre-approval is critical – once you’re in the market, you need to be ready to pounce when you’ve found the home you want. First Internet Bank is here to help – and we’ll be with you every step of the way, from application to closing. To speak to a First Internet Bank Loan Officer, call 866-742-5158.
Homeownership is an amazing journey; whether it’s now or down the road, we wish you success finding your dream home.