Homebuying Prep for Millennials Who Want a Mortgage
Millennial homebuyers are expected to snap up a huge chunk of the 2019 housing market. Maybe it’s because they’re fed up with unpredictable rental rates, inconsiderate neighbors and unanswered maintenance requests. Or it could be they’d rather the thousands of dollars they pay on housing each year to go toward equity instead of into the ether.
Whatever the reason, you’ll need to do some legwork when you decide you’re ready to buy a home. Below we’ll dive into the to-do’s for millennials who want a mortgage.
4 ways to prepare for the homebuying process
Follow these four tips as you prepare to get a mortgage
Determine if you’re ready to give up renting
Homeownership is a major financial decision that takes a lot of preparation, and not everyone is at the point to take the leap. Among the share of U.S. consumers who don’t own a home, 16% said it’s because they need the flexibility that comes with renting, according to consumer survey data from the National Association of Realtors.
If you haven’t found a community you’re ready to commit to, or if you just enjoy being able to move around from year to year, then it’s probably not time for you to buy a home just yet. But if you’re eager to put down roots and reap the benefits of owning a home — like building equity, taking advantage of tax incentives and decorating your space the way you want — it’s possible that you might be ready to forge ahead with homebuying.
Make sure your money isn’t funny
Before you invest hours in house hunting, one of the first actions you should take as a homebuyer is getting your finances in order.
First, figure out how much of a monthly mortgage payment you can reasonably afford. Mortgage payments typically include the five following components:
- Homeowners insurance
- Mortgage insurance (if you’re making less than a 20% down payment)
A good rule of thumb is to keep your mortgage payments at 30% of your gross monthly income or lower. Learn how much house you can afford by using LendingTree’s home affordability calculator.
You’ll also want to save for a sizeable down payment and closing costs. It’s possible to buy a home with just 3% down, but that’s still going to be thousands of dollars. If, for example, you learn that you can afford the mortgage payments on a $200,000 home, you would have to put down at least $6,000.
Closing costs encompass the other fees associated with originating your mortgage and can equal anywhere from another 2% to 6% of the home price. On that same $200,000 house, your closing costs could run you up to $12,000. The good news is that there are first-time homebuying programs that offer down payment and closing cost assistance. But you’ll still need to save as much as you can, and make sure there are cash reserves left over after you leave the closing table.
Figure out which mortgage fits you
Because buying a home is not a “one-size-fits-all” experience, there are different types of mortgages available. We discuss a few that could be more attractive to millennial buyers.
A Federal Housing Administration (FHA) loan is a mortgage backed by the federal government, though the loans are underwritten by approved private lenders. Borrowers applying for an FHA loan can put down as little as 3.5%, but they’ll need a 580 credit score or higher. They also need to meet other requirements, including having steady employment and income.
One caveat to choosing an FHA loan is the mandatory mortgage insurance premiums (MIP). Borrowers are required to pay the premiums, but they protect the lender in the event that the mortgage goes into default. Unless you put down at least 10%, you’ll pay MIP for the life of your loan, which might be up to 30 years.
Fannie Mae HomeReady
Fannie Mae, one of the two government-sponsored enterprises that buys and sells conventional mortgages, has a mortgage product called “HomeReady,” which serves low- to moderate-income consumers who are either first-time or repeat buyers. There’s a minimum 3% down payment and 620 credit score required.
Similar to FHA loans, you’ll pay mortgage insurance, but it’s waived once you build 20% equity in your home.
Freddie Mac HomeOne
The other GSE, Freddie Mac, has the “HomeOne” mortgage product, which is specifically for first-time homebuyers. You’ll need a 3% down payment, and you must complete a homebuyer education course. Private mortgage insurance is also required.
Get preapproved and shop around
In order for you to be taken seriously as a homebuyer, you’ll need a mortgage preapproval. A preapproval is a letter from a lender that gives you the estimated mortgage loan amount and interest rate you likely qualify for. Keep in mind that a preapproval is conditional — it only lasts for about 90 days and there’s no guarantee the lender will fully approve you for a home loan.
Still, a preapproval helps you narrow down the home prices that fit within your budget and shows home sellers that your offer holds weight when you put in bids.
Make sure you’re also getting mortgage quotes from multiple lenders before you commit to one company. Comparison shopping can help you save thousands over the life of your loan. Get started by comparing mortgage offers from multiple lenders on LendingTree.