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Buying your first home is exciting and also a little scary. And the good news is it’s as complicated as it first appears.
It’s really easy to get distracted by the idea of buying your dream home. But there is more to home buying than simply getting pre-approved for a mortgage, picking out a house, and making an offer.
Millennials need to start learning about the home buying process early. That means you should:
- Understand different types of mortgages
- Create a zero based budget so you know what you can afford
- Find a trustworthy realtor
- Start saving for a downpayment (hopefully at least 20%)
- Understand all the costs involved in your mortgage like taxes and interest
Even though there is so much information available, it can be difficult to know how to get started, that’s why we have developed this guide for you with valuable tips and information to consider when buying a house as a millennial.
Understand How Much You Can Afford
Figuring out how much you can afford is a big part of buying a home. There are a lot of variables that go into determining how much your monthly mortgage payment will be.
First, you need to know the total costs of your new home. This includes the down payment, closing costs, and the principal and interest payments. Then, you need to calculate your monthly income and expenses. If they don’t match up, you might want to consider getting a roommate or cutting back on other expenses so you can afford your dream home!
Here are some home buying tips for millennials to keep in mind when buying a house:
- Don’t get too carried away with all the excitement of finding your dream home! Make sure it’s actually in your price range before jumping into anything serious with sellers or real estate agents.
- Do some research on different types of mortgages so you can determine which one is best for you (5-year fixed rate vs variable). You’ll also want to know what kinds of fees are associated with each type so you can plan accordingly when budgeting for closing costs and other fees associated with purchasing real estate (such as property taxes).
- Make sure the house meets all necessary requirements for it being considered.
Get Pre-approved for a Mortgage
First things first: before you start looking for properties or houses, make sure that you have been pre-approved for a mortgage.
What does Pre-approval mean?
Pre-approval simply means that an expert has looked over your financial situation and decided that based on your income and credit history, among other factors such as your down payment amount and debt level, they think you qualify for the loan amount requested.
There are several ways to go about getting pre-approved for a mortgage:
- Go with your bank or credit union – many banks offer free services where they will look over your finances and give their opinion on whether or not they think the lender would approve them if they applied right away.
- Use an independent mortgage broker – just like how real estate agents represent both buyers and sellers in transactions (except without taking sides), independent brokers do all of the same work but without any bias towards one party over another.
The most important home buying tip any millennial can take from this article is this: start early!
How can you start early when buying a home?
- Plan out your budget to see how much of a mortgage you can afford
- Start the pre-approval process with a local bank or lender you trust
- Start saving money for your house now (use this sinking fund tracker to help)
- Take a first time home buyers class
- Find a realtor you trust
You should begin researching and preparing for your first home purchase as soon as possible. If you start early enough, you’ll have plenty of time to save money every month for a down payment and get yourself into good financial standing before making an offer on your dream house.
You can snag a $5 budget template and a Sinking Fund Tracker to start saving money ASAP! Creating a sinking fund specifically for a buying a house can help ensure you transfer money to your savings account.
Do Your Research
One of the best things about being young is how much energy and excitement you have—and that energy should translate into research!
When looking at houses, try visiting several neighborhoods near each other so that you can compare them side-by-side. That way, you can decide which neighborhood feels right for you.
Understand the Costs Related to Buying and Owning a House
Buying a house is a major decision, and it can be a confusing process. It’s important to understand all the costs involved in buying and owning a home.
Knowing and understanding the different types of mortgages available will help you know if you can afford a house and what all of the costs are going to be.
Unlike renting, a mortgage has several components that vary depending on the type of mortgage you choose or qualify for.
Here’s a short list of common mortgage options:
- Traditional mortgage allows you to borrow up to 95% of the value of your home
- Interest-only mortgage allows you to borrow more than the value of your home but pay only interest on that amount until it’s paid off
- Variable-rate mortgage with fixed payments (VRMF), which is similar to a conventional mortgage but has lower rates initially and then increases over time.
Buying a house involves more than just buying it. When you’re planning your mortgage budget, you want to think about:
- Homeowners insurance
- Property taxes
- Maintenance and home improvement
Creating a dedicated emergency fund will help you plan for emergencies that are inevitably going to come up. A broken furnace in the middle of winter is stressful enough without stressing about how you’re going to pay for it.
An emergency fund can easily save the day and is one of the best money saving tips for millennials.
Shop Around for Your New Home
Shopping for a home can be a daunting task, and it’s important to have the right person on your side.
Finding a real estate agent who is an expert in the area you’re looking to buy in will help ensure that you find exactly what you want, at the best price possible.
Ideally, this agent should also be someone who works with people like yourself—young professionals or first-time home buyers—on a regular basis.
It’s also important that this agent works with clients similar to yourself: someone who has time constraints (such as working full-time or going to school), limited means (like not having much savings), and is potentially a first time home buyer.
How Much Should Millennials Put Down on a House
The answer to that question is different for everyone.
The amount of money you can put down on a house depends on your credit score, income, and debt-to-income ratio.
But if you’re wondering how much money you should put down on a house, here are some guidelines that may help.
The standard rule of thumb is 20% down on a mortgage. However, the average millennial has only saved 5% of their annual income for a down payment, according to Bankrate’s latest Financial Security Index survey.
Millennials also have less cash available to cover closing costs than they did in previous years because they’re spending more on rent than previous generations.
So how much should millennials be saving for a house?
Most experts recommend saving 15% or 20% of the purchase price as a minimum down payment on a residential property; 10% is considered better practice but not required by most lenders.
Remember that, putting down a large amount of money on the home you want to buy is key in getting approved for a mortgage, and it can also help lower your monthly interest payments.
When you apply for a mortgage, lenders will look at your credit score and debt-to-income ratio (how much total debt you owe compared to how much income you make).
Having good or excellent credit will help boost these numbers, which means that your chances of being approved are better.
Buying a home can be one of the most exciting parts of your life, but it can also be overwhelming. The best home buying tips for millennials are to start researching and learning early with a first time home buyers class. You also need to understand your budget and get pre-approved. And one of your best tools when buying a home is finding a realtor you trust.
Partnering with an experienced real estate brokerage can also be helpful to a successful home buying experience.