The Millennial Homebuyer’s Guide
Millennials have hit a major milestone, according to the U.S. Census Bureau. Almost 52% of millennials own a home. This is in stark contrast to the last few years, when barely 40% of millennials owned a home yet.
This is all thanks to the tumultuous economy millennials have found themselves in ever since they graduated college.
With the market settling and interest rates having the potential to decrease, it’s important to understand the factors and tips necessary for millennials to buy a home.
X Things Millennials Must Know About Buying a Home
Millennials are a unique bunch. They graduated college with some of the highest student loan amounts any generation has had, and the housing market was anything but attractive when they were of age to purchase.
This has left millennials far behind their parents and the net worth they had at their age. The average first-time homebuyer is now 35 years old versus in their 20s.
So, while this group has had a tougher time ‘making it’ in the economy, millions are getting ready to buy their first house. Here’s what you must know.
1. Credit Scores are Important
Credit scores are the first thing lenders consider when you apply for a mortgage. It doesn’t matter how much money you make or how high you are on the corporate ladder. If your credit score doesn’t show that you’re financially responsible, getting approved for a mortgage can be tough.
The good news is that credit scores are fluid, and you can easily increase yours with a few simple steps:
- Take care of any bills in collections
- Bring any past-due bills current
- Don’t apply for any new credit
- Keep your credit card balances much lower than your credit limits
Your credit score won’t change overnight, so if you know your credit score can use some improvement, start now so when you’re ready to apply for a mortgage, you have an improved score.
Here’s what makes up your credit score:
- 35% payment history: How timely you make your payments (or not) affects your credit score the most. The credit bureaus look at any payments 30 days past due as negative, affecting your credit score accordingly.
- 30% amounts owed: Your credit utilization rate, or the amount you owe compared to your total credit lines, affects your credit score significantly, too. Keep your outstanding debt at 30% or less of your credit lines for the best credit scores.
- 15% credit history length: The credit bureaus reward long credit histories. If you have any accounts you can keep open, do so, even if you don’t use them. They increase your credit’s average length and help improve your score.
- 10% new credit: Each time you apply for new credit, it’s an inquiry on your credit report. When you want to apply for a mortgage or other large loan, refrain from applying for any other credit.
- 10% credit mix: The ideal applicant has a mix of installment debt (ex, personal or auto loans) with revolving debt (credit cards). This affects 10% of your score.
2. Real Estate Cycles Happen
Many millennials are stuck on the thought of the housing crisis that occurred in 2008 because that was right about some were graduating college and starting their adult lives.
Here’s the thing: real estate cycles happen. We will always see hills and valleys in home values. The key is to think long-term and not focus on every hiccup that happens. The housing crisis was an incident, but everyone in the industry learned from those mistakes and has moved on.
Know that you might buy a home, and a few years later, the value might decrease or greatly appreciate. It’s the average that matters and timing the market both when you’re buying and selling. That’s why a good real estate agent, as is a long-term plan, is essential. Knowing when you plan to move again will help determine when and if a house is a good investment.
3. Debt can Hinder your Approval Chances
It can dampen your mortgage approval if you’re over your head in debt. The key is to have as little debt as possible. Millennials have an average of $32,800 in student loan debt alone, and that’s before any credit cards or auto loans.
Student loan debt can be troublesome when trying to apply for a mortgage. Consider your consolidation options or income-based repayment plans that lower your payments to decrease your debt-to-income ratio.
If you have debts, try consolidating or paying them off before applying for a mortgage. Lenders will calculate your debt-to-income ratio. This compares your monthly income to your debts. The lower your DTI, the easier it is to qualify, not to mention the easier it is to afford the mortgage payment.
4. Saving Money to Buy a House is Imperative
Chances are you’ll need money to put down on a home. How much depends on the loan program and what the seller wants. You’ll need earnest money to show the seller you are a serious buyer, and then there are the closing costs to cover.
Having money available not only to cover the costs of buying a home but to put aside for emergencies or a ‘rainy day fund’ can increase your chances of approval and lower the risk of financial strain as a homeowner.
5. Know if You’re in a Buyer’s or Seller’s Market
The type of market you buy a home in really matters. In a buyer’s market, you have more control over negotiations because it means there are more homes for sale than buyers. In a seller’s market, though, there is tougher competition, which means sellers can be choosier about the offers they accept. This may translate into a higher sales price.
How to Find the Right Home
So now the big question is how do you find the right home? Here are some simple steps.
Decide What You Can Afford
First, decide what you can afford. Look closely at your budget, especially your current housing payment. Can you afford more? If so, how much?
Plug the numbers into your budget and see how they feel. You should be comfortable with your mortgage payment because you could have it for the next 30 years. Think not only of your current finances but your plans, too. Will you go down to one income or change careers? This could change what you can afford.
Determine Where You Want to Live
Next, decide the area you want to live. This doesn’t mean finding the perfect house right now. Instead, think about what you need in a neighborhood and area. Consider the amenities, the type of environment (rural vs urban), public transportation, and the overall neighborhood vibe.
Your real estate agent can help you find the perfect house, but you must first know where you want to live.
Think of the Future
As we discussed, think of your future when finding the right home when deciding what you can afford. Ask yourself, is this a short-term purchase, or is this your ‘forever home.’ If it’s more long-term, think about how your life might change. If you are single, consider having enough room for a spouse or even kids.
If you’re buying short-term because you think your career path may change or you may move to another area/state, you don’t have to worry as much about the future and can focus on today’s affordability.
Work with a Reputable Real Estate Agent
No matter your options, decisions, or needs, it’s best to work with a real estate agent. Buyers don’t pay commissions for agents; that’s the seller’s job. The buyer’s agent will help you narrow your choices and find the right home in the best area. You can share your needs/wants, budget, and other factors with your agent to make the job search easier.
The nice thing about using a real estate agent is they also handle all negotiations and paperwork. They are your go-between with the seller and any other involved parties. It’s like having someone on your side, helping you through the real estate buying process.
Final Thoughts
Millennial homebuyers are in a great position today. While you may not have started adulthood like your parents did, purchasing a home at a much younger age, the housing market is currently in a great place, making it much easier to purchase a home.
The key is to prepare yourself financially and mentally for the largest purchase of your lifetime. Have money saved, minimize your debts, and determine what you can best afford in your budget to make homeownership as fun as possible.
