Published September 26, 2012
While many Gen Y grads are putting off major life events until they get student loan debt in check, others are moving up to become young homeowners.
According to ERA Real Estate's survey of millennials born from 1978 to 1995, 32% have already achieved homeownership. What’s more, 64% plan to become homeowners and 53% of millennials who do not yet own houses view them as good investments.
With low prices and interest rates, now is the time for financially-able grads to look into becoming a homeowner, says Carolyn Warren, author of Homebuyers Beware: Who's Ripping You Off Now?
“We’re now in a market where you have to say, ‘do I want to live here for a while? Or would I like to live in this house for a year and then turn it into a rental?’” she says. “If a person is putting a minimum down and they’re not sure if they want to live in that area, they can find themselves stuck in a house.”
Buying a home is one of the biggest purchases grads will make and requires substantial thought and research before signing on the dotted line. Here are tips from real estate and mortgage experts on how to navigate the process.
Shop around. Working with a seasoned real estate agent who knows the area well can help hopeful buyers find the best values.
“A good real estate agent will encourage a prospective buyer to have some serious conversations with mortgage borrowers and lenders and to get pre-approved,” says Eric Tyson, co-author of Home Buying for Dummies. “A good agent is not going to waste their time working with somebody who can’t finance the purchase.”
In addition to finding a quality agent, Warren recommends buyers also shop around in finding the best lender for their situation.
“You don’t just go with one lender that your real estate agent recommended or the bank that your parents went with, you still want to compare two or three or you could end up paying more than you need to.”
Set a realistic budget. Over-borrowing and leveraging led to the 2008 housing market collapse, and young buyers need to carefully budget and plan for how much home they can afford.
Homebuyers should budget for monthly housing costs such as their mortgage, homeowners insurance and property taxes, but also for any upgrades they may want or need to make to their home, says Ameriprise private wealth advisor Tucker Watkins.
“It’s important that they don’t exhaust their assets or income on housing costs alone, but are also prepared for the costs associated with owning their first home,” he says.
Know your credit. A good credit history plays a vital role in getting approved for a mortgage loan and it’s one of the first thing lenders look at, followed by income and assets.
A healthy credit score also determines what type of loan homebuyers get approved for and how good the terms are for that loan, according to Tyson.
“The better your credit score and the cleaner your credit report, you’ll then qualify for the best mortgage loans at the best rates,” he says. “In the best case, it can literally save [homeowners] tens of thousands of dollars over the life of a typical mortgage loan because they’ll be eligible for the best rates.”
Get pre-approved for a mortgage loan. Young homebuyers should know the difference between being “pre-qualified” (a borrower who has verbally reviewed income, assets, and credit with a loan officer, but has not yet been verified) and “pre-approved” (when a lender has reviewed formal income documentation such as tax returns, pay stubs, bank and asset statements from the last 60-90 days, and conducted a full credit report review).
“In today’s changed market, it is more important than ever to be pre-approved versus pre-qualified,” says Watkins. “Almost all loans require full documentation to qualify and having this reviewed previous to your home shopping experience can help you to be more successful not only with your offer but with the formal approval process itself.”
It’s important to get a “hard pre-approval” before making any kind of offer on a house to avoid big disappointment, says Warren.
“If you go on pre-qualification only and make an offer and it’s accepted and you have a contract and then you find that you can’t be pre-approved for that much, that’s going to be awfully embarrassing and awkward because you’ve already got a contract.”
Shop around for the right mortgage loan. Potential homeowners should really consider their personal circumstances and how much risk they’re willing to take before deciding on a fixed rate or adjustable rate mortgage loan, says Tyson.
“Adjustable loans, or so-called ARM loans, make more sense for people who understand the risk and can financially take on some risk but also aren’t planning on holding a mortgage for more than five to seven years,” he says. “You really have to run some numbers and consider some different scenarios to see the conditions under which one loan might be better than another loan.”
Warren explains that it’s also important for buyers to think about their debt to income ratio and being comfortable with their payment.
“You will get a smaller payment with a 30 year loan, so most people want a 30 year as opposed to a 20 or 15 year when they’re first-time buyers,” she says. “Right now, rates are at historic lows and it’s fantastic—take that 30 year fixed rate.”