It’s no secret; millennials are struggling to get into the housing market. Many millennials prefer the flexibility of rentals, and others struggle to accommodate saving for a home on top of underemployment and heavy student loan burdens. Yet for those who feel confident enough to go from “renter” to “owner” there are a few items to consider before a purchasing a first home.
You Don’t Need as Much for a Down Payment As You Might Think….
Depending upon the type of mortgage you qualify for, many millennial home buyers can get away with putting down as little as 3.5% of the home’s cost. This is for first-time buyers only, and can be a great way to get into a home if you don’t have a large nest egg, or would prefer not to part with all of it. Those who opt to put down 3.5% should be aware they’ll have to pay private mortgage insurance on top of their monthly mortgage payment until have 20% equity in the home.
While private mortgage insurance can be costly, it may be worth it if buying in your area is more advantageous and cost effective than renting. Talk with your mortgage broker about your options and how your down payment amount will affect your month-to-month costs.
….But Don’t Forget the Added Extras
Many millennials forget to accommodate for closing costs (5-6% of the home’s value, but in some cases covered by the seller), HOA fees for neighborhood/building upkeep, and inspection and appraisal fees, when calculating the costs for a home purchase. Many buyers can swing the mortgage on a condo or pricey neighborhood, but when they factor in hundreds of dollars in HOA fees each month, an affordable monthly mortgage can turn into an unaffordable luxury.
When I purchased my first home I had an additional $2500 in fees on top of my down payment. When you’re already writing such a big check for the down payment, $2500 feels like an unbearable amount, so prepare your budget for the added extras.
Don’t Skimp On the Homework
Vet your real estate agents, brokers, and inspectors thoroughly. I know as an inexperienced, first-time buyer it can be easy to go with the first name you’re given, but with so much money on the line, this isn’t the time to phone it in.
Another thing many millennials forget? Checking your credit before you shop for a home. Your credit score will impact the interest rate you receive, which (depending on if it is good or bad) could cost you thousands of dollars over the lifetime of your mortgage. If your credit is less-than-stellar, spend some time trying to improve your score. It is tedious work, but can pay off big time when it comes to borrowing money for your home purchase.
Avoid Costly Repairs
The learning curve on being a first time buyer is already steep, but the learning curve for renovating a home and knowing how to manage a major project is even bigger. It can be incredibly overwhelming (and expensive!) to juggle both a first purchase and a first renovation.
A few minor cosmetic repairs (paint, light fixtures, counter tops) or going one room at a time can turn a hidden gem into a great home, but put off any major work until you buy your second home.
Take a Home Buyer’s Education Course
A Home Buyer education course is required by many banks, but even if it isn’t, all buyers would do well to take one. These courses are designed to educate buyers on what to expect during the bank underwriting process, and what happens after your take ownership of the home. It can also counsel you on what to do in the event that you’re unable to pay your mortgage or need financial assistance.
Owning a home is completely different from renting, which is why it pays to be as prepared as possible. Ask your mortgage broker or do a quick google search to find home buyer education courses in your area.