5 Tips for Millennial Homebuyers

Millennial homebuyers have passed Baby Boomers and Gen Xers for the fifth year in a row. This cohort accounted for 46% of mortgage originations during the third quarter of 2019, up 3% from a year ago. During the same timeframe, Gen X accounted for 35% of mortgage originations (down from the year-ago figure of 37%), while Baby Boomers accounted for 17% (down from 18%).

If you’re a millennial looking to buy a house, here are five things you can do to make that dream come true.

1. Pay Off Student Loans and Other Debt

What’s the biggest challenge facing millennial homebuyers? Student loans. Over 44.2 million Americans are paying off a national student loan debt of $1.48 trillion—and, in 2016 alone, the average student loan debt was $37,172 per graduate!

As if student loans weren’t enough, consumer debt has postponed the home-buying dream of many millennials. In fact, the National Association of Realtors (NAR) reports that, second to student loans, the two expenses that delayed saving for a down payment were credit card debt (32%) and car loans (32%).

Since buying a house is the most expensive purchase you’ll make, you should be debt-free before you buy one. If you have any debt, get on a budget and find a debt reduction strategy that works for you to pay off those loans. Only then will you be ready for the next challenge: the down payment. But don’t be discouraged if you aren’t 100% debt-free, your lender will be able to help you navigate your options.

2. Save for the Down Payment

Most of us don’t pay cash for our first home. In fact, 98% of millennials buy with a mortgage. That’s why it’s important to have a strong down payment—not only to lower your interest rate but also to help you pay off your mortgage even faster. 10–20% is recommended. If you have 20% tucked away, you’d bypass private mortgage insurance (PMI)—additional insurance lenders make you have that protects them if you stop making mortgage payments.

If you’re struggling to save for the down payment, you’re not alone. One-fourth of millennial home buyers couldn’t do it alone, accepting a money gift from a friend or relative. And because of high rents and student loans, some millennials need more than seven years to save for a down payment, according to one study by Builders Online.

That’s why, if you’re still saving, you must be patient and stay the course. Keep saving! Start with a clear plan. Know how much house you can afford. Stay motivated with a goal tracker. And with a smart plan like this in place, it can take less time than you think.

3. Stand Out in a Competitive Market

If you’ve already paid off your student loans and saved for your down payment, good work! The next step is to get into the housing market. In the past few years, the housing market has had a shortage of sellers, which has not only raised the prices of homes, but also has caused competition among buyers. Gen Xers are typically buying more established homes instead of starter homes, so your competition is other millennials—and your parents.

Yep, that’s right. Just as millennials are finally moving out, empty-nesting baby boomers are downsizing into the very starter homes that millennials are trying to buy. You might find yourself in bidding wars with buyers who have a bigger budget and more home-buying experience.

While you should expect competition—especially in hot housing markets such as Seattle, Nashville, and San Francisco—that doesn’t have to derail your home-buying budget. Stay in the game with these tips:

First, get pre-approved for a home loan before you make an offer. A pre-approved loan means that your lender has looked over your finances and decided that you can cover the down payment and the mortgage payments. Though it can take some time to get, a pre-approval letter sends a powerful message to the seller that you’re a serious buyer.

Second, act decisively. Do everything to keep the process moving. For example, tighten the timeline of your home inspector. Most inspectors can inspect a house within five days of your request. Never ask a motivated seller to wait weeks for a home inspection if you can get it done in days.

Lastly, be human with the seller. Send a handwritten letter, explaining why you and your family like the home. Selling a home can be emotional for homeowners, so you never know how far a personal letter can go.

4. Find an Affordable House in a Seller’s Market

Another challenge facing millennials is the rising value of homes. For many —especially those that have just managed to pay off student loans and land a stable job—rising market prices could be the most frustrating hurdle they face.

Fortunately, the housing market is beginning to slow down. NAR predicts a 1 to 3% growth in housing prices this year, which is far less compared to the 5 to 7% annual growth over the last five years.

My best advice, then, is patience. Once you start shopping, don’t give in to the temptation to stretch your dollars and buy a home that’s out of your price range. Keep your monthly housing payment (which includes mortgage, taxes, insurance, HOA dues, etc.) to no more than 25 to 30% of your take-home pay on a 15-year, fixed-rate conventional mortgage. No home is worth sacrificing your retirement or your kid’s college fund. However, do consider stretching your “zone”, the area you are hoping to purchase in. Likely this is your first house, but not necessarily your forever house. Look at areas that will provide good resale a few years down the road - say where new public transportation is coming to. Build equity now for your forever home in the future.

5. Gain Experience With the Buying Process

One of the best things you can do as a first-time homebuyer is familiarizing yourself with the buying process.

That’s why it’s extra important for millennials to work with experts who know what they’re doing. Look for an agent who brings at least four years of experience to the table, one who knows the market well enough to find a great deal on the home that’s right for the buyer.

Partner with a real estate pro who has the heart of a teacher and takes time to listen to your needs and answer your questions. A good agent is more concerned about your bank account, not theirs.

Thanks to Rachel Cruze (#1 New York Times best-selling author, helping people learn the proper way to handle money and stay out of debt) for these tips.