Homebuying for millennials: A comprehensive guide
Monday, 11 June 2018
It's understandable why so many millennials are wary of homeownership.
Many of them are already saddled with student debt while trying to find stable employment, and they saw their parents struggle to keep houses they couldn't afford during the financial crisis. A recent MacArthur Foundation survey of Millennials found that 76 percent say homeownership is harder for them than previous generations, but a full 88 percent aspire to this goal, and 53 percent report it's a high priority.
Homeownership is a great opportunity for many people—young adults in particular. In addition to the psychological and emotional benefits of owning a home, it builds wealth. Like any investment, typically the longer you own a home, the greater the chances of a high return on investment. In order to bridge the gap between the perceived difficulty of buying a home and the pressing desire to own a home, young adults need to dig into finding out what really goes into purchasing a home.
Your credit score
You will generally need a credit score of at least 580 to qualify for most mortgage loans. The higher your credit score, the more attractive your mortgage options will be. In other words, if you can prove you're a responsible borrower, you will qualify for lower-interest loans, which makes it easier to afford a home and will save you money over the long-term.
To help hit a solid credit score, pay at least the minimum on all your debt payments on time, every month, and keep balances to 25 percent or less of your credit limits. Check your credit report at least once per year and immediately and take steps to resolve any suspicious activity. For more information, see how to boost your credit score.
This is the monthly recurring debt payments—typically mortgage loan, credit card, student loan, or car loan payments—as a percentage of your income. In general, a mortgage lender will approve a mortgage with payments of no more than 28 percent of your income, and total recurring debt payments of 36 percent of your income, though this number can go as high as 43 percent in some cases.
Down payment: How big?
In general, lenders require borrowers put down at least 20 percent of the purchase price of a home upon closing. If you don't have that much, you'll be required to take a second mortgage to make up that 20 percent, or pay private mortgage insurance (PMI), which costs an average of about one percent of the original loan amount per year, typically until you have 20 percent equity in the home. Of course, the bigger the down payment, the more equity you will have in the home, and the sooner you may be able to pay off the loan.
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