Graduating college, starting your career, getting married and buying a home in the suburbs is still very much the American Dream. You can't turn on your TV these days and not be surrounded by shows glamorizing the process of buying a home and over-emphasizing how happy you will be when you have your first BBQ in your backyard.
Owning a home will likely be your biggest asset and require 15-30 years to pay off - gulp. There are many advantages to owning a home, such as a potential mortgage tax deduction, owning an appreciating asset and the simple luxury of being able to paint your walls any color your heart desires.
But as you probably guessed, with pros come cons. Just like there are people who can't stand the combo of peanut butter and chocolate, not everyone is ready for homeownership.
What about you? Are you ready to be a first-time homebuyer?
What a first time homebuyer looks like
A recent survey by Mortgage Hippo, a mortgage resource site, polled millennial first-time homebuyers to find out what the average buyer looks like and found some interesting statistics.
Credit score: 730
Down payment: $15,000
Available assets: $20,000
Years to stay in home: 9 Years
While these stats tell one side of the story, there are plenty of myths when it comes to home buying as well. It's true: you don't always need 20% as a down payment, and it is possible to buy a house with a lower credit score. However, if you're thinking about buying your first home, having some cash and a great credit score will put you at the top of the pack.
Are my savings all that and a bag of chips?
No one has ever complained about having saved too much money. When it comes to home buying, saving money is an integral piece to your home buying strategy, and you've also got to make sure your budget can handle the added expenses.
First, you will need savings for the mighty down payment, even if you decide to put down less than 20% (the standard average down payment amount). If you don't have a 20% down payment, you can still purchase a home. However, you will be required to pay Private Mortgage Insurance (PMI) until you have at least 78% of loan to value. PMI adds to your monthly mortgage payment and is not deductible on your taxes, which is why it’s a real bummer.
You've probably heard of the saying, "Don't be house poor" – that is, don’t spend a disproportionate amount of your income on home ownership costs. It's something to strive for, but it's also very easy to get swept up in the fury of buying a home where you throw all reason to the curb and let your emotions take over. Before you even start to look at houses in your favorite neighborhood, make sure you contact a local mortgage broker to become pre-approved.
Think of pre-approval as your parachute that's there to catch you before you go skydiving. This process is relatively simple and requires a mortgage broker to get under the hood of your finances to figure out how much house you can afford. Plus, once you are pre-approved, the lender can issue you a letter stating that they've double checked all your financials, and you're ready to go forward with buying a house. Having a pre-approval letter can make a real difference if you get in a competitive process with another buyer – it's your stamp of approval.
On top of your down payment savings, you will also want to make sure you have some cash reserves for lots of little expenses that add up. The down payment is just one component of your home purchase. You will also need somewhere around 2-4% of the purchase price for closing costs, which includes taxes and insurance.
Also, if you have grand plans of remodeling your house, fixing the roof or maybe putting in that tricked out Jacuzzi in the back yard, your reserve savings will become your best friend. You never want to get in a situation where you burn through all your cash and are struggling to make the mortgage payment.
But my credit score is not great
Don’t go into the home buying process if you haven’t checked your credit score lately. It’s super easy these days to check your credit score with companies like Credit Sesame and Credit Karma’s free apps. In a few seconds, you can uncover your magical three-digit number.
You’re aiming for a score north of 740 (credit scores range from 300-850) ideally to secure the best interest rates for your mortgage. If your score is not up to par, there are plenty of tricks you can do to help raise your score in a short period.
Before you are quick to dismiss the importance of your credit score, you need to understand why it’s so important to your whole financial future. Your credit score determines the interest rate you will receive for your home mortgage and the lower your credit score is, the higher your payment will be.
For example, on a $300,000 home purchase where you put down 20% for a 30-year fixed loan, with a great credit score (720+) your monthly payment would be approximately $1,064.35 with a 3.4% interest rate. On the same purchase, with a not-so-great credit score (680 and below), your monthly payment would be approximately $1,347.67 with a 5.4% interest rate. That's nearly $300 a month extra over 30 years, just for having a subpar credit score.
The morale of the story is a credit score does matter.
With a stellar credit score, a flush savings account balance and a pre-approval letter in the palm of your hands, it's entirely possible that you are ready for homeownership. Buying a home can be an incredibly smart money move for you to make if you have the right situation and have put yourself in a place where success is a likely outcome.
If you're still working on building your savings and correcting your credit score, just know that there's nothing wrong with renting a few more years. Your bank account will thank you, and the home of your dreams will be there waiting for you when you're ready.