Defy the millennial curse: The money tips for home ownership
True story: Buying a home is a huge moment. But it’s not straightforward and for millennials, it’s also not common.
According to data from the US Census Bureau’s Population Survey in 2020, millennial home ownership currently stands at 47.9% — more than 20% lower than any other generation.
The biggest reasons for this are delays in marriage and starting a family, and the fact that the US population is a lot more racially diverse than it used to be.
Ok, now for the good news. This pre-home buying checklist should help you prioritize steps you can take today to get to your goal of owning your home faster.
Step 1: Understand Your Motivation
It’s helpful to start with some internal reflection around your reasons for home ownership to keep you aligned with your goal.
Why do you want a house? Is this a short term “starter” house or a forever home?
Decide where you want to live and the kind of house you want. How much does it cost?
Where do you ideally see yourself in 1, 3 and 5 years? (This is how long it might take to build up your finances for a down payment).
Are there any other goals that are a priority in the short-term?
Step 2: Understand Home Ownership
Do your research and speak to friends, family, and other homeowners to understand the pros and cons of home ownership.
Ownership Costs: You’ll be responsible for all maintenance, repairs, taxes and other costs — include this in your calculation.
Transaction Costs: Buying a home can be a process, and there are costs and fees associated with the transaction — include this in your calculation.
Step 3: Get Financially Organized
Let’s get organized on the financial front to make the buying process easier.
Safety First: Make sure you have a fully funded Emergency Savings account.
Boost Credit: Check your credit score, and credit history, in order to qualify for a loan. You can also request a report to review and dispute any errors.
Maintain Low Credit Utilization: Pay down any credit cards or personal loans, maintain a low balance on credit cards to show that you’re in control of your finances. But don’t close any unused credit cards.
Debt to Income Ratio: An important metric that your bank uses to calculate the amount of money you can borrow is the DTI ratio — comparing your total monthly debts (for example, your mortgage payments including insurance and property tax payments) to your monthly pre-tax income.
Depending on your credit score, you may be qualified at a higher ratio, but generally, housing expenses shouldn’t exceed 28% of your monthly income.
Step 4: Determine How Much You Can Afford
This will depend on what you’d like your monthly payments to be, which will include your mortgage payment, as well as any other maintenance costs, utilities etc.
28%/36% Rule: Most financial advisers agree that people should spend no more than 28 percent of their gross monthly income on housing expenses and no more than 36 percent on total debt — think: housing as well as things like student loans, car expenses and credit card payments.
Step 5: Saving for Your Down Payment
Once you’ve identified how much you can afford, it's time to start saving towards your goal!
Down Payment: The more you put down, the better mortgage rates you might get as the bank and lenders are taking less risk on you, and the less you’ll need to pay each month. A reasonable amount a bank might request for a down payment is typically 10-20%.
Closing Costs: These are administrative and borrowing costs associated with the home purchase, and they can be anywhere from 2%-5%
Start Today: Start saving towards your home ownership goal, by setting aside an auto transfer each month to a high-yield savings account. If you don’t need the money for at least a year, consider a certificate of deposit (CD).
Step 6: Get Pre-qualified and Pre-approved
Once you’ve started saving, and have improved your credit score, you can actually get pre-qualified, and pre-approved, to see how much you’d be able to borrow and on what terms.
Information required to get pre-qualified and pre-approved
We do more than write helpful blog posts. Our Money Coaches will give you the emotional and financial guidance you need to take the above steps, stay on track to meet your goals, and feel confident while doing it all. What do you say?