Becoming a Home Owner

Wondering if your'e ready to buy your own home? It's important to start with an understanding of the home-buying journey—everything from determining how much house you can afford to closing on your new home. It's a little different for everyone, but getting comfortable with the steps to purchasing a home can help just about any home owner in the making.

Understand the steps to buying a house

The process generally works like this:

• Determine how much you can afford to spend on a home.
• Make a plan for saving for a house. You may need to take some time to save up money for a down payment. If you're finding it challenging to pay for any recurring bills on your current budget, such as those for credit cards or your car, then you may want to consider waiting to buy a home until you feel more certain about your finances.
• Get pre-qualified for a home loan with a lender. Your credit score is one of the first things lenders examine when they consider making a loan to you. It will impact the rate you are offered. You may want to improve your credit score in advance to secure a lower rate. You can request one free credit report a year from an agency like Equifax, Experian or TransUnion. (Please note that credit scores obtained from these services may be different from the credit score a mortgage lender uses.)
• Start scouting neighborhoods you like to search for homes within your price range. The more on-the-ground knowledge you have about what's on the market, how it's priced, and whether it's selling, the better.
• Work with a real estate agent to find your home and make an offer.
• Start the mortgage process, making sure you find a lender you can trust to help you find a loan that meets your needs. Organize your paperwork.
• Close on your new home—and enjoy making it your own!

Do the math

Before you calculate the day-to-day expenses of owning a home, you'll first want to determine if renting or buying makes more financial sense for your situation. If you expect to move around a lot or have a limited budget, renting may make sense, because you pay a fixed cost every month on what is typically a one-year lease. Plus, the widely accepted rule of thumb is that you should plan to stay in the house you buy for at least five to seven years to justify the initial closing costs and transaction fees.

Renting can also help you try out different communities for a year or two to help you decide where you eventually want to buy. And if something breaks, your landlord generally has to get it fixed and pay for the repair.

But if you have a steady job and want to stay in the same place, home ownership may appeal to you more for personal reasons—and may make financial sense.

Depending on the down payment you would need and the specific interest rate and other terms of your mortgage, your monthly payment might just be lower than your rent. And part of your monthly mortgage payment is an investment, rather than an expense. As you pay down your mortgage, your home equity increases. Eventually, you could own real estate—and no longer have a monthly payment.

If you've decided that owning a home is right for you, it's important to know how much home you can afford.

You will need money for:

• Down payment . Aim to pay at least 5% to 20% of the cost of the home. Some mortgage products offer features specifically designed to aid first-time homebuyers, such as low- and no-down payment options, relaxed credit-score requirements, or consideration for student-loan debt. Money market accounts1 can also be useful for saving up for a down payment as they have the potential to earn a small return with low risk while your funds remain accessible.
• Closing costs . If you do get a mortgage, you will need to pay closing costs. These generally range from 2% to 5% of the cost of the home.
• Your monthly loan payment . You can get an estimate from a lender or a loan calculator online. The rule of thumb is that housing payments should be no more than 30% of your total monthly income.
• Taxes and insurance . These vary by location and may be due once or multiple times per year.
• Household utilities . The electric, gas and water companies can provide an estimate. Asking the previous owner is also a good way to get a feel for the monthly bills.
• Furnishings and upgrades . New homeowners are sometimes unprepared for these costs. But you’ll almost certainly need, or want, to paint, or refinish the floors, or maybe even replace the roof or water heater. You may want to consider purchasing a home warranty—or negotiating to have the seller provide one—to cover some unexpected costs. At the very least, it’s important to get to know the ins and outs of your new home.

Know the tax benefits of owning a home

While you have to consider the tax implications of buying a new home, it's important to remember that there are tax benefits for owning a home. Here are some ways owning a home might save you money on taxes:

• Deducting prepayments of interest (known in mortgage lending as "points") and other closing costs.
• Deducting any interest you pay on your mortgage.
• Getting tax breaks for money you spend on energy efficient appliances, solar panels or other renewable energy.

Whatever your current situation, homeownership doesn't have to feel unattainable. With careful planning, saving and spending, you can move from renting to building equity in your home.