The Millennial Guide To Buying Homes

When it comes to buying homes, millennials are in a tough spot. Not only do they make less than previous generations, but thanks to population growth, they’re also part of the biggest generation of home buyers in a world where homes cost more than ever before. More than a third of millennials end up needing some help from relatives to get a home, but not everyone has that option. Thankfully, there are other ways you can make the process a little easier.

Beware the Down Payment

It’s commonly said that one should make a 20% down payment when buying a house. The basic logic is that a large down payment often provides better interest rates, a lower monthly payment, and less money paid overall, whereas a smaller down payment would likely end up costing you more in the long run.

However, pinching pennies in the short term for gains in the distant future isn’t a viable strategy for everyone. If times are tough now and you’re not making as much as you want, but you have strong advancement opportunities in your field, then you don’t need relief in the future, you need relief now. Don’t be afraid to make a smaller down payment today if it will lessen your financial burden. In the future, you may be more than capable of bearing the slight increase in overall payments.

Stay Under Budget

When calculating how much you can afford to spend on a mortgage payment each month, don’t feel like you need to walk on the razor’s edge. Even if you can afford a two- or three-bedroom home, that doesn’t mean you should. Opting for a cheaper and smaller home (or one in a less ideal neighborhood) can provide you with a lot of room to maneuver.

One thing that many new homeowners overlook is just how many extra fees and charges you’ll be dealing with. Beyond the actual process of buying the home, you’re also going to need to deal with the obvious stuff like mortgage payments, but also property taxes, insurance payments, and any closing costs. These can add up to 5% or even 10% of the overall price tag of your new home. If you were skirting on the edge of what you can afford, then those additional costs can easily push you over the edge into a crisis.

Furthermore, staying safely under budget can make things a lot easier when it comes to unexpected circumstances. If you need to make an emergency payment on anything from medical care to repairs for the home, you want to have that money readily available.

Pick the Right Time

Everyone knows that buying a home can take a while, but it’s still easy to underestimate just how long the process can really take. Even if you find your dream home, you could end up waiting for the buyers, the market, or your own circumstances. However, that doesn’t mean you should spend all that time waiting.

What you want to do is start searching for a mortgage earlier. The application process can take a while, plus your credit score makes a pretty big difference, so you may want to wait a few months for any outstanding issues to get cleared up. Try not to open up any new lines of credit like credit cards. If you’ve done that recently, then consider waiting a bit for your credit score to recover.

When you apply for a mortgage, you’ll need to have a firm grasp of your FICO score and credit history. Ideally, your score should be above 720. If you manage to put your affairs in order before making your application, then you could end up getting a much better interest rate. Even a single percent lower can end up saving you tens of thousands of dollars in the long run.

One key to owning a home in the future is setting up the right conditions for your current housing situation. If you’re renting, then an extremely short lease term (month-to-month, if possible) allows you the flexibility to jump at any home buying situations that crop up, as opposed to needing to wait for your lease to run out before committing fully.

Choose Your Funding Means Carefully

By now, it’s pretty old news that you should consider getting a second or third job to pay for your home. Everyone says to save a little extra, cut down on the moderately extravagant meals, and skip any vacations that you can.

What you need to keep in mind is the exact opposite, what you absolutely shouldn’t do: dip into retirement savings. It can be very tempting if you’ve been working for a few years, but it’s difficult to overstate just how devastating early withdrawal penalties can be. It’s not unusual to lose half of the money you take out, plus you’re missing out on the interest that your savings would have accumulated over the next few decades. It can be very tempting to take a little bit out to buy your home, but if you need to resort to such measures, are you really prepared to make your monthly payments? There are a lot of questions you should ask yourself before proceeding.

Do Your Mortgage Research

With all the different options out there, it’s not unusual for mortgages to be downright overwhelming. How much you make, where you live, your credit history, the home you’re looking at, the state of the economy, and a dozen other factors all go into what kind of options you’ll have available to you.

On top of that, you have to also keep in mind any special offers or programs you might qualify for. If you’re buying a home for the first time, there are programs out there (sometimes on both the state and federal level) that can help you out. You should also look into combination mortgages and VA mortgages to see if you qualify.

One of your biggest assets when pursuing a mortgage is a firm understanding of your own financial situation. The better and more stable your job is, the more assured the bank will be that you can pay back your loan. If you have a good credit score, then you effectively have a concrete value for just how good you are at paying back your debts. From pay stubs to tax forms and bank statements, you want to have all the necessary evidence for the lender.

The Bottom Line

At the end of the day, there are a lot of different tips out there to make the home buying process a little easier, but the general principles are pretty simple.

Have a history of making good on your debt repayments. If you don’t have that, wait a few months or years until you do. A failure in this area will lead to much less favorable interest rates and that’s if you even qualify for a mortgage at all.

Don’t try to get the most expensive house that your budget can afford and don’t take drastic measures that hurt your finances in the long run to afford a down payment. You don’t want to get rid of your safety nets, especially not at this vulnerable juncture in your life.