No thanks to student loans, the economy, and other factors — most millennials have been led to believe that they cannot afford to buy a home. However, buying a home is possible, and it's the smartest financial decision a millennial can make. Because of all the misinformation out there about millennials and homebuying, a lot of first-time homebuyers aren’t sure where to start. Additionally, the whole process can feel overwhelming. Here are a few tips for millennials who are looking to purchase their first home.
Pay off debt and start saving
It may feel impossible to pay off all your debt but juggling a mortgage payment alongside student loan debt can become overwhelming. Pay off credit card debt, followed by student loan debt, and then start saving for a down payment.
Speaking of that down payment…
Figure out the home price you can afford to buy and then save up 20 percent of that amount. When buying a home, we recommend putting 20 percent down, as anything lower will be subjected to private mortgage insurance (PMI), which is additional insurance that lenders require in the event you cannot make your mortgage payment.
However, the down payment isn’t the only thing you’re expected to pay up front, there are also closing costs (which can be 2 to 5 percent of the home price), and home inspection fees. Be prepared to pay these various fees when you go to close on the house. One millennial homebuyer told Business Insider she opened a second savings account — separate from her emergency fund savings account — and saved for five years without touching the account before she was ready to put 30 percent down on her first home purchase.
Understand all the hidden costs associated with owning a home
A lot of first-time homeowners assume that if their current monthly rent is on par with a potential mortgage payment, then they’re in the clear. Unfortunately, your monthly mortgage isn’t your only monthly house payment. Be prepared for property taxes, home insurance, and if you live in a gated community or condo — HOA fees. Rule of thumb: Your entirely monthly housing payment (mortgage, property taxes, insurance, potential HOA fees) should not be more than 30 percent of your monthly take-home pay after taxes.
Additionally, many millennials aren’t prepared for the true cost of owning a home, not just buying a home. Repairs, upkeep, even the cost of furnishing a home is more expensive than furnishing a presumably smaller apartment. HGTV says that a home’s annual maintenance fees are around 1 to 3 percent of the purchase price.
Get preapproved for a home loan first
Before you even make an offer, get preapproved for a home loan. A pre-approval loan means that a lender assessed your current financial situation and credit history and came up with a figure that you can afford to pay. This pre-approval puts the seller at ease because it means the lender has decided that you have the finances to cover the down payment and the mortgage. You can do this online or over the phone, and it only takes a couple of days to sort out, but get this squared away, and then start your home hunt.
You should apply to several lenders to make sure you are getting the best mortgage rate available and consider looking outside your home bank, as many large banks have more restrictions on getting a loan. Most millennials are first time homebuyers, and fortunately, there are many government and private programs that cater to first-time homebuyers to make the home buying more affordable. For example, some programs will roll the closing costs in with the monthly loan payment.
Buy a home you can see yourself staying in for a while
Since you have to summon up closing costs each time you buy a home, it’s important to buy a home you can see yourself living in for at least five years. It may seem fine at first to buy a small condo for two years and then move out to the suburbs when you have kids, but each time you move, you’re throwing away tens of thousands of dollars in closing costs.
Here are some questions to consider that will help you suss out whether this dwelling is a good five-year home.
Does the home have enough bathrooms/bedrooms/space for future kids? Do you like the area you live in or was it the only neighborhood you could afford? Would your job take you somewhere far away in the near future?
Write a hand-written letter to the seller
In competitive housing markets, many people are putting offers on homes. Even after you make an offer, the seller may get backup offers. If you feel the situation is competitive, it doesn’t hurt to appeal to the seller’s sensitive side with a lovely handwritten note on what this home would mean to you and your family.
Find a great agent and ask a lot of questions
Buying a home can be confusing, but luckily there are people who can field your questions: real estate agents. You might be compelled to buy a home without an agent to save money, and that’s fair, but if the process is daunting and the logistics evade you — team up with a knowledgeable agent who can guide you through the process.