A decade ago, economic experts were complaining about the emergence of a “boomerang generation.” Young people left for college with bright eyes and dreams of rewarding and fulfilling careers. Then, in 2000, the economy collapsed. These ambitious, well-educated folk found themselves with tons of debt and little opportunity. Many of them swallowed their pride and moved back home with Mom and Dad.
This situation wasn’t great for anyone. Mom and Dad had to put retirement plans on hold. Older Gen Y members had to postpone their professional and social development to take internships and part-time jobs. It’s hard to feel “grown up” when your evenings end and mornings begin in your old childhood bedroom.
The economy improved, and some members of this generation are in a position to consider buying a house.
However, buying a home can be a daunting task. The challenges of being a first-time home owner can be intimidating, particularly for people who are moving away from home, starting their careers and dealing with student loan debt. Here are a few guidelines to help take some of the stress out of your decision.
The house you buy may not be forever.
Because real estate is generally a sound investment, many first-time homebuyers try to get the biggest house they can. They may be trying to start families or need more space for their existing family to grow. Whatever the motivation, buying a house is one of the few times people try to plan their lives 30 year, or more, down the road.
That’s a big gamble. Any number of changes may happen in 30 years: Your job or your partner’s job may force you to move, your parents may have medical problems that need attention, or you may decide to change careers or start your own business. This uncertainty means it’s not always in your best interest to plan for a future that’s so far away.
Look for a house that suits your immediate needs and understand that every place is adaptable to a degree. A den or an office can become a nursery, a shed can become a workshop, and a basement storage area can become another bedroom. Don’t think you need to plan your life out forever if you choose to buy a home. Make some reasonable, educated guesses about what your life will be like for the next 10 years, and buy the house you need for that time.
Don’t become ‘house poor’
Many first-time homebuyers fall in to the trap of spending the most they can afford on a new home. The reason is simple: money spent to repay a mortgage isn’t really “spent.” Homes can be refinanced or remortgaged if money gets tight, or repaid when the house is sold. That’s a sound strategy, but only to a point.
People who end up spending most of their monthly income on a house payment leave little for other debt repayment, retirement savings, or an emergency fund. They find themselves unprepared for an unexpected medical bill or car repair. They also find it difficult to take vacations or make home improvements. That’s an uncomfortable position to be in.
Avoid this trap with a little financial consultation. Spending the most you can afford on housing expenses should be your worst-case scenario. Buy the house you need, not the most expensive house you can afford. You’ll be happier in your home and in your budget.
Understand the process
There are a lot of factors that go into obtaining a mortgage. First, you and the seller have to agree on a final price, which includes the money you pay for the house and a host of fees, like the inspection, appraisal, and title transfer. The Realtor in charge of selling the home can walk you and the seller through the fees. (These short videos will walk you through the six major steps of the mortgage process.)
Next, you’ll need to arrange financing. You’ll want to shop around for the best prices, but new regulations can make that costly and time-consuming. Each financier has to appraise the value of the home, and then compare their estimate to the price you agreed on with the seller. The greater the difference between these two values, the more expensive your home loan will be, but that’s not the only factor. The financing institution also has to check your credit, verify your income and assets, and confirm your employment to follow new regulations passed after the last financial crisis that was largely fueled by bad mortgages.
These regulations can make it more difficult just to get the home loan, much less one at a good rate. This is particularly true if your employment history is short or if you’re just getting started with a new business.
Buy a house you can afford, building your credit score by reducing the amount of credit you’re using, staying with the same employer and saving for a significant down payment. You should aim to have at least 20% of the total amount of the sale for a down payment, as this is the threshold to avoid having to pay for Private Mortgage Insurance (PMI). A larger down payment reduces the risk of the loan to the lender and can help get you a less expensive mortgage and a less expensive housing payment. You can also ask for help from mom and dad; a cosigner on a mortgage may improve your credit score and lower your interest rates.
Don't go it alone
A lot of national lending institutions advertise appealing mortgage specials on billboards, TV and the radio. The rates may seem reasonable and even enticing. In reality, though, those rates go only to a small percentage of borrowers – those who have exceptional credit, significant income and a considerable net worth. As a first-time homebuyer, you probably will not qualify for the rates those large, corporate lenders are using as bait to pique your curiosity.
To see CAP COM’s current rates or information about getting pre-qualified, click here.
Given the difficulty of shopping around, make your first stop the institution that has the best chance of giving you the best rates from the start. CAP COM is here to help new home-buyers secure loans for the first time. You’re making the right decision by looking for a home during a buyer’s market. Make another smart call by speaking to a CAP COM representative about mortgage rates.
When you’re ready to get out on your own, we hope that CAP COM will be your first stop.