So, you want to buy a house. But you’re young and not more than a few years out of college. You’ve got to pay back student loans, mortgage rates are climbing, and home prices aren’t falling by much. The market’s less competitive than it was, but you still hear stories of people getting outbid.
This scenario may sound all too familiar if you’re Gen Z. From a practical standpoint, you’re unsure if your dreams of becoming a homeowner are within reach. You’re just starting your career, and the current economic climate isn’t helping. However, achieving your goals is possible if you know how to deftly navigate the hurdles. Here are four tips to get you going.
1. Know What You Can Afford
Knowing what you can afford seems obvious. But there are more costs to homeownership than the agreed-upon purchase price. More than likely, you’ll need a mortgage to buy the property. The loan covers the remainder of the list price and closing costs after your down payment. In exchange, you’ll pay your lender principal, interest, and escrow each month.
What’s escrow? It’s the cost of your annual home insurance premium and estimated property taxes divided by 12. Your lender takes money from your accumulated escrow balance to pay the premium and taxes on your behalf. A lender reviews your escrow balance annually to see if there are enough contributions to cover the costs. It’s one reason your total mortgage payment can change over the life of your loan.
Of course, there are other costs, such as HOA fees, maintenance, and utilities. Before you look at homes, crunch the numbers to arrive at a ballpark figure. Getting pre-approved for a mortgage can also help determine how much house you can afford. You won’t need to complete the income verification process now, but it doesn’t hurt to get your paperwork ready. This means gathering proof of income, including W2s, tax forms, and bank statements.
2. Determine Your Down Payment Options
How much you’ll need to save for a down payment will depend on your budget and mortgage type. Experts recommend putting down 20% of the purchase price to avoid what’s known as private mortgage insurance or PMI. Under conventional 15- or 30-year mortgages, anything less than 20% makes you a high-risk borrower. To compensate, lenders require PMI, which adds to your monthly mortgage payment.
The good news is once you accumulate enough equity in your property, you can have your lender remove PMI. You don’t have to pay PMI if your loan-to-value ratio is 80% or lower. Still, being able to afford a down payment is one of the top three barriers to homeownership. A 2022 survey found it was why 40% of respondents said they didn’t own a home. When average prices are over $400,000, coming up with at least $80,000 may not be feasible.
Besides saving money in a high-yield account, you can see if you qualify for downpayment assistance or a government-backed loan. First-time home buyer programs may help cover your down payment or at least a portion. FHA, VA, and USDA loans also have lower down payment requirements. If you don’t qualify for a government-backed loan, know you’ll need to put down at least 3% for conventional mortgages.
3. Leverage Technology
Nearly everyone’s heard about home buying apps. You can browse properties, take virtual tours, and calculate your estimated costs. But did you know you can set up alerts, save searches, and find an agent? You can also discover open houses and schedule in-person showings directly from the app.
Technology can be a game changer in your home search because it allows instant access to property information. You don’t have to rely on a real estate agent to tell you what homes are for sale and when prices change. Home buying apps give you the ability to create and control your own shortlist. You select your criteria, favorite the properties that look promising, and know when something changes. It could be a price drop, an impending sale, or a dissolved contract.
Alerts also tell you about ‘coming soon’ properties. You can get a head start on showings and bids if you think the home’s the one. Looking at houses online will give you a realistic preview of your local market’s price points. You’ll have an idea of what you can get within your budget. You won’t have to spend as much time looking at properties in person since you can narrow down your list.
4. Remain Flexible
Even seasoned home buyers know they won’t get everything they want in a property. Yet, this lesson is often a shocking eye-opener for those embarking on their first rodeo. You can have ideas about the perfect house in your head. Just know you’ll be doing well if you can come close.
It’s why you should make a list of must-haves and items you’re willing to compromise on. Maybe your ideal choice is a single-family home near your favorite shopping and entertainment district. But a condo or a property on the edge of town isn’t out of the question. In competitive markets, remaining open to different choices can mean the difference between finding and not finding a home.
Remaining flexible also helps you find affordable options. Sure, you’d like three bedrooms, but could you live with two instead? Maybe having a fireplace or a big backyard sounds nice. Nonetheless, features like these add to the initial purchase price and ongoing maintenance costs. Know what’s a deal breaker by ranking your list with consideration for how long you plan to keep the house.
Buying Your First Home
You dream of the day you get the keys to a place you can say is yours. Transitioning from renter to homeowner is one of your top goals. At the same time, you know you’re up against an unpredictable economy and a wonky housing market. Plus, you’re young and aren’t in your peak earning years. But with financial planning, technology, and open-mindedness, you can achieve your home-buying dreams.