Tips for the Millennial Homebuyer in 2022
The New Year is here, 2022 resolutions are underway, the excitement and bustle of the holiday season has begun to wane. As we begin to thaw out from our winter activities, the beginning of the new year kicks off the fundamental steps for the upcoming Spring/Summer buying season in real estate. Although there is a growing trend of millennials becoming more mobile in general, there are still millions who are newly married, new parents, still renting yet hoping to purchase their dream home in 2022. This article is for you, the millennial who wants to know how they can buy their first home in 2022.
As a millennial embarking on the homebuying process in 2022, there are some potential roadblocks and unknown factors that can prevent you from sliding right into that new home of your dreams; however, we are going to address each of these head on so that you can come into knowing and become prepared to achieve that homeownership goal. Remember, this is to help you get prepared to have the smoothest process of becoming a homeowner. The sooner you begin, the more time you allot yourself, the better off you will be.
1) Address your debt(s)
This could be the toughie. We don’t often like addressing the spending habits that shape our financial life. The simplest way to state the importance is reducing your personal debt is this: any monthly payment on your credit report works directly against your monthly housing payment affordability. Any monthly payment that will show up on your credit report becomes part of the debt-to-income calculation performed by the lender. This ratio (called “DTI” for short) is important when seeking your loan approval as there are thresholds for each mortgage program that set the acceptable risk levels for the bank. Your proposed housing payment, insurance, property tax, HOA, etc…are all considered in the composition of your DTI. The higher the DTI the riskier to the bank. The lower the DTI the less risky to the bank. Also, be aware that your DTI can change when you increase or decrease the amount of mortgage you need to obtain.
Example, if your DTI is higher than the banks threshold for a $500,000 loan, then you may need to work with your loan officer to decrease the loan amount until the DTI falls back underneath the threshold, like reducing the loan amount down to $475,000. The same is true if you have a DTI within below the banks limits for a $500,000 loan, you may be able to increase your buying power all the way up to the limit of your DTI threshold, say $525,000 in this instance.
2) Know and understand your credit
Your credit score is used for so many facets of financial life whether we like it or not. When it comes to the homebuying process, your credit score determines your interest rate, but your “creditworthiness” determines whether the lender can offer you a mortgage or not. Things like late payments, credit card balances vs. credit limit, number of open credit lines, and even the mix & variety of credit lines all weigh in on the underwriting decision. If you are unsure where your credit standing is, start here first and early on in your process. Have your credit run when you meet with your local mortgage expert, so you have a full understanding of how you look on paper. Additionally, your local lender will be able to guide you as to which items are helping and/or hurting your credit profile in the eyes of underwriting. Unfortunately, there can be incorrect items on consumer credit reports, and it’s vital to cure these as fast as possible. Afterall, we hate to see incorrect information on your credit report standing between you and the home of your dreams.
3) Save for your down payment & closing costs
Part of strengthening your purchase power is having your down payment saved BEFORE you go out looking for homes. There are few things more stressful than finding the home of your dreams, but still needing another month or 2 to save up the amount you need for a down payment. Additionally, you should not count on the seller accepting your offer asking for them to cover your closing costs. Yes, there are times in the market where this is common practice, but before you count on that working in your favor, ensure you have enough money to cover your own closing costs in case the seller cannot or will not. In the end, if the seller does contribute towards your closing costs you will be in great shape as the money you have saved will be there in your reserves moving forward post-purchase.
4) Search for homes within your means
This is all about affordability. Just because its free to look online, doesn’t escape the truth of the real-life costs that come along with homeownership. We recommend you shop for homes within your budget and leave room for margin. If you squeeze yourself into a home knowing it will be financially tight be sure that is an acceptable concession to make when you are buying a home. That may sound like an oversimplification but read it this way: It will be tight until it’s not. Further, sellers are seeking buyers who can afford their home and you will increase your chances of becoming chosen by the sellers if you can demonstrate your affordability alongside your offer. Ultimately, it is of no tangible consequence to the sellers; however, from decades of doing mortgage financing we can say that sellers do take this into consideration as your purchase power strength gives them confidence in the pending success of their home sale.
5) Be confident in your decision
How YOU feel about your home purchase carries a lot of weight before, during, and after your purchase transaction. We want to ensure you are excited and prepared for the benefits and responsibilities of homeownership. We understand this is more of an intangible element of the homebuying process, but it does matter to us.
Look, you need a roof over your head. If you’re reading this, you are probably paying rent (which is going to that owners mortgage payment) so in essence you’re already paying a “mortgage” it just may not be yours. Candidly, if you are second guessing your choice to become a homeowner, please pause, take your time, and return when your confidence is in order. If you are gung-ho and boldly stepping into the responsibility of homeownership, own it, own it with every choice and make it the best decision you’ve ever made.
Lastly, remember every person’s financial situation is different. It is important to meet with a mortgage expert BEFORE you go out house hunting. Any real estate agent you select will want you to be fully approved before showing you homes, and in many cases, sellers will only allow their home to be shown to serious buyers who already demonstrate the financial ability to buy their house. A local mortgage expert can help address each of the areas outlined in the article specific to you. This is critical especially when you are making the largest purchase of your life and have personal criteria which are important to you in a home.
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Rates & Fees Disclosure:
‡ The payment on a $300,000 30-year fixed-rate VA loan at 3.000% with a 80% loan-to-value ratio is $1,292.01 with 0 (zero) origination points due at closing. The annual percentage rate (APR) is 3.235%. Payment does not include tax and insurance premium impounds. The actual payment amount will be greater. By refinancing your existing loan, the total finance charges may be higher over the life of the loan. Some state and county maximum loan amount restrictions may apply. Appraisal fee of $600, Processing Fee of $895, Underwriting Fee of $795 included in APR calculations with borrower paying 0 (zero) loan origination points.
‡ Based on Mortgage Heroes internal data.
