6 Tips for Millennial Homebuyers
Home ownership is part of the American dream. But trends indicate millennials are slower to purchase homes than individuals in past generations. Millennials, individuals born in the 1980s and 1990s, face social and financial challenges in buying their first homes. Below are some key reasons millennials are delaying homeownership, as well as six tips for millennial first-time homebuyers.
3 Reasons Millennials Delay Homeownership
High Student Debt
The biggest obstacle millennials face in buying their first home is high student debt. High student debt requires high loan payments, which reduces the amount of cash available to make a mortgage payment. Additionally, having high student debt increases a borrower’s debt to income ratio (DTI), which is a key factor lenders will look at when determining whether or not a borrower will qualify for a mortgage.
High Prices and Low Wages
In addition to having a high student debt load, millennials are battling high housing prices paired with low wages. According to Chase, housing prices are 40% higher than they were in the 1980s, but wages have not increased by nearly that much. This means millennials are trying to pay higher debts and higher housing costs with less money.
Cohabitation and Later Marriages
Beyond financial reasons lie social reasons many millennials delay homeownership. Primarily, millennials are getting married later in life than previous generations. Marriage is a typical trigger for buying a house, but millennials are more likely to wait to get married. In fact, according to the US Census, the trend for cohabitation, or living with a partner before marriage, is more popular for millennials than living with a spouse. Thus, cohabitation may be one of the reasons most millennials choose to rent instead of own.
6 Tips for Millennial First-Time Homebuyers
Despite the unique challenges millennials face in homeownership, the generation still makes up 37% of the homebuying market. A survey by Apartment List shows 18% of millennials plan to rent forever. But that still means at least 82% of millennials plan to buy a house at some point in their lives. For those millennials looking to become homeowners, below are six tips to prepare to buy your first house.
Tip #1: Increase Your Credit Score
Your credit score is one of your most important tools when applying for a mortgage. Lenders will use this to determine the terms of your loan including how much you qualify for and what your interest rates will be. Interest rates are very important when calculating the overall cost of a mortgage. A difference of 0.5% in your interest rate might not seem like much, but on a mortgage for a $300,000 house, that half a percent could mean a difference of $72 per month and ultimately $26,000 in interest over the life of the loan.
Take steps to increase your credit score. Make payments on time for all your debts, even if you can only afford the minimum payment. Pay off credit cards to reduce your utilization rate. Lenders want to see low credit usage compared to limits, meaning you don’t max out your available credit. Learn more about how to increase your credit score with Tip #2 in our How to Save for a House While Renting article.
Tip #2: Pay Off Your Student Loans
Since student loans are the #1 financial obstacle millennials face in buying their first home, work on paying your student loans off as early as possible. By paying off your student loans, you will have more cash available to put toward monthly mortgage payments or a down payment. Similarly, paying off your student loans will significantly reduce your debt to income ratio, or DTI, which is a figure lenders use to calculate how much they are willing to offer you in a mortgage loan.
Tip #3: Know Your Numbers
Take the time to crunch numbers. Know what monthly payment you can afford. The monthly payment is the most important figure in determining whether or not you can afford the house, but keep in mind the additional costs of owning a house. If you’re transitioning from renting to owning, be wary of assuming you can afford a mortgage payment equal to your monthly rent. Home ownership also comes with costs such as maintenance, repairs, property taxes, insurance, and more. Get to know the expected costs within your area and shop within your means.
Tip #4: Learn About Real Estate
Familiarize yourself with different options of buying a house. The standard way to buy a house is to make a 20% down payment and get a mortgage to pay the rest. But this is not the only way to buy a house. There are lenders who will accept little or no money down and charge private mortgage insurance (PMI), as well as landlords who offer opportunities such as renting with an option to buy. By learning about real estate before you buy, you can decide what works best for you based on your goals and your financial situation.
Tip #5: Prepare for Mortgage Before Marriage
It’s common for millennials to rent and cohabitate. But if you choose to buy a house with your significant other before marriage, be sure you understand the legalities associated with such a decision. American Financing recommends first deciding how the house will be titled. Sole ownership? Tenants in common? Joint tenants? If you will both be on the home loan, consider how it will affect your credit, and how both of your credit histories will affect your application. Further, The Mortgage Reports recommends consulting legal advice. Have an attorney draft a Cohabitation Agreement to detail each person’s financial obligation to the home, as well as a Property Agreement to address furniture and other items acquired within the joint household.
Tip #6: Decide What You Want
It’s important that you know your reason for buying a home. The reason will influence what home you buy and how much you invest in it. Do you want a house for investment purposes? For your lifelong home? As a starter home? To pass on to future generations? To flip and sell? Once you determine your goals, you can outline in more detail what you are looking for in the home.
Create a detailed list of what you want in the house you buy. When you know exactly what you want, you can avoid the temptation to buy something you don’t really want just because it is available. Be patient, especially if you’re looking for your lifelong home. A home is probably the biggest investment you will make in your lifetime, so make sure you know what you want before you buy it.
Most millennials will achieve the lifetime milestone of buying a house at some point in their lives, despite delaying the event to later in life. The above list of tips could be a mile long, but for the most part, they all boil down to the same thing: live within your means. Despite the challenges this generation faces, millennials can prepare to become homeowners and fulfill that part of the American dream.
Find out how 101 Financial’s Workplace Wellness program helps homebuyers prepare for their financial investment.