Millennials are amazing. They’re the largest and most educated generation in the United States.
But only about half as many millennials own homes today as their predecessors did at the same age.
There are lots of reasons for working professionals to be shy about buying a home in 2018. For one, student loan debt is at an all-time high. It feels impossible to even talk about purchasing a home if you’re already struggling to pay back Sally Mae.
Turns out drooling over Zillow listings with your cat and a glass of wine doesn’t get you a mortgage loan. So financially speaking, where do you start?
The steps to purchasing a home are much simpler than you’ve been led to believe. Sure, it’ll take patience and discipline. But I promise you, home ownership is entirely possible when you set your mind to it.
Read on to learn how to buy a house, starting with the right financial preparation.
Improve Your Overall Credit History
We’re listing this first for a reason.
Banks look at your entire credit history while considering which mortgage options to offer you. Your total credit history includes how often you’ve moved in the past, how long you’ve held the same job, what types of debt you have, spending habits, etc.
Knowing how banks see your credit history will make your home buying process so much easier. And the good news is it’s never too late to start boosting your credit. It may be as simple as contacting your financial institutions for extensions on debt payment instead of ignoring late notices.
A strong credit portfolio will save you thousands of dollars in the long run by giving you access to lower interest rates and better payment options. Besides, a strong credit score can help bring down other recurring bills like your car insurance premium or internet bill. All of this saved money will come in handy if you plan to own your own home soon.
Start being intentional with your credit history as soon as possible. Future you will thank you.
List All Your Dreams and Deal Breakers
Trust me, this isn’t a silly exercise in positive thinking. This is important information you’ll need to make a final home buying decision.
It takes about as long to get out of owning a home as buying one. You should plan on staying in your first home for an average of five to seven years. Don’t pick the first fixer-upper you can pay for just for the sake of owning property. Find the best home you can afford so you won’t be miserable for a good part of a decade.
Start by describing your dream home. Don’t limit yourself! Set all rationality aside for a minute and start listing what you would call perfection in all the following areas:
- Neighborhood – The city, state, zip code, and lifestyle
- Home Style – Condo, townhome, ranch, duplex, two-story traditional with a basement, etc.
- Home Layout – Number of bedrooms, bathrooms, garage size, etc.
Keep the description of your dream home handy. Put it up on a wall, or tape it to your mirror.
Next, list all the bare minimum necessities for your first home that you couldn’t live without. For some people, this might include staying within a 30-minute commute to work or finding somewhere in a good school district for their future kids. Be as specific as possible. These are your deal breakers.
Remembering your dream home and your most basic needs will become a way to knock tempting houses off your list when you start viewing houses.
Turn Your Dreams into Goals with a Budget
Now that you’ve clearly defined your dream home and your deal breakers, it’s time to figure out what you can afford.
Start researching the housing market in your dream neighborhood and other neighborhoods like it. Collect as much detailed information as you can to start figuring out how much you’ll need to save for a downpayment. While researching, you may discover you need to compromise or downsize in different ways.
For example, while researching the housing market you may discover there are affordable homes that match your needs in a neighborhood you’ve never explored before. Or, you may realize you’d prefer to save up for a few more years if it means you can afford to stay close to work and all your favorite places in town.
Knowing how much everything in town costs will help you create a realistic timeline for your saving goals.
Start Saving for a Downpayment and Expenses
There’s just one more step before you’re ready to call a realtor.
Set aside cash for a downpayment of at least 20% of your estimated home price. You can still get a mortgage for a much smaller amount of money, but it’s often not worth it in the long run. Trust me.
Any less than a 20% downpayment, and you’ll end up paying extra each month for private mortgage insurance to protect the lender in the event you default on your loan. Even with amazing credit, a large down payment is the only thing that will save you from unnecessary lender’s insurance.
There are plenty of online resources to help you figure out about how long it’ll take to save all the money you need. Take a look at these online savings tools or this fraction calculator.
While you’re saving, don’t forget to account for moving expenses like new furniture, utilities, and a bottle of champagne to celebrate your new home ownership.
Doing All the Math for Purchasing a Home
Relax! Purchasing a home sounds like a lot of work, but all it really takes is making a good plan and sticking to it.
To recap:
- Start making small changes today that will help build a credit history your mortgage banker will love
- Define your dream home and your deal breakers
- Research, research, research until you find a specific home and neighborhood to save for
- Start saving cash for a 20% downpayment on a mortgage for your realistic first home.
If you found this post helpful, check out even more great math and finance articles on our blog.
Thanks for reading!