Millennial First-Time Homebuyers: What You Should Know￼
Millennials are growing older and growing up. The oldest members of that generation are now in their 40s, and the youngest are inching ever closer to their 30s – and they’re starting to totally reshape the entire real estate market.
According to a National Association of REALTORS® (NAR) report and a study by Zillow, younger Millennials are a force to be reckoned with when it comes to real estate sales. Roughly half of all homebuyers in the last couple of years have been under 36 years of age.
What’s Driving the Surge of Millennial Homebuyers?
A number of factors have converged to set the stage for Millennials to make the en masse shift from renters to homeowners, including:
- Changes in the economy related to COVID-19, including a job market that is amenable to better pay, increased benefits and more
- The massive drop in mortgage interest rates seen over the last couple of years
- The savings that many professionals and entrepreneurs are realizing thanks to at-home work that allows them to reduce their living costs
- The fact that many Millennials are moving forward in their careers, which brings higher incomes
Millennials also, broadly speaking, took their time “leaving the nest.” Many stayed longer with their parents than previous generations and others moved back in with their parents due to either pandemic concerns or economics. This had the effect of causing many Millennials to delay marriage and start families of their own while simultaneously allowing them to save up for downpayments, moving costs and more.
How Is the Real Estate Market Responding to Millennial Homebuyers?
The home buying process is going high-tech, largely thanks to Millennial buyers. While online home listings have been increasingly important as advertising in recent decades, Millennial buyers don’t just want to shop around on the internet for a home – they expect it.
Millennials are generally experience-oriented, so they also expect real estate agents and mortgage providers to offer them options. They are technologically savvy, and they expect to take advantage of virtual showings that facilitate a quick, easy purchase.
By the same token, Millennials are very in touch with their feelings about choices. They’re not afraid to be picky about major purchases, and they may not be inclined to rush into an offer if they aren’t 100% sure that a home is right for them.
If You’re a Millennial Looking for Your First Home, What Should You Know?
Well, the real estate market is tight right now, with homes in certain markets going for far more than their listing price and receiving multiple offers almost as soon as the listing goes up.
On one hand, if you’re a first-time buyer, you don’t have to worry about offloading your current home before you can afford another. On the other hand, you have other concerns that you need to address before you start your homeownership journey. Here are suggestions on how to prepare:
1. You Need to Save as Much as Possible Because Prices Are Rising
Real estate prices have been rising by leaps and bounds, and there’s no sign that things are slowing down. Even though mortgage interest rates have suddenly bumped up (with the average 30-year fixed rate recently jumping from 3.11% to 5.11%), Zillow estimates that home prices will still rise 14.9% between March 2022 and March 2023.
You can get away with as low as 3.5% of the purchase price for a downpayment on a home if you go through the Federal Housing Administration (FHA), but in a competitive market, it’s often better to put as much money down as you can. Having a larger down payment is way more important through the lens of rising interest rates.
2. Know Your Credit Score and Your Debt-to-Income Ratio
Two major factors can affect your ability to get a mortgage for a home: your credit score and your debt-to-income ratio.
Credit scores range from an abysmal 300 to a perfect 850, and they represent your creditworthiness – meaning it’s a way that a lender can gauge the risk that you’ll eventually default on your loan. Few people have perfect credit, but you want yours to be at least in the high 600s or above 700 to qualify for a mortgage.
Lenders pull and check your credit reports and your debt-to-income for you. Do not try doing this yourself first. Lenders will pull and check from all three major credit bureaus (Experian, Equifax and TransUnion) and look for any mistakes, old unpaid bills or other problems that need to be cleaned up. Raising your score by a few dozen points could help you drop your interest rate on a mortgage dramatically.
Lenders will take a good look at your debt-to-income (DTI) ratio when you start to figure out how much of a mortgage you can afford. If your DTI is a little high, concentrate on paying off any small credit cards, loans or other debts right away.
3. Understand the Value of a Pre-Approval on Your Mortgage
Because it’s a seller’s market right now, you want to position yourself to be as attractive a buyer as possible. One of the best ways to do that is to get pre-approved for your mortgage.
Do not confuse pre-approval with pre-qualification. Pre-qualification is a largely informal process and doesn’t really create any kind of commitment between you and the lender. At best, they’re a rough estimation of what you can afford based on your reported income and debts to the lender.
By comparison, a pre-approval is much more in-depth. Your lender will want proof of your income and debts. If everything checks out through underwriting, you’ll get a conditional offer of a mortgage. This will not only tell you exactly “how much house” you can afford, but it will also give a seller reassurance that your offer is solid. That can give you a leg up when a seller has multiple bids and needs to sort through them.
4. Finally, above all, trust your agent as your guide.
The home buying process can be confusing even if you’ve done this before, but a real estate agent’s experience can be absolutely invaluable to first-time buyers!
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