According to a 2019 homeownership study from ApartmentList.com, and contrary to popular misconceptions about the generation, the vast majority of millennials do want to purchase a home in their lifetime — yet many cite down payment affordability and other financial concerns as some of the main obstacles preventing that from happening now.
They realize homeownership is a worthwhile investment, and they’re tired of throwing away money on rental agreements that keep going up in cost. Unfortunately, they’re confronted with a whole set of different problems when they try to enter the housing market.
Here are a few tips for new homebuyers to help ease the transition from daydreaming about owning a home to closing the deal.
Research the Housing Market in Your Area
The housing market today is highly competitive, and home prices are constantly rising — especially in popular urban areas like Seattle, where even the global pandemic isn’t slowing down the rise in home prices.
Prices are so high in areas where millennials most want to live that many struggle to even make a down payment. “Young buyers often start their careers in fast-growing cities in which the market is particularly tough,” said Dr. Svenja Gudell of the Zillow Group in a press release. “And they’re trying to save for a down payment while making record-high rent payments.”
Even prices outside the cities are going up, making living in the next county over and commuting a difficult option as well.
The situation doesn’t look like it will get better anytime soon. In downtown Seattle, 25,000 new housing units are planned before the end of the decade, but 94 percent will be rentals, meaning there is still no end in sight to this affordable housing shortage.
Millennials should do their research on the area they are looking to purchase a home in, examine housing trends and average prices, and consider the pros and cons that come with living in a popular city with a hot market.
[Related: The Best Times to Buy a House in Seattle]
Start Saving Early
As millennials struggle to raise money to buy a house, they’re often forced to cut corners and make sacrifices to make it happen — otherwise they’d have to give up. In 2019, around 70 percent of millennials said they would plan on less than the traditional 20 percent down payment on a home, which is unheard of in years past.
While down payments of less than 20 percent are possible, we don’t recommend them. Paying as little as 3 percent down may be attractive at a glance, but it often means you are paying much more in the long run.
Toy with a down payment calculator to figure out your goal amount, and remember that the more you pay upfront, the more you’ll save later on. Starting to save up sooner rather than later makes this much easier to do.
[Related: The Complete Guide to Moving to Seattle]
Check Your Credit
Your credit rating is one of the most important factors in determining what kind of mortgage loan you will qualify for. You need to know this information when going into the home-buying process. If you find any errors or possible mistakes on your score, challenge them — look for every angle you can find to improve your score.
Pause New Credit Activity
Your lender performs a hard inquiry anytime you open a new credit account, including when you take out a car loan, get a new credit card, or apply for a mortgage. These all ding your credit score temporarily.
If you plan to do any of these, make sure they take place after your mortgage loan approval, and not before. The temporarily lowered credit score will limit what you qualify for.
Budget Your Closing Costs
In Washington state, the closing costs of your mortgage generally run between 1 and 3 percent of the property’s total purchase price. So, on top of saving for your down payment, you want to make sure you have enough saved up for closing.
You can shop around to find the best deals for title searches, home inspections, and homeowners insurance, but nothing beats having a little bit more padding to make the expenses easier to bear.
Research Mortgage Options
A standard 30-year mortgage isn’t for everyone. If you can afford it, a 20- or 15-year mortgage will give you a lower interest rate. And in some circumstances, an adjustable-rate mortgage may be the better choice.
Know your circumstances, know the options, and find the best fit — just because you get an offer doesn’t mean that it’s the best option for you.
Organize Your Documents
Homebuyers must have proof of their income and taxes when applying for a mortgage. Usually, mortgage lenders will require two recent pay stubs, W-2s from the two previous years, bank statements from the past two months, and tax returns. They will want every single page of these statements.
Get a Preapproval Letter
Being prequalified gives you an estimate of how much a lender may be willing to offer you based on your debts and income. With preapproval, on the other hand, the lender examines your finances and confirms in writing exactly how much they are willing to lend you and what terms they will provide that loan under.
It’s the difference between an estimate and a quote — the latter is always more accurate.
Stay Under Your Limit
Pushing right up against the ceiling of what you are preapproved for is always a mistake. When your agent is showing you homes, be sure to stick to properties that are a little bit below your preapproval level.
While you can technically afford the houses right at the limit, that is the absolute ceiling of what you can spend. It accounts for move-in costs, repairing broken appliances, and other expenses that materialize when you first move in.
Give yourself a little breathing room to make sure that you can cover any potential obstacles.
Whatever you decide to do, act deliberately with each step. Do your research, have your paperwork ready, know what you want, and work with someone you trust. Your first home is an investment that for most will last a lifetime, if not at least several decades. Every step of preparation contributes to making that investment go more smoothly.
As long as the growth and investment continue to flow into Seattle, millennials might be better off making the jump to homeownership now instead of later — no matter the risks and sacrifices required.
Are you looking into purchasing a home in Seattle? Do you need more tips as a new homebuyer, or advice on applying for a loan? Seattle Mortgage Planners is ready to help you every step of the way. Contact us via our online form or schedule a call with us today.