Millennials are shaping the real estate market in one form or another. After historic low rates of homeownership by millennials, it’s estimated that close to 36 percent of millennials are now proud homeowners this year and that this number is expected to increase at a faster rate over the next few years.
Unfortunately, many obstacles exist in the way of millennial home ownership from low home inventories to historically high prices in many cities across the country.
As millennials begin looking for new homes, it’s easy to get captured in the cycle of debt that the last subprime mortgage crisis trapped many in. Tack on student loans and rising auto loans, and trying to save a buck in this economy is becoming more difficult.
Owning a home is definitely expensive and an investment that should not be taken lightly. Fortunately, there are some steps young people can take to save money on their next home purchase and still have some money in the bank.
Set your credit straight
First things first, you won’t get approved for a mortgage until you improve your credit rating. Pay off any outstanding small debts you have that could negatively impact your credit rating. It’s often suggested that you build your credit by making small purchases with a credit card and paying back the remaining balance on time.
The better your credit, the smaller your interest payments and the more principle you can pay off in the short-term. Try to establish a good line of credit and avoid taking out any loans six months before applying for a mortgage. This will negatively impact your credit, even if you are actively making payments.
Start saving early
Honestly, I suggest saving close to a quarter of your paycheck at least a year before purchasing a home. For one, this will pad your savings and also give you an idea of what you can afford in terms of monthly payments. Secondly, this will teach you how to properly budget your money, as your mortgage would ideally encompass 25% of your pre-tax income.
Stay away from taking on any more debt obligations as this will stress your finances and impact your credit score. Try to repay as much of your student loans as possible and consider refinancing or consolidating your debts to make them more affordable.
Get pre-approved for your mortgage
You can seek pre-approval from virtually any lender and the process is super easy.
Getting pre-approved for a mortgage will allow you to view how much your expected monthly repayment will be. This should be used to determine a downpayment that will lead to a monthly payment you can comfortably afford.
Seek out an FHA loan and assistance
Many first time home buyers have the option of seeking a low-cost FHA loan that doesn’t require a hefty 20 percent down payment. Most FHA loans have down payment requirements as low as 3.5% and are available to people with a credit score above 580.
Depending on where you live, your state or municipality may offer housing assistance in the form of rebates, discounts, or tax deductibles. For example, if you’re purchasing homes in Connecticut, you’ll be offered downpayment and closing cost assistance to help you afford those inflated out-of-pocket costs.
Perform your due diligence
In real estate, location is everything. It’s important to perform your due diligence on a home before making a purchase to the most suitable offer. This includes evaluating housing characteristics, such as:
- Comparative market value of the home
- Neighborhood characteristics (i.e. local schools, amenities, etc.)
- Your actual neighbors
- The housing market (seller’s vs. buyer’s market)
Set realistic goals
Finally, none of this really matters unless you commit to a strict budget and realistic financing goals. Sure, buying your dream home in your 20s is exciting, but not very practical. Honestly, millennials have a prime opportunity to forego home ownership in exchange for an investment or rental property they can use to supplement their income and pad their savings.
Ultimately, it comes down to personal preference. But by doing your research you can skim some money off of your monthly payments and still have money to support your young lifestyle.
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