Buying a Home as a Millennial

Buying a Home as a Millennial

For Millennials, there’s often a misconception that purchasing real estate is beyond their reach. Now, many remain home with their parents or rent for an extended period while working tirelessly to pay off debt. However, it doesn’t mean they aren’t interested in becoming a homeowner one day. Not only does owning a home include gaining control over living space and privacy, but you’ll build your equity while having the pride of ownership in your back pocket. 

The hardest part of purchasing a home is always getting started. Here, we will break down three ways to help you save up and own your very first home. The biggest thing to remember is patience.

Saving Up for a Down Payment

When saving up for a down payment, consider how much you need to have set aside before you begin house hunting. Depending on the type of loan you choose, your down-payment requirements can vary from 3%-20%. The two most common types of loan options for first-time homebuyers are listed below.

Conventional Loan: 

Not insured by the federal government, a conventional loan can last anywhere from 15 to 30 years. To qualify, you should maintain a credit score of at least 620, provide proof of stable employment, and have at least 3% of a down payment saved. For lower monthly payments, you can have up to 20% saved for a down payment. 

A primary benefit of having a conventional loan is the option to have a fixed or adjusted interest rate rather than a set rate for the duration of the loan. However, it’s important to remember that if you have less than 20% saved for a down payment, your mortgage lender may require you to purchase private mortgage insurance (PMI).

FHA Loan: 

Easier to qualify for than a conventional loan, a Federal Housing Administration (FHA) loan is government-insured and a good option for those looking to contribute a smaller down payment. 

These loans typically last 15 to 30 years and include a fixed interest rate, so you’ll never have to worry about a fluctuating monthly payment. Eligibility requirements are more flexible with an FHA loan compared to a conventional loan. For credit scores over 580, you only need to worry about having 3.5% saved for a down payment. Anything lower, and you’ll have to have at least 10% of your down payment set aside. 

Similar to a conventional loan, you’ll need to purchase private mortgage insurance (PMI) if you plan to put down anything less than 20%.

No matter which option you choose, start by determining the timeline around which you’d like to purchase a home and begin building your savings. The easiest way to do it is to look at your monthly income and determine what you can put away each month while still living comfortably. 

An easy tip is to set up a recurring weekly payment. It might seem daunting at first, but soon, you’ll adjust and start saving without even noticing. It’s a win-win!

Pay Down Debt

Debt comes in all shapes and sizes. You may be tackling student loan debt, credit cards, auto loans, you get the picture. And while your debt can seem daunting, you need to look at it with the same perspective as saving up for your down payment; it takes time, and you need to be patient. 

Although it varies depending on your type of mortgage loan, a good rule of thumb is to try and keep your debt to income rate lower than 50%. 

Start by determining your fixed monthly costs and leftover take-home pay, then consider how much can go towards your overall debt. When it comes to tackling debt, people often choose either the debt avalanche or debt snowball method. 

Debt Avalanche

With a focus on saving money on overall interest, the debt avalanche method involves making minimum payments on all of your outstanding accounts, then using your remaining leftover to pay off your account with the highest interest rate. 

To be successful, you have to remain disciplined. It will take time, dedication, and motivation. However, paying off your accounts with your highest interest rates first is a great way to save you both money and time in the long run. 

Debt Snowball

If you are more of a visual person, the debt snowball method may be a better match. It involves paying off your smallest debts first, then moving on to your larger accounts.

Similar to the debt avalanche method, you will make minimum payments on all of your outstanding accounts. However, instead of using your remaining leftover to pay off your account with the highest interest rate, you will put that extra money into your lowest account to pay off first. Once your first debt is taken care of, you move onto your next smallest account, and so on. 

While it’s easier to implement and remain motivated, you’ll be spending more money on interest and it may take longer to pay off your debt in its entirety.Once you’ve decided which payoff method would work best for you, you can get creative on how to reach your debt-free lifestyle faster. Whether it’s picking up a side hustle, making some financial sacrifices (do you really need to eat out multiple times a week?), or putting that extra money from a raise or tax return towards your debt, every little bit helps. It may seem like you are cutting yourself short for now, but imagine the financial freedom you’ll feel once you’re officially debt-free!

Work on Increasing Your Credit Score

As mentioned above, when you’re applying for a mortgage loan, lenders will look at your credit score. While the qualifications for your credit score may vary, a strong credit score will mirror your financial efforts and place you in good standings for purchasing a home. Below are a few ways to increase your credit score:

Make on-time credit card payments

No matter how much effort you put into raising your credit score, nothing will matter if you’re making late credit card payments. On-time credit card payments are one of the largest factors in determining your credit score, and a late payment, depending on the size, could last on your credit report for years. 

Minimize your credit card utilization

A good rule of thumb is to keep your credit card utilization under 30%. Having it rack up any higher, could mean you have more difficulty in paying off your overall debt. Although many factors play into what you’re using your credit cards for, tread with caution. The more available credit you have available on your accounts each month, the better!

Keep dormant credit cards open

Another factor to consider when raising your credit score, is taking a look at the length of your credit history. Although not as influential as on-time payments, your credit score factors in your newest and oldest credit card accounts, and averages them together. And the longer your credit history, the better! It will show lenders that you have seasoned experience managing your credit, and provides them the confidence that you will make timely payments.

Even if you have a credit card that you don’t use often, make a small payment, such as on gas or groceries, to keep the credit card open. This will increase the longevity of your credit history, and may help with increasing your score.

Remember, buying a home takes time, and there are a lot of factors that come into play. While it may not happen overnight, work towards each of the goals listed above, and in time, you will get there. Slow and steady wins the race, you’ve got this!

Ready to take the next step?

Contact us today for an overview of the buying process!