As millennials progress from being students to moving into their first serious jobs and up the career ladder, a natural next step for many is transitioning from renter to owner and nestling into a place to truly call their own. Like any other generation of home buyers, budgeting for a down payment and securing a mortgage are likely top concerns. However, given that this may be a first-time home purchase for this group, they may not have a long-standing credit history or equity in a current home to help with the down payment and approval process.
That said, the American dream doesn’t need to be as daunting as some may think. Here are four pieces of advice for first-time homebuyers to prepare for taking the big step.
Get Your Personal Finances in Shape
Borrowers who are “financially fit” will do best when applying for a mortgage. Make sure that your debt obligations, credit score and bank accounts are as healthy as they can be before you consider a home loan. Consider using one of several free online options to review your credit history about six months to a year before house hunting to ensure there are no red flags.
With a clear understanding of your credit score and financial obligations, you’ll have the confidence to explore the housing market. Additionally, if you can increase your credit score before engaging with lenders, this may result in a lower monthly interest rate.
Have Realistic Expectations
We all have that dream house in mind. It could be a brownstone just off Prospect Park in New York City, a cozy cabin in Minnesota, or a sprawling ranch in Arizona. The exciting part about buying a home is the neighborhood, the overall architecture and that curb appeal.
But this is your first house, so be realistic: don’t buy (or pay for) more than you need unless you plan to live in your home for a long while and add to your family there. Trulia notes that there are 3.6 million bedrooms vacant in the 100 largest US metro areas, with top markets had an average of 4.2 bedrooms per household and 2.6 household members, which translates to a lot of unused space. That’s okay if you can afford it, but for your first home, it’s probably wiser to save your dollars for something you are really going to use. Better yet, invest that extra savings where it can earn interest for when you are ready to upgrade.
Do Your Research
The internet can be a great resource for looking at potential properties. But before you start to browse, you need to determine how long you plan to live in a home and how much money you have to spend.
For example, if you think you’re going to move in 3-5 years, an adjustable rate mortgage may be better for you because it offers a lower rate and payment for the first few years compared to a fixed rate mortgage. Regardless of which loan you choose how long you plan to own your home is also a big factor in deciding whether it's worth it to pay extra for points to lower your interest rate.
You’ll also have to factor in other expenses such as closing costs (appraisal, inspection, lender and title fees, escrow requirements, etc.) which can run between 2 percent and 5 percent of the home's purchase price. A good place to start is an online estimator, which takes into consideration factors like annual household income, monthly expenses, credit score and property location.
Choose Your Lender Wisely
Once you have given yourself plenty of time to become knowledgeable about the process, figure out what you can reasonably afford and understand the different financing options available, you should focus on choosing a lender with a team of loan experts who can provide hands-on support through the process. Many lenders will allow you to complete the process online which can help to streamline the whole process of buying your first home, not to mention making it far easier to provide much, if not all, of the documentation from wherever and whenever you choose at your convenience.
When you’re ready to take that big step you should feel confident that your home loan advisor will get you into the right loan and term for your particular situation, and whether get you the best deal when buying your home sweet home. Often, financial institutions will offer promotions to help defray mortgage costs for home buyers, such as Ally Home’s Price Match Guarantee which matches the interest rate and points if a borrower provides an eligible competitive loan estimate from another lender.
One final but very important tip: make your search for a home enjoyable! Coming home to a place you can call your own is truly one of life’s greatest pleasures.