Social media is filled with posts by people (many of them Millennials) about the frustrations of adulting. Paying bills, buying cars, job searching, all these things fall under the adulting umbrella.
But they all fade in complexity to buying a house—especially your first home.
This is the case for most millennials. Over a third of home buyers are millennials around 30 years old, and 70 percent of them were first-time home buyers.
The decision to switch from renting to buying is a big one. Renters can move out when a job changes, a relationship ends or a child is born, provided they are within the limits of their lease or pay to get out early. Homeownership is more permanent and more expensive. The Median home price was $320,300 as of the second quarter of 2019, though that varies greatly by geographic region. And the mortgage is just one part of home ownership costs. Are you ready? Below are five signs you are ready to search for your dream home.
- You have a good credit score
- You can afford the down payment
- You are ready to settle down
- You have stable employment
- You can afford to maintain a house
If you checked off all five boxes, read on to learn more. But be patient: Home buying is a long process and in many instances takes over three months.
The Personal Finances for First-Time Home Buyers
Step 1: Assessing Your Personal Finances & Credit Score
The median income of home buyers in 2017 was $91,600 according to the 2019 National Association of Realtors, but that dropped to $71,200 for buyers 28 or younger. How much you make, though, is just one yardstick. There are two much more important ones: how much debt you have and how much savings you have. Financial experts recommend having 3 to 6 months of living expenses in savings. This is money beyond the check you will write for the down payment and closing costs, and beyond checks you write for your daily and monthly expenses.
How much debt you have is a much more important number as lenders actually measure this one before giving you a loan. It is called the debt-to-income ratio, or DTI. This formula helps lenders determine if you have the capacity to meet your monthly debt obligations, including home expenses. To get a qualified mortgage, your DTI generally needs to be below 43 percent. Many Millennials have a lot of student loan debt. While this does complicate the process, it is a hurdle that can be cleared.
Step 2: Find Out How Much House You Can Afford
New homes vary in size and cost. They also vary in how much is needed upfront. Handy people might choose a fixer-upper so they can personalize it and save on the down payment and mortgage. Less handy people, or busy people, are more likely to look for a move-in ready home. Homes also vary in up-front costs. Let’s dispel a common misconception now: You do not need a 20 percent down payment to buy a home—though buying one with less will require private mortgage insurance (PMI) or a second loan. Having a 20 percent down payment is conventional, but it is not required.
Lenders wants to want make sure first-time buyers are not trying to buy too much house, which will lead to financial worries down the road for homeowners, lenders and the economy. The 2008 financial crisis and subsequent recession was caused in large part by more lenient lending rules which led to a housing bubble and a housing market crash. Lenders learned a lesson and are now more critical of potential buyers. To make sure your mortgage loan is manageable, lenders look to see that monthly housing expenses (including monthly mortgage payments, homeowners’ insurance, property taxes, and sometimes homeowners’ association fees), do not exceed 28 percent of your gross monthly income. This math is important because household expenses exceed these costs and include everything from maintenance, lawn care and utilities to food and transportation.
Step 3: Get Pre-approved
Before visiting a single home or open house, get pre-approved for a home loan. Without this pre-approval, sellers will not take you seriously, and in tight market, that could get frustrating quickly. Pre approval is not the same as pre-qualification, which requires minimal documentation. Getting pre-approved is as simply as a 10-minute phone call to Own Up. A pre-approval letter tells you how much house you can afford and informs the house hunting process.
Get your credit report so you know your credit score. A credit score below 620 will typically make obtaining a mortgage extremely difficult. A credit score over 700 is something to aspire to, while over 740 puts you in the top tiers. If you are one of the people whose credit score is too low to qualify for a mortgage, contact Own Up and we can give you advice on how to raise your score.
Your credit score will change if you open a new credit card or get a new loan(for instance to buy a car), so minimize these types of transactions during the home search and buying process.
Step 4: Find a House with a Real Estate Agent
Own Up is your co-pilot in the mortgage part of your home buying journey; a real estate agent is your co-pilot during the search for a new home. Choose a buyer’s agent who will represent your interest and is familiar with the area you are focused on. More experienced agents will likely be members of the National Association of Realtors. They understand the market, are familiar with home prices and can be much more helpful that going to open houses alone. Search real estate listings in the area you want to move and see what agents are selling houses that are similar price and size to your desired home. Also look to see who long these homes have been on the market.
People wishing to pass the data crunching on to someone else, HomeLight searches its database of tens of millions of real estate transactions and thousands of reviews to find the best agents for you. The service is free, real estate agents cannot advertise on their site, and buyers and sellers receive information on the top three agents in their chosen area.
Step 5: Buy Your First Home
Once you have found your dream house, it’s time to negotiate an offer. This includes everything from the purchase price to contingencies, or the requirements that must be met for the sale to go through. These include a home inspection, appraisal, financial contingency in case a lender refuses to finance a loan, and a title search. The agreement is laid out in a Purchase & Sale Agreement, also known as SPA. Your real estate agent will guide you through this process.
The Purchase & Sale Agreement is a binding legal document that states the final price for the house and the terms of the purchase, as negotiated between the buyer(s) and seller(s). One of the contingencies mentioned above is the inspection contingency. The inspection will red flag any problems needing immediate attention, but potential buyers should consider the age of the furnace and roof, and appliances, before making an offer as the older they are, the sooner they will be need to be replaced.
Step 6: Research Your Mortgage Options
All mortgages are not alike. In fact, they are very different. Some are conventional loans with a 20 percent down payment; others have down payments as low as 3 percent. People with less income and more debt (including student loan debt) can get a Federal Housing Administration (FHA) loan with rates as low as 3.5 percent while veterans can access VA loans with less stringent requirements. Read this to learn the language of mortgages so you know what is being offered.
The most important thing to remember is you have mortgage options, so shop around. You wouldn’t go to one car dealership and buy a car, would you? This purchase is much bigger, so shop around. Different institutions offer mortgage loans. Understanding you options is key to finding the one that is right for you. There are both fixed-rate mortgages and adjustable-rate mortgages. You can also pay points to lower your interest rates, or get a lender credit to lower your closing costs. Many states offer first-time homebuyer programs. Search for programs in your state here.
Once you are ready to pick up the phone, be ready with all the needed documentation. This includes:
- Income verification: pay stubs for the last 30 days, W-2’s for the last two years, and address records for the last two years
- Asset verification: the last two months of bank statements (to prove you have money for the down payment)
Step 7: Close the Deal and Moving In
The last step in the home buying journey is the closing. The hard work and research is done and buyers most need nimble hands to sign their names and initials to reams of paper so they can get the keys and move into their new home.
Own Up knows that the homeownership journey is confusing, especially as a first time buyer. Own Up believes that education is the key to empowerment. Call us, and we can walk you through the home buying process.