Changes now can help pave the way for Millennials’ home purchases
Homeowner — sure, it’s a title you want to claim one day, but maybe not right now.
Between paying off school loans, establishing your career path and getting your footing in the “real world,” you’re just not ready to take on the responsibilities of a home.
Although homeownership is years ahead, there is still work you can do now to prepare for homeownership.
“Buying a home is one of the largest purchases you’re ever going to make, so you need to make sure you’re prepared,” says financial expert Rachel Cruze. “Without taking the proper steps, a home can quickly turn from a blessing to a curse.”
In an effort to help you along the path to homeownership, we’ve talked to the experts to get their advice on steps you can take now, so that when you are ready to purchase your first home, you can be knowledgeable and prepared.
Start Saving … Now
One of the first things you can start doing now to help make your path to homeownership smooth is build up your savings account. While the task may sound daunting — especially when funds are tight — it doesn’t have to be.
In fact, according to the National Association of REALTORS 2016 Profile of Home Buyers and Sellers, 61 percent of recent homebuyers used their savings for their down payment. So it's practically never a bad idea to keep padding that savings account.
It’s important to remember that a stockpile of saved money doesn’t happen overnight. “Obviously, saving money takes time, so it’s never too early [to start],” says Brian Koss of Mortgage Network in Danvers, Mass. “If you’re young and are thinking about buying a home someday, don’t wait to save — start now.”
Save For The Unexpected
When it comes to saving for a future home, most people only consider their looming down payment. This is a mistake you don’t want to make. Cruze suggest saving an additional three to six months’ worth of expenses as an emergency fund. “In doing this, you’re building a solid foundation for your finances,” she says.
Kevin Gallegos of Freedom Financial Network in Tempe, Ariz., suggests saving a bit more. “Conventional wisdom holds that individuals need to save six to nine months’ worth of living expenses in an emergency fund. This is in addition to saving specifically for your home,” he says. “If that sounds daunting, start with the level of expense that would cause you to rush to a credit card. Have at least that amount available and build toward six or more months’ of living expenses.”
Dennis M. Breier, president of a wealth management firm in Burr Ridge, Ill., also recommends extended savings.
“Young clients need to save an emergency fund in case something goes awry with the house they purchase,” he says. “Often, young people have a down payment, but they are poor when they get into the house. At the first sign of trouble with the home, they have no money to fix it.” (Though, this is not an issue if you are purchasing a newly built home since everything is new and under warranty.)
How to Save: Cut Costs Where You Can and Create a Budget
“The biggest obstacle to saving money is changing your habits,” says Koss. “Sometimes sticking to a major goal is easier when you include family, friends and workmates in the challenge, because they can hold you accountable. Another tool is to keep pictures of your dream home in your wallet, on the fridge and next to your computer, so that you are reminded of your goal any time you’re about to spend money elsewhere.”
Laura Price, an investment advisor in St. Joseph, Mo., suggests something a bit more structured. “Create a budget and stick to it,” she says. “Sounds easy, right? It’s not.”
Price recommends depositing into a savings account the funds left over once all non-discretionary (fixed) expenses are paid. “Sure, everyone needs a social life, but live within your means,” she says. “What you give up buying today means you can buy more of what you want later.”
“I would start by creating a timeline for my ideal time to buy,” says Susan Chong, a broker with SPIRE Urban Real Estate in Denver, Colo. “Take money saved specifically for a home and subtract it from the 20 percent you’ll need for a down payment. Divide the remaining amount among the number of months you have until you want to buy and hit that goal each month.”
Know the Importance of Your Credit Score
It’s often not until you hear that you have bad credit that you even know what your credit score is. While perplexing, your credit score is a number that has great impact on your future purchasing power. Be smart and start paying attention to this number now.
“At bare minimum, [Millennials] should know what their credit situation is. Mortgage lenders, credit card companies and even employers are looking at your credit profile. You should be too,” says Edward Carroll, a senior loan officer in Richmond, Calif. “One in five Americans has errors on their credit report — errors that could cost you a higher interest rate on your credit cards, a home mortgage or even your car insurance. If you want to buy a home, get fiscally fit. Time will be your friend if you start early.”
Take control of your credit by actually using your credit, keeping usage around 35 percent of available credit and always paying your bills on time.
Above All, Be Knowledgeable
When it comes to buying a home, one of the most important things you can do to ensure a smart purchase is to arm yourself with knowledge. Know all the terms and numbers. Understand what they mean and how they work and speak with a financial advisor if you need more explanation.
Over the years you may have heard of people buying a home with as little as a 3.5 percent down paymentt. Maybe this caused you to sigh a breath of relief. A down payment that size may sound quite doable to you, but often 20 percent is the old standby.“We tell Millennials and Generation Y clients that 20 percent down should be the goal without compromise and further, a 15-year mortgage is the ideal loan term,” says Breier. “We do this because those clients who listen, which is very few unfortunately, end up avoiding a situation we call “over housing” themselves. Clients who put very little down on a house often buy far too much house and become enslaved to their mortgage payment.”
Chong agrees with a 20 percent down payment. “I think it’s best for people to shoot for 20 percent down, which has been the growing trend as lending guidelines have tightened,” she says. “Although you can start as low as 3.5 percent down with an FHA loan, you’d have to purchase mortgage insurance and would ultimately end up paying higher closing costs.”
Find out how to get assistance with that initial down payment.
What is PMI?
PMI, or private mortgage insurance, is a risk-management product that protects lenders against loss should a borrower default on their loan.
“Mortgages with less than 20 percent equity, which means a 20 percent down payment, require PMI in case the owner defaults on the loan,” says Gallegos. “When the homeowner pays a conventional mortgage down to 80 percent or less of the home’s value, the home owner can request that the lender cancel the PMI, enabling them to stop paying the additional amount.”
While homeownership seems at least a few years away, it’s important to financially prepare yourself now. The sooner you start saving for a down payment and the more you understand about financing a home, the better prepared you’ll be when the time comes to start shopping for your dream home.
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