Few things define true “adulthood” as clearly as buying your first house. While many industry experts have painted millennials as the next generation of long-term renters, recent numbers tell a different story. In fact, in 2017, the number of households headed by someone younger than 35 increased more than any other age group. That’s not to say the path to home ownership is always a smooth one, though. From problems at closing to unexpected expenses, there are several potential pitfalls new homeowners must overcome. If you are considering buying your first house, here are some tips to navigating uncharted waters more smoothly.
Everything in Due Time
Millennials are known for doing their homework before making major purchases. So it’s no surprise to find that most spend a lot of time looking at their options—from location, to price point, to financing. But the first tip is to not get too far ahead of yourself. The best thing any home buyer can do is to make sure everything looks good on paper. This means clearing up any credit card debt and preparing your finances so you can prove you have the necessary down payment funds in reserve. You can expect to need anywhere from three to 20% of the purchase price as a down payment. Zero money down options still exist, primarily for those who qualify for a VA loan, but there are pros and cons to this. Generally speaking, the bigger the down payment you can afford, the better your interest rate will be.
Additionally, potential home buyers are ahead of the game if they secure a pre-approval from their lender before they start looking at houses. This way, you know what you can afford, and the seller knows any offer you submit has the backing of a lender, which means less potential for problems in the closing process. This also helps prevent buyers from falling in love with a house that is out of reach for their budget. Buying your first house is exciting. With good planning up front, the entire process will be more enjoyable and less stressful.
Cleaning up Your Credit Score
The single biggest factor in the mortgage loan approval process is the credit score. Not only can this be make-or-break on whether you can get financed at all, but it will impact how low of an interest rate lenders will offer you. Fortunately, obtaining copies of your credit scores from all three major agencies is easy to do. It is well worth your time to see what the prospective lenders see. If you find any errors, go through the necessary channels to clear them up before you start to apply for a mortgage.
If your report is error-free but your scores are lower than you expected, pay down debt to improve your debt-to-credit ratio. If you are carrying student loan debt, look into options to consolidate and refinance these. Do not open new accounts, as these will all require credit checks, which do not work in your favor. Additionally, you want to avoid actions like:
- Closing credit accounts
- Opening any new insurance policies
- Missing payments
All of these actions have a negative impact on your credit score for various reasons. Missing payments is the most obvious problem. Less obvious is the negative impact that comes from closing accounts. Since credit scores are based partially on your debt-to-credit ratio, when you close an account you are no longer using, you are decreasing your available credit. This increases the ratio, which looks worse to the credit reporting agencies. Additionally, when you open any new insurance policy, a credit check is part of that process (just like with a new credit card), which is viewed as a negative by the reporting bureaus.
Getting Realistic about the Real Costs
Our next piece of advice is to be realistic about expenses beyond the list price. In a study conducted by Bank of the West, 20% of millennials had regrets about the house they purchased because they realized there was damage present after they closed. Another 20% regretted the ongoing expenses incurred by home maintenance, and 13% reported feeling stretched too thin financially. As a group, only 32% had no regrets of any kind.
New home buyers are ahead of the game if they budget for repair costs that are bound to pop up from time to time. Even if your new home is in perfect condition now, eventually the roof, furnace, and water heater will need to be replaced. Appliances and flooring wear out. Walls need to be repainted. Landscaping needs to be maintained.
But it’s not all bad news. Mortgage interest and property taxes are tax deductible. Home values are continuing to rise, which means homes are earning equity. Home ownership offers a level of privacy and independence that renting cannot. And pride in home ownership creates strong communities and roots for families. Good planning and realistic expectations about the true costs of home ownership will go a long way toward ensuring you do not have buyer’s remorse.
Knowing your Target Market
There are a lot of factors that go into selecting where you want to live. While it’s easy to get caught up in the specifics of the ideal house, spend some time thinking about your ideal neighborhood, too. Some projections show millennials are generally favoring urban areas, while others show the suburbs are still king. What this really means is there’s no one-size-fits-all answer. Consider where you work, what kind of commute you are willing to make, and the type of environment you are looking for in a new home. Do you like open spaces, or is walkability more important? Want to rent out part of your house? Make sure your target neighborhood allows it. Thinking about starting a family? Check out the local school district before you commit. No matter what you are looking for, put some time into researching the areas that meet your needs before you start to look at individual properties. How you live will help you decide where to live.
Looking with an Open Mind
Not only do millennials generally research thoroughly before making major decisions, they also tend to want homes that are in perfect condition. The housing market is slowly shifting to favor this mentality; sellers are doing more to complete renovations, update appliances, and work harder to ensure their listing looks as good as possible. However, perfection comes at a price—literally. While many buyers in today’s climate are willing to pay more to avoid making home repairs and upgrades right off the bat, there is still something to be said for looking at properties that may need a little work. This is especially true if buying a fixer upper makes the difference between buying in an ideal neighborhood or having to compromise on location. If you are willing and able to put a little “sweat equity” into your house, you will come out ahead in the long run.
Getting a Home Inspection
When you are buying your first house, you will likely have a lot of questions before you commit to the purchase. After all, houses are generally the most expensive purchase we make, and they are a long-term commitment. A good home inspector can point out potential problem areas, answer your questions about his or her findings, and alleviate some of your concerns.
Particularly in hot real estate markets, or with newer construction, buyers can sometimes be tempted to skip the home inspection in hopes of looking better to the sellers or saving money. This is a mistake. Once the closing documents are signed, anything that happens with that property is your responsibility. Hidden issues can be extremely expensive, and the last thing any new homeowner wants to hear is that the problems they are experiencing could have been prevented with an inspection. Older homes can have improper electrical wiring, asbestos, lead paint, hidden roof issues, foundation problems, and mold damage that you may not notice on your walk-throughs. Even new homes have been known to have problems with the wrong size HVAC system, or missing insulation.
Don’t be fooled into thinking the 1-year home warranty will cover everything, or that any potential problems will make themselves known within that first year. Corners are sometimes cut, and you may not notice right away that the roof was not installed properly, or that the lot was not graded to allow for necessary drainage. Protect your investment by paying for that home inspection before you close.
Looking at the Long Term
If there is a silver lining to the housing and financial crisis of 2008, it’s that Millennials came out the other side with a better sense of how to manage their money. While the crisis is often blamed for a lack of jobs as Millennials were graduating from high school and college, it also showed them the dangers of making snap decisions and overspending. This financial reset means that though this group may be nervous about buying their first houses, by researching the potential dangers up front, they approach this milestone armed with the facts they need to make a good choice. Buying your first house is exciting, and a little scary. With a clear understanding of the true costs of homeownership, Millennials can make decisions that fit their needs, budgets, and expectations.