Harjit Earnest,Home Lending Leader, Capital Region, KeyBank
Millennials are in an interesting position. According to Forbes, they’re making less than their parents did at the same age, adjusting for inflation, but they’re the largest demographic of homebuyers. While more than one-third are relying on gifts or loans from relatives, there are other ways of saving for a down payment.
Conventional wisdom says it’s best to make a 20 percent down payment when you buy your home. While this can help you lock in better interest rates and lower your monthly payment, you need to consider your individual financial situation and needs.
Home prices vary wildly depending on where you live, but you can expect to pay $150,000 to $250,000 on a starter home, typically a one- or two-bedroom. However, because millennials often rent longer, when they do purchase a home, they are opting to forgo the starter in favor of homes that cost $300,000 and above, according to CNBC. However, just because you can stretch your budget doesn’t mean you should.
Even if you’re preapproved for a specific loan amount, you may find that a lower home price gives you breathing room month to month. For long-term homeownership success, consider not only your down payment, but your monthly payments, property taxes, homeowners insurance and closing costs — which can amount to 2–5 percent of the purchase price of your home. Smaller down payments may require you to get private mortgage insurance (PMI), which would increase your total monthly mortgage payments.
Going under budget gives you flexibility for home repairs or other financial emergencies. Many experts recommend saving between 1 and 3 percent of your home’s value each year for routine maintenance.
The homebuying process can take time. If possible, begin to prepare months in advance from when you want to move in. If you know you’re going to apply for a mortgage within the next few months, forgo opening new lines of credit, whether via a credit card or loan. This can negatively impact your credit score, which can increase interest rates and, ultimately, how much you’ll need to spend.
Also, know your FICO score and review your credit history. For the best rates, lenders will look for your score to be above 720. The higher your score, the better. If there are errors on your history, look to get them corrected. Delaying homeownership for 6 to 12 months to boost your credit score and clean up your history can save you tens of thousands of dollars over the life of your mortgage.
If you’re renting a house or apartment, try to negotiate a month-to-month lease or find an apartment that allows for a shorter lease term. That way, when the time comes to pull the trigger on buying a home, you can do so without the stress of rent and mortgage payments. Some millennials even opt to stay in their parents’ houses to save on rent.
Anything worthwhile doesn’t come without hard work. As such, many millennials with their heart set on owning a home are taking on additional part-time jobs or forgoing vacations to save up for their dream home. However, there’s one income source you want to avoid touching: retirement funds. If you’re going to tap into this money, carefully consider the risks.
There’s no one-size-fits-all mortgage and your income, location and more can dictate your options. Talk to a professional mortgage loan officer who can explain the home financing process and lay out the loan options that make the most sense for your situation.
Depending on where you’re buying a home, your state may offer special programs for first-time homebuyers, or you may qualify for a Federal Housing Administration mortgage based on your income. Other options, like combination mortgages and VA mortgages, can eliminate the need for PMI. However, in the case of combination mortgages, you’ll need a bigger down payment and VA mortgages are available only to veterans, service members and eligible surviving spouses.
Also, prior to applying for your mortgage, you can help streamline the process by understanding the most important factor for lenders is a borrower’s ability to repay the loan. Be prepared to provide the following: current or reasonably expected income or assets; current employment status; current debt obligations, including alimony and child support; monthly payment on the mortgage; monthly payment on any simultaneous loans; monthly payment for mortgage-related obligations; monthly debt-to-income ratio or residual income; and credit history.
Prior to meeting with potential lenders, collect your paperwork and documentation. You will need to provide pay stubs for the past 30 days, W-2 forms or your two most recent tax returns if self-employed, as well as statements from bank and investment accounts.
Before diving into the exciting journey to homeownership, use a mortgage calculator to see how much house fits your lifestyle and then consider any other expenses and financial buffers you may need now and in the future.
About the author: Harjit Earnest is home lending leader for KeyBank in the Capital Region. She is based in Albany and may be reached at 518-580-2766 or [email protected]
Calculating the costs of moving
Moving is stressful…and expensive. It is also something many individuals and families moving to a new location don’t fully account for. The best way to de-stress a move and control cost is to plan. The following list provides a look at some things you should account for:
• Movers and/or rental truck or container. If you’re going to hire movers, get bids from reputable providers and be clear on their price structure—by the hour, pound or cubic foot. Moving at non-peak times, such as the middle of the month or from October to March, can help you get more competitive rates. If you’re more of a “do-it-yourselfer,” recruiting friends and family to help you move can save you a lot of money. You’ll still have the cost of a truck rental or cargo container/pod, but the overall cost savings is significant. Be sure to book early.
• Packing materials. Ask friends and family if they have any boxes lying around that you can use. You can also find boxes at the local liquor store, grocer or recycling center. If you need additional boxes, shopping online can help you land significant discounts.
• Delays. Closings get delayed. It’s one of the surprising twists and turns that are an unfortunate but not uncommon part of the process. It is also expensive. First, you may need to put your household goods in storage. Second, you may need to pay for additional truck rentals or moving expenses. Third, you may need to pay for someplace to temporarily live. You would be well served to account for each of these unforeseen expenses in your moving budget.
• Tax deductions. In 2018, deductions for moving expenses for nonmilitary taxpayers was suspended. However, if you are an active member of the military and moving due to a permanent change of station, you can deduct your unreimbursed moving expenses. For more information, see IRS Publication 521, Moving Expenses.
You can’t plan too much or too far ahead when you’re making a move. Also, while it may be stressful, there are many resources available to you, from the Internet to moving professionals, friends, family and even your banker. You just need to seek out help.