Who can wrap their heads around taking out a mortgage when you’re still struggling with paying off college loans?
a ton of people your age! As millennials begin to earn higher wages, get married, and look to settle down, you are turning your sites to homeownership. In fact, the National Association of Realtors found that millennials made more home purchases last year (36%) than any other generation. That might sound like everybody’s packing up and moving out. But it’s only one piece of the where-do-I-live puzzle.
Your home or mom’s?
While millennials account for the highest share of home buying activity last year, you also hold another record: the largest number of young people living with their parents (31%.) And that number is expected to grow, according to Census Bureau data. There are many reasons why this is occurring (and if you live at home, you probably know them all):
You’ll notice that ‘no job’ is not on that list. 90% of live-at-home millennials are gainfully employed. But with the many expenses you face, coming back to the family home is often the most financially responsible move you could make.
Why the basement is not so bad
Rent-free living is a golden opportunity to begin building your financial foundation. The money you save can really help you eliminate that student loan debt. It’s also a chance to pursue your bliss, rather than feel compelled to take the highest-paying job you can find. You can capitalize on building a solid credit history. And you can sock some cash away toward your future apartment’s security deposit, or even a down payment on a home.
Is renting right?
Traditionally, young people’s first move was to an apartment or other rental property. Then, in their early 30s, they’d purchase a home. Today that’s not always the case. A recent survey showed that 80% of renters had no intention of trading up to homeownership anytime soon. Here are their top reasons:
Renting really costs you
Renting certainly is easier to afford than buying, especially when you are first striking out on your own. But it comes with a huge price tag. One recent survey showed that young millennials spend an average of $92,600 on rent by the time they’re 30. And they will end up right where they started: owning nothing – and needing a place to live. Another rent-related problem: prices are rising quickly, and in many cases the cost of renting is virtually equal to carrying a home. It all adds up to a growing movement toward investing in real estate.
You have to live somewhere
Let’s look at the next 30 years of your life. You can either pay over $500,000 in rent (assuming $1500/month), and still need to shell out for a place a to live. Or you can put that $1500 a month toward paying down a mortgage, and end up owning your home, and living rent-free (mortgage payment-free, that is.) Yes, there are other costs you’d need to pay with a home. But you also get these benefits:
What can you afford?
A home is probably the single largest purchase you will ever make. And while right now it may seem way beyond your financial reach, the more you learn about the purchase process, the closer you are to becoming an owner. Start by taking a snapshot of your financial picture. There are a number of ways to calculate how much house you can afford to carry. Rule of thumb from the FHA (Federal Housing Administration): spend 29% of your gross income on housing. That amount can increase if you have little or no debt. If you don’t want to give up your dinners out or weekends away, adjust the percentage down to leave ‘lifestyle’ money in your budget.
Use this calculator to get a ballpark figure of your price range: Affordability Calculator
Costs of buying a home
Very few of us can buy a home outright. So instead of plunking down hundreds of thousands of dollars, 98% of millennials pay for it a little at a time, with a home loan, or mortgage. Most mortgages usually come with a 30-year payback, and a fixed interest rate. Shorter terms mean higher monthly payments, but you pay less in interest. Here’s an overview of factors to consider when determining the costs you may incur:
A pre-shopping list
Think homeownership might be for you? Before you hit those open houses, make sure you can answer these questions:
Dealing with down payments
It’s not news that the hardest part of buying a home can be coming up with the money for a down payment. But you might be surprised to learn that there are assistance programs out there that can reduce your requirements – or make them disappear entirely! There are nearly 2,500 down payment programs in the US, and the average amount of down payment assistance is about $11,500, according to an article in Realtor.com.
Start online, with sites such as:
The US Department of Housing and Urban Development (HUD) offers a variety of programs that assist with down payment and closing costs. HUD also has a link that connects to your state’s programs.
Start strong with pre-approval
It’s a competitive market out there. Give yourself the advantage over other buyers by starting your home search with a mortgage pre-approval from your lender. It shows realtors and sellers that the lender has checked your credit and documentation, and verified that you are ready to receive a specific loan amount, once your property has been appraised. So there will be no surprises down the line. Tip: pre-qualification can help you pinpoint a price range. But that is just a first step in the home purchase process. Go for pre-approval instead. It can give you preferred status with sellers.
Side hustles: help or hindrance?
The number of gig workers continues to rise as millennials go strictly freelance, or augment their income with second jobs. So how does that affect your ability to get a mortgage? If you qualify for a mortgage with the income from your ‘regular’ job, you don’t have to do a thing. Lenders want to see two years of income history, and that can be a bit difficult if you’re self-employed, do work that isn’t steady, or need your second income to qualify. If possible, provide documentation to verify all your income for two years prior to applying for a mortgage.
If you cannot, here are some ways to compensate:
More help is coming: in answer to the growing gig economy, mortgage lenders are beginning to develop new risk assessment models. These aim to increase income verification flexibility, which will help side hustlers qualify for a mortgage. Plus, alternative programs enable self-employed workers to count all their cash flow as income, not just the amount left after writing off expenses.
It’s an “L” of a process
The path to homeownership isn’t as long – or as daunting – as you might think. And the earlier you start, the more ways your investment can pay off.
Just follow these signposts along the way:
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