Many people have called millennials the ‘renters generation’, as more young people are choosing to continue to rent later into their life than in generations past. This could be attributed to the fact that Millennials (and many Generation X and Y-er’s) don’t want to be tied down by the same ‘roots’ previous generations considered an advantage. They want the freedom to travel, move to a new city, or even a new country! They also saw the market crash in the mid-2000’s and are wary of home ownership. However, as time passes, these folks are settling down and deciding that buying a house might be a sound investment. In the summer of 2014, 30% of homebuyers were young people, according to an analysis from realtor.com, and that number is on the rise.
While planning the purchase of a home as a young person many be intimidating, there are many ways to tell if you are financially and emotionally stable enough to begin the process. Once you decide that it’s time for you to take the plunge, consider these tips!
- Check your credit score. One of the first things you’ll want to do when considering buying a home is verify your credit score. Just because you consistently pay your bills on time does not mean you have great credit. The amount of money you have out in loans also has a significant effect on your credit. Ideally you will want to have less than 1/3 of your credit utilization ratio (the amount of credit you're using relative to your available credit limit) used at the time you apply for a home loan. If your credit needs repair, take the time to fix it before applying for a loan, as this can save you money in the long run! We would suggest checking your credit at least six months before you begin the pre-approval process.
- Pre-qualify before you being your search. After you know you have a decent credit score, talk to a lender about getting pre-approved for a home loan. Talking to a lender will provide you will all sorts of helpful information. You will learn if your credit score is high enough to get a loan, and if not what you will need to raise it. You will learn how much you are likely to need for a down payment, and learn more about the real costs associated with buying such as closing costs. You will also learn what the maximum amount you can borrow is, which will help you determine how much house you can afford. It’s crucial to procure this information BEFORE starting your search so that you know which houses to consider and are not buried in debt later on.
- Organize all of your financial documents. To pre-qualify you don’t need too much more than your pay stubs and credit score, however, to actually get your loan finalized you will need many more documents. Typically, mortgage loan officers will ask for two recent pay stubs, the previous two years' W-2s, tax returns, and the past two months of bank statements - every page, even the blank ones. If you're gifted money from someone else (think a parent, grandparent, or in-laws), they will want to see a gift letter, stating that they are providing that amount. Ask your mortgage professional what else you might need, having it on hand prior to starting the process will make everything run much more smoothly.
- Seek a place that could become a rental property (now or in the future). When you purchase a home at a young age, it’s important to understand that this may not be your forever home. Choose a home that you could possibly rent out in the future, and it becomes an investment property! One way to go about doing this is to buy a duplex. Live in one side and rent out the other to offset mortgage costs. When you’re ready to move on, rent out both sides, and you are likely to have some additional monthly income! Choose an area that is attractive to renters and is near schools, parks, and activities. This will make it easier to rent out. Don’t want a duplex? Buy a house that has a room you could rent out. Whether it is a detached guesthouse, a room with a separate entrance, or a mother-in-law plan with a private bathroom, buying a house with attractive rental features could end up benefiting you in the long run.
- Try to seek an energy efficient home. Upon moving into their first home, many young adults get sticker shocked by their first set of utility bills. While bills are usually going to be higher (especially if one is moving from an apartment to a house), they don’t have to be outrageous. Try to choose a house that has updated, energy efficient appliances, is well insulated, and has double or triple-pane windows. Your inspector should be able to tell you if your windows have a high energy rating, and this can save you loads on your bills. Make sure to fix all leaks (even small ones), and add weather stripping to the doors if not already included in the home to avoid paying more than you have to in bills!
- Don’t go too big. Many people want their first home to reflect the dreams they’ve always had of home ownership. This often means that they spend the maximum amount they are allotted from the loan officers. What they don’t realize is that mortgage loan officers are paid on commission; this is their incentive for getting you the highest loan amount possible. Many times they don’t take into consideration what you can actually afford – that is up to you! Calculate out what your monthly mortgage payment would be, plus taxes and insurance, plus (a high estimate) of bills, plus repair costs, and buy only as much house as you can afford.
- Take your time. In all of the excitement during your first home purchase, it can be tempting to jump right in, before taking the proper planning steps. Buying a home is much different than buying a new TV, or even a car! It’s probably the biggest purchase you’ve made in your life up to this point, and not to be taken lightly. Buying a home is an emotional purchase – this is the place you’re going to call home. You want to be sure you make the wisest choice possible. Do your research, and don’t ever let anyone make you feel rushed. Don’t feel the need to jump into any decision just because you’re in a ‘hot’ market and there are multiple-offer situations. Try to learn the market, do your research online, and check out some open houses just to see what’s out there. Remember that you may make several offers before finding the perfect place, and don’t feel pressured to go too much over budget to secure a house you like. The right one will come along at the right price, you’ll see!
- Ask your parents for advice. The real estate market has likely changed since the last time your parents bought a house. Before 2008 or so, there was very little access to accurate online listings, and interest rates used to be a lot higher. However, they have still been through the process and can provide valuable advice to new homebuyers. They more than likely have a solid financial opinion and have successfully navigated the trials and tribulations of new home ownership. So go ahead and gather as much information from them as possible, and take into account their experiences while setting out making your own.
- Don’t try to navigate the market alone. This is a big one. Many millennials these days think that because you have listing data (and sometimes even sold listing data) at your fingertips that you no longer need the help of a real estate professional, which is extremely unwise. The agents job is not to only provide the keys to a property and show you around; it’s much more than that. A good agent has years of experience, great negotiation skills, and can help make the process so much smoother. Your agent should know the market like no one else because they’ve seen hundred of homes and have relationships with many of the other agents around town. They know what red flags to look for, and what will be a good investment down the line. Additionally, they handle all of the contract to close paperwork, which can be daunting to the most capable untrained person. Having a real estate agent in your corner during the home buying process – especially as a young homebuyer – is absolutely essential!
Stick with these tips and your first home buying experience will be fun and exciting. Happy hunting!