Buying a Home is Hard For Millennials
I remember when I first got out of college. I moved from Nebraska to Las Vegas to become a teacher. The starting salary back then was $24,000. I could not afford to buy a home or even rent a place by myself. I ended up renting a room in a home with 5 other people. As time goes on, you make more money, pay down bills, possibly change careers, and you can afford more. Housing affordability has changed some, but in many cities it is still hard for millennials to afford a home. Check out the Bloomberg housing affordability chart.
WHO ARE MILLENNIALS?
- Millennials are the 18-34 age group
- The largest generation of people are the millennials. This generation is between 70-75 million people.
- 40% of all unemployed workers are Millennials (US Census Data) - With such a large population there are not enough jobs out there for them. They are the first population to have higher levels of unemployment, student debt, poverty, and lower personal income and wealth than all of generations as the same stage of life.
- Millennials have an average college debt of $33,000 and the median income is the same as in 1999 (PEW Research and USA Today college)
- Millennials are having children 5-8 years later than previous generations. The average age as is 30 years. (PEW Research) - They are having a hard time affording to live so they cannot afford to have kids.
Just these basic statistics show how difficult it is to afford a home and many are living paycheck to paycheck. There are some ways to make home buying more affordable to millennials.
Strategies To Help Millennials Afford A Home
- Be realistic about what you can afford - The days of the great deals are over (at least in Metro Atlanta). A typical starter home is back to what it truly is. It is a 3 bedroom and 1 or 2 bathrooms. Typically 1200 - 1800 square feet and needs some updating. There is value in these homes especially if a home owner does the updating over time.
- Inventory is low so you cannot be too picky - I see this a lot. Millennials are looking for the best deal and there are none. We are in a sellers market and have incredibly low inventory. There is not a huge selection. If you come across a good deal there is a reason for it. When the market was really down and a majority of the sales were distressed properties there were some great deals. The starter homes during that time are considered move up homes today. In the current market if there is a distressed sale, most of the time, it will need more than cosmetics. Since values have come back, more people have equity in their homes. If they do not, that means that the home is in an area that has not fully recovered, the house has not been maintained, or they took out a loan that did not have the best terms, like an interest only.
- Be willing to look farther out - Most people want to live close to work. That is natural and I get it. When you are first starting out your career and want a house, look in areas that are farther away. For example, I have a client who wants to live in Smyrna and their price point is $150,000 - $200,000. In Smyrna, a typical home in that price point is an older ranch home that is three bedrooms and one to two bathrooms that needs updating. My clients did not like any of those homes, so we talked about looking farther out. We started looking in Powder Springs, Kennesaw, and Acworth. It added about 20-25 minutes on their drive time, but what they had for a selection were two story traditional houses built in the 1990's. These homes were larger and more updated. By looking father out they are able to get a home that is more of what they are looking for.
- Avoid a community with a homeowners association - A homeowners association can be a good thing, but it also costs money. To keep your costs down, look for a well maintained community with no homeowners association. This will save you money. To be able to make the most informed decision read about the pros and cons of a homeowners association.
- What compromises can you make - So is the house worth the extra 20-25 minute drive? That is a good question. Any buyer, who wants a home, will have to make compromises. When I sit down with a buyer client and ask for their wish list of what they want in a home, I write everything down. I ask them two questions:
- What are your deal breakers for a home? These would be things that they must have in their home. For example, a two car garage, large yard, finished basement, etc.
- What are you willing to compromise on? These would be things like having more updates in a home, square footage, smaller backyard, garage, etc.. What can you live or live without?
These questions are important. It does not matter if you are buying a $100,000 home or a $10,000,000 home, there are always compromises. So what can you compromise on?
- Save Money - If buying a home is what you want then you have to save money. By saving and having a larger down payment it will lower your mortgage amount and your mortgage insurance.
- Look at all loan options - There are some great first time home buyer options, and most are income driven, so that works great for most of the millennials. Research the different types of loans. I know in Georgia they have a great program called the Georgia Dream. It is a down payment assistance program that gives a buyer $5,000 toward their down payment, but if you have a public service job like a teacher, firefighter, or nurse, etc. you can get up to $7,500.
- Keep you mortgage payment lower - If you cannot afford a larger mortgage payment look into ways to keep the mortgage payment down. Some options could include:
- Higher down payment - The higher the down payment the lower the mortgage payment and mortgage insurance will be.
- Try an 80/20 loan - These essentially are two separate loans. The first loan is for 80% of the purchase price and the second loan is for the final 20% of the loan. The first loan is usually at the current interest rate and the second loan is usually at a higher interest rate. There is also a 85/15. These will get rid of your mortgage insurance. Check with you lender on all the terms and rates on these loans.
- Lender paid Mortgage Insurance - This is when the lender will pay the mortgage insurance for you. How this works is that if you have an interest rate on your mortgage at 4%, then the lender will raise the interest rate slightly to be able to remove the mortgage insurance. See the example below.
Mortgage payment with Mortgage Insurance
- Purchase price - $150,000
- Interest Rate - 4%
- Mortgage Insurance - estimated - $150
- Mortgage payment (principal and interest) - $716.12
- Mortgage payment + Mortgage insurance - 866.12
Mortgage Payment without Mortgage Insurance
- Purchase price - $150,000
- Interest Rate - 4.25%
- Mortgage Insurance - $0
- Mortgage payment (principal and interest) - $737.91
Savings with lender paid mortgage insurance - $128.21 a month
These are estimates. In this example, the lender raised the interest rate .25% and it increased the mortgage payment but dropped the mortgage insurance. It saved the buyer money. Some lenders will raise the interest rates and some will charge you an upfront amount, for you to pay, to drop the mortgage insurance. Make sure you ask your lender what all options are.
- Make a plan and be patient - When you start off on your own, it takes time to pay off bills and earn a higher wage. So be patient. Don't do everything all at once. Make a plan of how you are going to pay of bills, save money, and get yourself in position to buy a house. It will take time but it is completely worth it.
To help get you started, take a look at my Buyer Resources and Mortgage Resources. These have lots of great information on home buying, the buying process, videos, mortgage information, type of home loans, etc. Please contact us with any questions we are glad to help anyway we can.
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