Homeownership has been touted as the ultimate “American Dream” and for good reason. Aside from the stability that owning a home can offer via having a set monthly payment, expected tax breaks (if you qualify – be sure to consult a tax advisor), and the ability to gain equity, owning a home is perhaps the most common way for families to build generational wealth. In honor of June being National Homeownership Month, we thought this would be the perfect time to take a closer look at what homeownership looks like in this country by generation along with possible hurdles and solutions for anyone who is hoping to begin the journey toward owning a home of their own.
The newcomers to the housing market are Gen Z (ages 18 to 21) making up just 2% of buyers and sellers in 2021. While their sample is too small to gather unique characteristics, it shows that a new generation is interested in homeownership and is sure to make a bigger impact in the future. Last year, Millennials continued to make up the largest share of buyers and have done so since 2014 at 37%. In fact, 82% of Younger Millennials and 48% of Older Millennials were first-time home buyers, more than any other age group. The highest-earning group of homebuyers was Gen Xers (ages 41 to 55) who purchased the largest and second-most expensive homes at a median home price of $305,000. Baby Boomers also made up a significant share of the housing market with younger Baby Boomers (ages 56 to 65) consisting of 18% of recent buyers and older Baby Boomers (ages 66 to 74) making up 14%. This generation is also expected to own their homes for the longest period at 20 years.
First-time buyers made up 31 percent of all home buyers in 2021 but there are still common myths that deter many from pursuing homeownership. Perhaps the biggest one is that a 20% down payment is needed. This misconception is dangerous because 20% of a home purchase is usually a lot of money. Therefore, the notion of needing that amount up front scares most potential homebuyers away. This belief may have originated from the fact that without such a down payment, many are subject to having to pay mortgage insurance, which can be costly. However, there are plenty of low and no down payment programs available for both first-time and repeat home buyers. There are also options to help with mortgage insurance so that your total monthly payments are affordable. The most important thing to keep in mind when deciding to apply for a mortgage is choosing the right program for you and your down payment needs. Once you realize that having a large down payment isn’t necessary, you can start the process with peace of mind.
Down payment assistance programs can also be a huge help in unlocking homeownership possibilities. Down Payment Assistance is a form of financial aid that is available to help homebuyers cover the cost of a down payment so that they can afford homeownership. They are mostly reserved for first-time homebuyers but sometimes extend to other types of borrowers. Typically, this type of assistance can be sought through your local or state housing authority or via non-profits. How much you’re able to receive depends on the type of program and your specific situation. Some will make the determination based on the price of the home you’re buying, while others will cap assistance at a certain dollar amount.
Down payment assistance eligibility is usually determined by your income and credit history. There are thousands of down payment assistance programs nationwide and they come in several different forms including grants, loans, and credits. Therefore, the assistance may require repayment. If you don’t qualify for a Down Payment Assistance program through your local housing finance agency, there are also government-backed programs that require lower down payment amounts. Some of the most popular loan programs that offer low or no down payment options include FHA, VA, and USDA* home loans.
Another step in the path to homeownership is simply understanding the process. Deciding to own a home of your own can be a scary notion but once you know what to expect and how to prepare, it can become much easier. The mortgage process typically involves six general steps:
Step One: Pre-Approval
During this stage of the mortgage process, a lender determines whether you’re qualified to borrow money. This is done by taking a close look at your credit, employment history, income, and debt obligations to verify the maximum amount you’ll be able to borrow. A licensed loan originator will use this information to help determine which loan program is right for you, taking into account the down payment amount and available interest rates. Once pre-approved, you’ll get a letter stating that you can indeed afford a home loan up to a certain value. This is the green light to start house hunting. Your pre-approval gives you an idea of how much you can afford and lets sellers know that you’re a serious buyer. The key to a successful pre-approval is working with a trusted and licensed loan originator who can help you qualify for the appropriate mortgage.
Step Two: Submit Initial Documents
After the pre-approval process, you’ll have to determine the type of mortgage loan that is appropriate for you and submit specific documents to verify your income and prove that you’re able to afford the loan. This typically includes your previous two years of tax returns and W-2’s along with 30 days of pay stubs. You’ll also have to disclose any additional income such as alimony, bonuses, freelance work, etc. This information is used to show that you have the funds for a down payment, closing costs, and any other fees that may occur.
Requirements vary based on your loan type, but a credit check is also necessary. Typically, lenders require a credit score of 620 or higher to approve a conventional loan. A lower score doesn’t necessarily mean all is lost; there are several options still available, but they may include loans with higher interest rates.
Step Three: Processing
Once initial documents are submitted, an experienced processor reviews, packages, and monitors your loan request. A processor collects all the information needed to approve the loan. They also contact credit bureaus, employers, accountants, and anyone else needed to verify your information. When it’s time, the loan processor will order the home appraisal, ensure proper policies are being followed, and order the final loan documents. When it’s time, your processor will also be the one who helps you schedule your closing appointment. The processor is a crucial person in the loan process as they keep your loan on track from start to finish.
Step Four: Underwriting
Once the processor has gathered all the supporting documentation, your loan is sent to the underwriter. It’s the underwriter’s job to review it to assess the lender’s risk in working with you. If they’ve determined that the loan is something you can manage, they’ll issue a mortgage commitment. To reach that conclusion, the underwriter will look at various items, such as your credit history, proof of income, debt-to-income ratio, savings, and any other factors that help them determine whether you’re financially ready for the responsibility of a mortgage payment. It’s also their job to look at the value and type of property in question to ensure that the mortgage terms meet the requirements for all parties.
Step Five: Pre-Closing
Once your loan has been underwritten, it’s time to finalize all the details of your loan with the lender and get everything in place for closing day. This usually includes conducting a walkthrough of the property and securing homeowners’ insurance set to go into effect the day you move in. Doing your due diligence during the pre-closing ensures a smooth closing day for you and everyone involved. You will receive a Closing Disclosure at least 3 days prior to closing and your closing agent and lender will work with you to make sure you have everything ready for closing day.
Step Six: Closing
This is the final step to becoming a homeowner. The good news is that the brunt work has already been done. Now, all that’s left to do is execute the final closing paperwork. You’ll also need to bring a photo ID. When it’s all said and done, you’ll get the keys to your home! Your first mortgage payment will typically be due one month after the last day of the month you close.
While it can seem overwhelming to embark on the journey of homeownership, it’s important to remember that you have a lot of people working on your behalf who can help you through the process. From beginning to end, the mortgage process typically takes around 41 days and while it may be strenuous, the result is a home of your very own.
The bottom line is that homeownership is not an unattainable goal. Regardless of age, race, gender, or sexual orientation, homeownership is something that should be within reach for all. Being knowledgeable about home loan options, down payment assistance programs, and the mortgage process is a great place to start in your homeownership journey. That’s where we can help. At Silverton Mortgage, we recognize that home loans are as diverse as the people who seek them, and we’ll work closely with you to help you find the right program to fit your unique needs.
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All loans are subject to credit approval.