Although homeownership is down among all age groups, it is incorrect to say that Millennials are avoiding homeownership. Millennials are highly mobile, with about one-third of people in their twenties moving each year. However, most Millennials have not yet reached the median age of first time home buyers and this has fostered a misleading narrative that Millennials lack the desire to own a home. In fact, surveys show that a majority of Millennials want to buy a home.
However, it is true that Millennials are pessimistic about their ability to afford a home. Residential construction has rebounded from the housing crisis of 2008. By 2017, almost 8.5 million workers were employed in the U.S. construction industry.
Similarly, home prices have recovered from the lows of the Great Recession. Since about 2015, home prices have been growing at a healthy 5% to 7% per year.
Even with the housing market working against younger first time home buyers, there are steps that Millennials can take to position themselves to afford a home. Here are five essential steps for any Millennial buying a new home:
1. Understand Your Credit Score
Not including mortgages, Americans have an average debt of about $38,000. This can affect your ability to buy a home in a few different ways.
- Debt to income ratio: The amount of debt that you have does not necessarily determine how creditworthy you are. Rather, it is the ratio of debt to your income that is the decisive factor. For example, if two people have $38,000 in debt, but one makes $100,000 per year while the other makes $10,000 per year, the higher earner is more creditworthy than the lower earner. This is not because of the higher earnings, but because the debt to income ratio is lower.
- Credit history: Your record of paying bills, including credit cards, is included in your credit score. If you routinely pay bills late, this is reflected adversely in your credit score even if they are all eventually paid off.
- Bad debt: If your debt has been sent to collections because you did not pay it off (or arrange to pay it off late), this bad debt will drag on your credit score for seven years.
- Too many credit applications: Each application that requires a “hard” credit check will cause your credit score to dip. The purpose of this is to prevent borrowers from becoming overextended. However, the result is a drop in credit score that can last as long as two years.
You should also understand what causes your credit score to rise. Good payment history, management of debt so that it is not too high for your income, and being judicious about applying for credit can push your credit upward.
2. Investigate Financing Options Early
In the old days, many people would shop first, then apply for a mortgage. This often worked to the detriment of both buyers and sellers. Buyers risked getting turned down for financing after making an offer. Sellers risked being held up while buyers attempted to qualify for financing.
Now, many lenders will pre-approve you for a mortgage so you know exactly the amount of house you can afford. As long as the home you buy is less than the pre-approval amount, the lender will fund the purchase on the approved terms.
The benefits of pre-approval include:
- You can shop around for the best mortgage terms, such as interests rates and the total loan amount.
- You can move quickly to make an offer when you find a home you like.
- You know exactly what your monthly mortgage payments will be for budgetary purposes.
3. Plan for the Future
Planning for the future means projecting your future income, future expenses, and future family situation. More than half of Americans are married. Even if you are currently single, you cannot guarantee that you will remain single throughout a 30-year mortgage. You should plan out what will happen to your home if you marry.
Similarly, you should have some idea of your future finances. If you are planning to retire or, conversely, expect to open a business or receive a promotion, you may want to build the decrease or increase in income into your plans.
4. Save for a Down Payment
An essential term of any finance agreement is your down payment. The greater your down payment, the better the financing terms will be. For example, your lender will charge you for private mortgage insurance (PMI) if your down payment is less than 20%. PMI is intended to protect the lender if you default but you pay the cost, usually about 1% to 2% of the total loan amount, as part of your monthly mortgage.
However, for those who are unable to save up for a 20% down payment, loans may be available for lower down payments. By seeking pre-approval, you can find out exactly the terms of your loan based on the down payment you can afford.
5. Protect Your Investment
Even after you have purchased a home, you need to protect your investment. Homeowner’s insurance can cover catastrophic losses in the event of a natural disaster. Just be aware while you are shopping for homes that homes within a floodplain may need to buy a separate flood insurance policy.
Similarly, security systems can reduce the likelihood that your possessions are stolen. A security camera with a resolution quality of 1280 x 720 pixels should be sufficient for most purposes. However, a high definition camera with a resolution of 1920 x 1080 will give crystal clear recordings.
Homeownership is within reach for most Millennials. Understanding credit scores and using that knowledge to obtain pre-approval for a mortgage can help you act decisively when you find your dream home. Saving for a down payment will help you get the best possible mortgage terms. Planning for the future will ensure that you are not biting off more than you can chew with your home purchase. And homeowners insurance and security systems can protect your home investment.