For many people, owning a home sounds amazing. You can paint your walls, plant a garden, and if you wanted to, you could hang pictures on every wall without worrying about losing a security deposit. You don’t have to worry about paying “pet rent” or bothering your neighbors when you want to have friends over on the weekend.
Most of all, you’d own property. You’d have your own little slice of your favorite place in the world. The more you think about it, the more you wonder, “Am I ready to buy a house?” I mean, what’s not to love?
Well, the complications that come along with buying a home, for one thing. When you’re looking at buying your first house, tips can vary from too broad to too specific. The process of buying a home can seem so overwhelming that you don’t even know where to start. Today, we’ll be taking a general look at what buying a house is like, and what you really need to own your first home.
Homeownership for Millennials
Millennials own less property than any previous generation, and as much as 20% of millennials believe they’ll never own a home. In fact, if you’re a millennial seriously considering buying a home, you’re in the minority.
Most people think it’s just too expensive. Not only do listing prices and down payments give you “sticker shock”, but hearing about all the extra taxes and fees you’ll have to pay can leave you feeling like homeownership is just not worth it.
Add in the huge amount of debt from things like student loans and medical bills that more than 50% of millennials have on average, and it’s a recipe for disaster. When you feel like you can barely keep your head above water, risking extra expenses just doesn’t seem worth it.
If the price doesn’t keep you away, other factors might. Many millennials have stated that they don’t plan to buy a home because they think it’s a bad investment. And it’s easy to see why – the housing market crash of 2008 caused more than 1 million families to lose their homes.
Anyone directly impacted by that crash would naturally want to shy away from homeownership. The good news is that another crash like that is unlikely to happen anytime soon. Meanwhile, rent prices rise by 40% on average across the US.
The rising cost of rent has made more and more people ask, “Am I ready to buy a house?”
Buying vs Renting a House
Here’s the deal – when you pay rent every month, it’s money down the drain. It’s not helping you achieve your financial goals, it’s not giving you more stability, and it’s not helping you plan for the future.
When you make mortgage payments on a house, though, the opposite happens. You get closer to owning the home in full. And if you end up moving before your mortgage is paid in full, that money goes into the equity.
Equity is essentially the dollar amount of your home that you own – no mortgage. You can use equity to make money when you sell your house, say if you’re upgrading to a larger home or moving to a new city. You can also use equity to qualify for loans that help you remodel or repair your home.
Basically, when you pay rent the money goes to your landlord. When you pay a mortgage, your money goes back to you – one way or another. Either you end up with full equity in your home, or you leverage the partial equity to buy a new home, or repair and remodel your current home.
If you’re thinking of buying your first house, tips mostly focus on making sure you have as much equity as quickly as possible. That’s how you make money on your house, and it’s how you can start to guard yourself against potential market crashes.
Planning to buy your first house?
Ok, so you’ve decided that you want to start planning to buy your first house. What steps do you need to take? Most of the time, you’ll ask, “Am I ready to buy a house?” and you won’t find a single concrete step to take. General advice like “save for a down payment” and “improve your credit score” is great and all, but how do you do that?
Save for your down payment
First, let’s look at saving. Living paycheck-to-paycheck just isn’t the move to take if you’re planning to buy a home, so first, we need to get you out of that cycle. There are a couple of ways to do this, so think about your financial situation and make the best decision for you.
You could start saving for your down payment by cutting costs. This means taking a hard, honest look at your budget and asking yourself if there’s anything you can save on.
A good place to start might be giving yourself a smaller budget for your hobbies. Don’t remove hobbies from your budget entirely! Just ask yourself what the smallest amount of money you can spend on your hobby is, and whether your current budget matches that amount.
Next, check for ways you can save money on necessities – this is your food, cell phone, internet, utilities, and housing. You won’t always be able to cut costs here, but there are definitely ways to save without living on ramen and burner phones.
First, groceries. While “skipping Starbucks” won’t buy you a house, meal planning can get you pretty far. About half of people who are millennials or younger eat out at least three times a week. If we estimate that you spend around $15 eating out, that adds up to $45 a week or roughly $180 a month.
There are tons of delicious recipes you can make at home for much less than $15 a serving (the average cost of cooking at home is $4). The trick is setting aside time to make them.
A pro tip? Make it a hangout. Plan, shop for and cook meals for the week or month with your BFF. Switch up who hosts and you’ll soon find you enjoy a meal you cooked together way more than hitting up Chipotle on the way home from work.
Down payment fund: +$132/mo
Next, cell and internet. Try switching your cell service to prepaid – many prepaid plans now let you keep your current phone, and even offer data and hotspot options. On average, you can expect to save $200 a year or more, depending on the carrier you pick. Internet is really going to vary depending on where you’re at, so we’ll skip that here. You can definitely find cheap internet plans if you live in an urban or suburban area, so check it out!
Down payment fund: +$16/mo = $148/mo
When it comes to utilities and housing, there’s usually not much you can do that will lower these bills by more than a few cents. At best, you can ask your landlord if they offer referral discounts for telling people to rent from them. However, it’s rare that you can refer enough people regularly to make a difference.
Depending on where you’re at financially, you might be able to make even more changes than this, but with these two changes alone, your down payment fund can go from $0 to $1,776 a year!
Pay off debt and boost your credit score
Next, credit. your credit score matters a lot when buying a house. While it won’t (usually) make or break you, having good credit can mean a lower interest percentage on your mortgage. That means you’ll get more equity, more quickly. Remember – equity is money in your pocket!
Your first step is going to be paying off your “smallest” debts. If you have a lot of debt, you may want to put that $1,776 towards those debts instead of a down payment. Why pay off debts? When you’re applying for a mortgage, you’ll need to meet something called a “debt-to-income ratio” (DTI).
What’s a DTI? The company you finance your mortgage through will tally up all your debts. That includes credit card debt, auto loans, student loans, unpaid medical bills, and personal loans. Then, they’ll look at your income. If the amount of debt you have is more than around 20% of your income, you’ll have a harder time getting approved. So pay off those little debts now!
Next, you want to boost your credit score, and there’s really only one way to do this. Borrow money and pay it back regularly. Easy to say, I know. Basically, your credit score depends on:
- How much money you’ve borrowed
- What kinds of things you borrow money for
- Whether you pay it back consistently
To boost your credit score as quickly as possible, you’ll need to have some kind of loan or credit card. Then, make payments that are higher than your monthly minimum. Not even by a lot, just by a little. Finally, don’t pay things off early in a lump sum!
I know it seems counterintuitive, but paying in a lump sum communicates to credit companies that you can’t manage reasonable amounts of money. They see you as someone who’s all-or-nothing – you’ll be flat broke for a while and then spend all your money to pay off debts.
Credit companies (and therefore mortgage lenders) are looking for consistency. Consistently have a line of credit to pay off, and consistently pay it back. If you follow these steps, you could see your credit score move to a new, better category within 12 months.
Buying your first house: Tips to make the process run smoothly
Alright, so you’ve been working on your credit, paying down small debts to improve your DTI, and saving for a down payment. You’re no longer asking “Am I ready to buy a house?”, you’re declaring, “I am ready to buy a house!”
Congratulations on moving to the next step in buying your first house! Tips for making the actual buying progress are plentiful on any real estate website, so we’ll keep things short for you.
If your finances are in order, there are only two things left to do. Pick a good time to buy and pick a good person to work with.
Pick a good time to buy
There are lots of factors to this, but “a good time to buy a house” is going to depend on what you want. Do you want lots of options? Shop in the spring or summer. You’ll see the most houses up for sale in spring, but this does mean that competition will be fierce.
Meanwhile, you’ll have less competition and find more people who are flexible on price in the fall or winter. However, this also means you’ll have fewer options, so you can’t be as picky.
You’ll also want to keep an eye on the general state of the housing market. The overall state of the housing market will often determine how individual sellers behave, no matter what season it is.
Pick a good person to work with
This means your real estate agent, sure, but not just them. You also want to make sure your mortgage lender is someone you’re comfortable working with for years. The recommendation when buying a house is to pick somewhere you want to stay for at least 5 years, but that holds true for your mortgage lender, too.
There’s a lot of emphasis on picking a good real estate agent, but remember you’ll be working with them for a couple of months at most. Your lender will be there 2, 5, 10, or even 30 years down the line, so do your research before you make a choice!
How to know if you’re ready to buy a house
Buying a house has a lot of moving parts (so to speak). It’s not as simple as buying clothes, or even a car. Buying a house is an investment, bottom line, and you want to make a good one. While it’s tempting to “impulse buy” a house, waiting will be worth it. Wait to apply for a mortgage, find a real estate agent, and even wait to start looking at homes until you’ve taken some time to make a plan.
The last thing you’d want is to end up stuck with a house you don’t love. Even worse than that? Being denied a mortgage and having to scramble for housing last minute. Anyone can work towards and achieve homeownership. It just takes time, patience, and a little financial know-how.
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