These 10 Tips for Millennial Home Buyers will help you prepare and decide if you’re ready to make one of the biggest purchases of your life.
Matt and I bought our “Starter Home” five years ago this coming August at the ages of 20 and 21. We were both working multiple jobs and going to college at the time. We know a few of our friends who bought houses young like us, but it’s not very common for most residing in the Millennium Generation. A reader recently asked me if I had a post with some tips on buying a house when you’re in your twenties and since I’ve been asked this same questions from Facebook friends, I figured it was time I write one.
First of all, buying a house is a big commitment. You need to be prepared and patient, but most of all, you need to make sure a mortgage is something you’re ready and willing to take on. A mortgage and a home cuts down on a lot of the freedom most people enjoy in their twenties. You might not be able to watch the Super Bowl with friends because you’ve gotta fix the plumbing, and you’re occasionally late for work when the furnace breaks down, or you’re literally trapped in your own house thanks to a busted door knob. Those are all things that have actually happened to us in the last few weeks.
No one looks forward to dealing with these types of issues, but stuff like that comes with home ownership. You’ve got to be prepared for your house to come first, paying the mortgage is a priority which means that trip to the Dominican to celebrate your 25th might have to wait. You might have to wait on getting a new Coach purse when the dryer craps out on you. If you’re not prepared to drop everything when something like that comes up, then you shouldn’t buy a house. However, if you’re up for the challenge here are some tips for millennial home buyers or first time home buyers of any age really.
1. Pay Off Small Debt.
Before you apply for pre approval for a home loan, it’s important to pay down any small outstanding debt you might have. If you’re a millennial in your twenties and looking to buy, chances are you have some student loans, don’t worry about these as much as credit card debt, car payments, and any other monthly payments you might have. However, if you can pay down some of your student loans, that’s great to but no matter what make sure you DO NOT miss a payment!
2. Setting a Budget.
Once you’ve paid off some of your smaller debt, it’s time to look at what you CAN afford, not what you THINK you can afford. Your monthly mortgage payment (payment, taxes, homeowners insurance) should be less than 25% of your monthly income after taxes. Ours is 10%. In all honesty, I would recommend on trying to stay under 15% but this isn’t possible in every situation. This Affordability Calculator from Zillow is a great tool to use when you begin analyzing your budget.
3. Build a Savings.
I honestly cannot express just how important this step is. You will need to start saving as soon as you begin entertaining the idea of buying a house if you don’t save regularly already. You’re going to need to have money set aside for a down payment, possible closing costs, home inspection, surprise expenses and you’re also going to want to build an Emergency Fund. To figure out just how much you need, plan to put 20% down in order to avoid Private Mortgage Insurance (PMI) which we’ll talk more about in a bit.
The closing costs are typically between 2-5% of the purchase price but you can often request that the seller covers closing costs and you pay a higher purchase price if you’re cash poor, this is usually stated in the initial offer. When we bought our house we submitted an offer where the seller paid closing costs and they accepted it. We only offered them $100.00 more than the listing price, but most sellers expect to sell for less than the listing price.
4. Pre Approval.
In most cases, you’ll need to apply for pre approval for a home loan. In all honestly, these documents mean nothing but most realtors and sellers won’t work with you if you can’t show proof of mortgage eligibility. Home loan pre approvals are generally drawn up with very little information and give you a vague sense of what you can afford. It’s the loan officers who draw up these documents, but it’s the underwriters who will actually be approving you for the loan and they have much stricter guidelines.
My best advice here is to look for a house well within your pre approval rate, there’s no award for spending every last dollar, in fact, you’ll probably be putting yourself at higher financial risk if you do. You also don’t want to be let down when you get your heart set on a house and it’s 20K more than you actually get approved for. Banks have really started to crack down on home loans and loans in general since the crash in 2008. They’re no longer approving anyone and everyone like they were 15 years ago which led to the collapse. This is why being prepared with steps 1-3 will help you secure the loan you need and ensure that you can afford it.
You’ll need to take your W-2 statements from the last two years (three is better), up to date bank and investments statements, and a driver’s license and social security card. The loan officer will also run a credit check and contact employers to verify employment and salary. If you’re a young first time buyer, your credit score has fewer factors than you would later in life. Make sure you pay your monthly bills ON TIME, because there are so few factors, a late electricity bill will have a much bigger impact on your credit score than it will much later in life.
5. Get a Realtor.
Anyone else out there under the impression that you only need a realtor if you’re selling a house? Well, we were. For the first few houses we looked at we were doing everything on our own. Luckily, we looked at a house listed by an agent who was amazing and inquired as to whether we had one. We told her we didn’t and she explained that buyers can have agents too to help them navigate and negotiate the home buying waters. There’s no out of pocket cost to the buyer for having their own agent, the agent simply gets a cut of the agent commission from the purchase/sale of the property. If there’s only one agent involved they would get the full commission, if there’s two then they would split it 50/50. Make sense?
Getting a realtor of our own was a game changer, it was so great to have someone in our corner to negotiate with sellers and the bank and explain what exactly all of the real estate market lingo meant. It’s important to have someone on your side and give some unbiased advice, unlike parents. There are realtors who specialize in first time home buyers who know
Now that you’ve got a budget, a pre approval letter, and a realtor, it’s time to sit down and decide on a location. Do you want to be near family, school, work, friends, or somewhere in the middle? As HGTV will tell you, it’s all about LOCATION, LOCATION, LOCATION! Location is extremely important especially when thinking about the future and potential resale, school districts for future kids, or amenities. When we purchased our home we were both still in college and weren’t quite sure where we’d find jobs.
We ultimately narrowed our hunting zone down to a couple towns close to the interstate that were between two of the bigger “cities” in Maine and about a half hour from our families. Matt started a job right in the town we bought the house in a couple months after moving in and I still commuted 40-50 minutes to school and work. Now we both make the commute, but at least we can car pool. When you add it up though, that means we spent close to 450 hours driving to and from work each year, plus approximately 25K miles of wear and tear on the car each year.
However, being on the outskirts does have some perks. Our utilities are low, our taxes are low, there’s very little crime, and I can’t see in my neighbors house while looking out my own window. This house was a good move for us five years ago. Our mortgage is about half of what we’d pay to rent in our area and it’s been a good little starter home for us. In a couple month though, it will be time for us to make a change. When you’re 40 minutes from work and 30 minutes from family in opposite directions with no real attachment to the town you’re in, it’s time to move on.
7. Starter Home vs. Forever Home.
What’s it going to be? This is probably the last BIG decision that needs to be made before diving in for the house hunt. What do you want to get out of your house? Are you looking for something small to start and learn with while building up some equity for a few years? Maybe you’re looking to start a family early on a settle down in one place for a long period of time? There are benefits to both but either way you should make sure you can commit to the house for at least 5 years because there are tax benefits that don’t kick in until year three. You’re going to lose 6-7% to fees when you sell your home so you want to make sure you’ve built up enough equity so you don’t lose money when you sell.
More than likely if you’re buying a house in your twenties, you’re not buying something brand new, though this isn’t the case for everyone. Most houses will need some cosmetic updates, figure out what’s a priority and go from there! If the 1970’s kitchen is a deal breaker and you want to remodel it that’s great. However, if you’re not equipped with the skills to do it yourself or the money to pay someone to do it for you, it might be easier to just go with a different house. You don’t have to be afraid though, a starter home is a great way to learn and make mistakes – hey there, crooked floating floors.
A house will more than likely be the biggest purchase you’ll ever make and shouldn’t be taken lightly. Are you willing to take on the work of a foreclosure or a short sale or are you looking for something that needs minimal updates? If you’re on your own, you’re going to second guess yourself and if it’s two of you, you’re going to argue about just about everything. This process is stressful, but if you can make it through alive, then you’re probably ready to be a homeowner.
P.S. The stress never ends.
8. Home Inspection.
Once you decide on a house, it’s time to put in an offer, which your realtor will walk you through. Once the offer is accepted you can move forward with a home inspection. We put offers in on four houses before our offer on the one we’re in, we were pretty set on the fourth house until the home inspection. Everything was well and good except for the heating system, it was old, nowhere near up to code and needed to be replaced. We had had our offer accepted on the last day of the First Time Home Buyers Credit and were looking forward to the extra cash to make some updates (not to buy a new heating system). After some failed negotiating with the seller to have her fix/replace the heating system before purchasing, we walked away and left the credit behind.
It was hard to walk away from the credit, especially since we had had five months of opportunity to get it when we first started looking. It was the right thing to do though and we’re so glad that the inspection revealed the issue to us. A home inspection is generally a requirement, but even if it isn’t, make sure you get one. Here in Maine they run about $500.00 a pop and are an out of pocket expense to the potential buyer. A home inspection can reveal major issues or affirm that the house is sound. The biggest things to pay attention to on their report is the roof, the plumbing, the foundation, and your heating/cooling system. If any of these things were to have issues shortly after purchasing, it could cripple your finances.
9. Avoid PMI.
If there is one thing I would stress to you more than anything on this list, it’s avoiding Private Mortgage Insurance or PMI. PMI is evil! You are charged interest on your loan based on what kind of risk they associate with you on a given loan. PMI makes you pay premiums on the risk of you defaulting on your loan so that the bank can insure that it gets paid anyways. Sometimes PMI isn’t as pervasive and you may only add $60.00 to your mortgage, but we know people who have had it add close to $400.00 to their mortgage each month.
This extra money doesn’t benefit you in anyway. It doesn’t go towards the principal of your home and it doesn’t insure you in any way, it only helps the bank. Even at $60.00 a month that’s still $720.00 a year! PMI stays on your mortgage until 20% of the principal has been paid off, usually 5-7 years. You can avoid PMI by putting 20% down at the time of purchase. You should also shop around for different loans and options, we were able to get a first time home buyers loan that allowed us to put down just 10% in order to avoid PMI.
There are other ways to get around PMI or at least limit it. Talk to your bank and realtor to decide which loan is best for you. Often times people will do an 80/10/10 loan which isn’t a complete solve, but can help save you money if you don’t have a lot to put down on the house. You can read more about PMI here.
This is something I struggle with everyday, in fact it seems like something our whole generation struggles with. We want what we want and we want it NOW! From deciding to look at houses to the day we got the keys, patience was something I really should have had a whole lot more of. We’d all like the home buying process to be short and sweet, but it’s not. It’s rocky with a thousand tiny loopholes to jump through and it’s enough to drive you mad. When that first closing date slips by and then the second waves at you without even stopping it gets pretty frustrating.
The home buying process is different for everyone, and most of you probably won’t be buying a double foreclosure like we did. Never heard of a double foreclosure? Well, basically our house was a foreclosure that was seized by the bank, then that bank went under in the collapse and another bank seized the home. Sounds awesome, right? Yeah, it was a nightmare, but it worked out for the best in the end as we were forced to hunt for a different type of loan that has put us in a much better financial position today.
Being a homeowner is hard work, but it’s very rewarding to know that you’re out there on your own making it work. You can paint the walls whatever color you want. You can walk around naked without worry that your landlord will stop by. You can get a dog and most importantly you can make it your HOME.