If you’re a Millennial, it certainly can feel like the deck is stacked against you financially. Compared to our parents and grandparents, student loan debt burdens are substantially higher, and without a college education these days, good paying jobs are limited. House prices are 10 times as high as they were 50 years ago; meanwhile, the middle 20% of workers by income only saw about a 33% increase in wages.
The good news is that although homeownership rates are admittedly lower than they’ve been in past generations, just over 1 in 3 Millennials own their home. If homeownership is an aspiration, there is a realistic path you can follow to prepare yourself to buy a home.
Set a Realistic Expectation for Home Affordability.
Look online and you’ll find countless mortgage calculators promising to answer the question, “How much home can you afford?” Tread carefully. It’s not uncommon to pre-qualify for a loan that is larger than is really best for your budget.
Instead, go through your income and expenses carefully and figure out what amount you could comfortably spend on housing each month (remember that you’re responsible for repairs and maintenance costs, too). Our handy Mortgage Readiness Quiz is a good first step in assessing both your buying power and loan approval readiness.
Once you’ve set your target house price, it’s also time to shop for the best mortgage products for your situation. Today, there are many special loan products for first-time homeowners with minimal down payments available. Pre-purchase coaching by a HUD-approved housing counseling agency will help you be prepared and The National Association of REALTORS® reported that in 2016, Millennials put down an average of just under 8% to buy a home, according to Census data from 2016-2018, that comes to about $25,000.
With time, creativity and a healthy budget, you can change almost any feature on a house, except of course its location. The adage “location, location, location” cannot be understated. It’s important to find a home in an area that fits your lifestyle both today and in 5-10 or even 30 years. Items such as travel times to your work, the quality of the school district and the local amenities, shopping, and restaurants, are they reasonable and will they fit your needs? The trick is not to equate “reasonable” with “ideal.” Expanding the area of your search can turn up affordable options you might have missed.
Generally, suburban or rural homes tend to carry a lower price tag than houses in urban locations. If you’re up for a dramatic change, see if a less-populated state has cheaper home prices than your current location (check salary rates, too, to make sure you can afford cost of living). Look past the “recently added” listings, too. It may be easier to convince the seller to consider a price drop if the house has been on the market for a while.
House Hunt for Your Current Life
One day, you may hope to have five kids and a pack of animals. If your budget isn’t ready to accommodate a six-bedroom house with a huge yard, that dream may have to wait. Your first home isn’t necessarily the place you’ll stay forever. Don’t pressure yourself to tick every item on your perfect-home checklist.
A couple expecting their first baby may have all the space they really need for the next 5-7 years (the minimum length of time many real estate agents recommend to let a house appreciate in value) in a two-or three-bedroom home.
Research Loan Programs, State and Federal
The Federal Housing Administration (FHA) offers a loan program that puts homeownership within reach for many people who would have a hard time qualifying for a conventional loan. FHA requirements, especially in the credit score requirements, tend to be more relaxed than some conventional loans. First-time home buyers can also purchase a home with only a 3.5% down payment if their credit score is at least 580, and home buyers with a 500-579 credit score can still get approved with a 10% down payment. If you’re lucky enough to have some gift cash from relatives, you can use this toward the down payment (lenders for some conventional loans may require you put up a minimum amount from your own funds, rather than relying on gift money).
You’ll pay two kinds of mortgage insurance: an up-front premium of 1.75% of the loan amount and an annual premium based on length of the mortgage term.
If you meet income requirements and want to live in a qualifying rural area, a USDA loan is another option. This program was started to encourage housing development in rural areas. It’s possible to get a USDA loan with no down payment. You can look up addresses on the site to see if the properties are included in the program.
Check State Programs
Your state may offer housing assistance that you can add to federal programs you qualify for. Look up your state on the HUD website to find out more. Maryland’s SmartBuy program, for example, gives home buyers the chance to purchase a home from a select list while also eliminating up to $30,000 in eligible student debt. Tennessee offers down payment assistance as a 0% second mortgage that’s forgiven after 15 years if you’re still living in the house.
Don’t Neglect Debt
Student loan payments and credit card debt can get in the way of saving money. Don’t drop other financial commitments in hopes of socking away a down payment faster. Missing credit card payments and carrying excessive balances hurts your credit score. A low credit score could signal lenders to offer less favorable interest rates or even deny your application altogether.
A better strategy is to meet with a certified credit and debt coach, who can help you understand your credit report and advise you on ways to establish a budget and work towards reducing excessive debt. Not only does this reduce your debt-to-income ratio (DTI; a number lenders consider when reviewing mortgage applications) and potentially help your credit, but it also encourages smart budget habits you can continue to use when saving for your down payment.
Housing markets change often, but staying committed to your homeownership plan will help you be prepared when it’s time. Explore your options and talk to a Mortgage coach or take a pre-purchase counseling course if you want more guidance on finding your best pathway toward owning a home.