Buying a home is a noteworthy accomplishment at any age, but recent years have seen this milestone achieved by more and more buyers who, just a few years earlier, were still in college.
‘According to the National Association of REALTORS® (NAR), millennials (persons age 22-40) continue to make up the largest share of home buyers at 37%, with younger millennials (age 22-30) contributing 14% 1 Of course, not every recent grad is focused on becoming a homeowner. Modest income, anticipated job changes, lack of credit history, and high student loan debt are just a few of reasons many millennials opt to continue to rent (or live with their parents.) But for those who feel the lure of “putting down roots,” there are a few things to consider.
The first question many prospective homeowners ask is “How do I know if I’m ready to buy?” To determine if you are in a good place financially to consider buying a home, start with these questions.
Do I have a solid, reliable income? If your income is inconsistent or reliant on a part-time job or overtime with less than a two-year history, you may have trouble getting approved for a loan.
Do I have a low debt-to-income ratio (DTI)? Mortgage lenders will look at the debt you already have in determining how much you can borrow. The lower this debt-to-income ratio (DTI), the greater your buying power. So if your current debt service makes up more than 50% your monthly budget you’ll be better served by paying down your debts before buying a home.
Do I have a sound financial foundation? Before buying a home, take a holistic view of your finances to make sure you’re on firm footing. If you don’t have an emergency fund, or you aren’t contributing to retirement savings, you should consider putting those pieces in place before taking on a mortgage. You should also review your existing interest rates. Debts, such as student loans and credit cards, with high interest rates will cost more over time. Paying down higher-interest balances before buying a home allows you to reduce what you pay in interest.
It is likely a good time to buy a home if you have a stable income and an emergency fund, your DTI is low, you’ve paid down any high interest loans, and you’re consistently saving for retirement.
Once you’ve made the decision to buy a home, consider ways to make the venture more affordable, both during and after the purchase.
Opt for a low down payment. Low down payment mortgage products — with down payment requirements of as little as 3 percent — will require private mortgage insurance and have stricter credit requirements. An FHA mortgage will require a minimum 3.5 percent down along with an upfront or annual mortgage insurance premium. Although zero down loans are no longer widely available, such options are available via the Veterans Administration, the USDA Rural Development Program, and some credit unions.
Take advantage of down payment assistance programs. Look for programs that provide funds to assist with your down payment and closing costs. (Your real estate agent is a valuable resource for this!) Assistance may take the form of grants or no/low interest second mortgages. Keep in mind that many such programs are geared towards low to moderate income borrowers, and guidelines regarding maximum income may apply.
Save money using sweat equity. Many buyers envision buying a home that is thoroughly modern and perfectly appointed, but a structurally sound home that needs cosmetic upgrades or lacks some of your wish list items, can not only result in a lower purchase price, but can allow you to increase the value by doing (or having done) some or all of the work yourself. Wish list items are those that are nice to have, but that can be added or upgraded later. This also allows you to customize the home to suit your taste.
Make it income-producing. Two or more friends renting a place together is a common way to reduce living expenses. It also works well when you own the house! Renting space in your home, whether a room or an entire level, is a great way to defray the monthly payment and build up your savings. Of course, you should purchase a home that you can comfortably afford whether or not you have a tenant.
Develop your budget BEFORE selecting a house. Mortgage loan qualification only considers expenses on your credit report, not your personal budget. Implementing a budget and keeping it front and center as you search for a home will help ensure that your new housing expenses are affordable and in line with your lifestyle.
Plan for the future. Buy a house that will meet your needs for at least 5-7 years, taking into account planned family/life changes. Resale value and wide market appeal are also important factors in being able to easily sell your property when the time comes.
1 2021 Home Buyers and Sellers Generational Trends Report, National Association of REALTORS® Research Group
Established in 2003, LIFE is a 501(c)3 non-profit Organization that conducts financial literacy workshops for youth and adults. Our community-centric mission is to enable consumers to expand their financial knowledge, avoid and reduce excessive debt, develop self-sufficiency, and create, preserve and transfer wealth. For more info, visit www.financialenrichment.org.