Real talk: buying a house can be intimidating. So we created the first-time homebuyer series to take the mystery and anxiety out of the house-hunting process. Dive into our complete guide which covers every step of the process: why you should buy a house, how to get pre-approved for a loan, how to find an agent, what to look for in a house, how to make an offer (and negotiate!), how an inspection works and how to close once you find the dream home. Don’t worry we spell it all out for you so that if this is your first time (or third) you’ll have all of the information you need for a successful purchase right at your fingertips. Read the entire series here.
It’s a raging debate among millennials, early Gen-Zers and pretty much anyone else who’s renting their home. According to a 2019 report from the National Association of REALTORS®, 86 percent of first-time homebuyers last year were 28 years old or younger, i.e. millennials.
Are Millennials Even Buying Houses?
Ask any millennial (people born between 1980 and 1998) why they haven’t bought a house yet and you’ll probably hear all about insurmountable debt, high costs of living, stagnant wages, etc. There’s been a widespread belief for a few years that millennials would never be interested in becoming homeowners because of their student loan debt and delayed participation in traditional economic and social milestones, like getting married, having kids and yes, buying houses.
Here’s the good news: millennials are buying houses, they’re just putting it off until a later age. The average age of a first-time homebuyer in the 1960’s was 24-25, according to David Benson in Business Economics. Nowadays, the median age of a first-time homebuyer sits around 33, according to the National Association of REALTORS®.
So should you buy a house? The answer is yes. You absolutely should think about buying a house in the next year or so.
7 Reasons You Should Buy a House
What benefits of buying a house outweigh the upfront cost? Can you purchase a house if you have student loan debt? Is it cheaper, in the long run, to buy a house instead of renting one? What even is equity and why do you want it? We answer all of these questions!
#1: Mortgages rates are low
Mortgage is not a dirty word! Think of a mortgage like rent- it’s a set cost you pay every month. However, while rent goes right into the pocket of your landlord, mortgage payments go toward your home loan and you build equity as you pay.
Mortgage rates are low right now and will stay low through 2020 and into 2021. Experts at Freddie Mac, Fannie Mae, the National Association of REALTORS® and the Mortgage Bankers Association are all forecasting an average mortgage rate range of 3.5 to 3.8 percent.
What does that mean for you as a potential homeowner? You can get a home loan for a low interest rate and you’ll keep that low interest rate, even if the market swings back and interest rates rise in a couple of years.
#2: Home values will grow over the next 5 years
Maybe you’ve been hesitant to buy a house because you’re afraid of being stuck with an expensive property that may not be worth much if the market takes a turn. Rest easy- home values are expected to increase over the next five years and by 5 percent this year alone, according to a CoreLogic study.
Homeowners can expect to see a cumulative average growth in family wealth of about $47,500 by 2024 because of the appreciation of home values. If you’re a homeowner, that increase in wealth stays with you, instead of going to whoever owns the house you rent.
#3: You can start building equity
You’ve probably heard this reason as the most common benefit of owning a home. We get it, equity is good! But what exactly is equity and why do you want it?
Home equity is the market value of a homeowner’s interest in their property. Basically, the market value of the portion of your home you actually own. Your equity in a home is the amount of the loan you’ve paid off and the more you pay, the more your equity increases. Your equity is also part of your personal wealth- the summation of all of your physical and financial assets.
Equity can also grow on its own as your home appreciates in value. So the combination of your mortgage payments and market value appreciation positively affects your personal wealth. Houses are one of the few big assets purchased with a loan that appreciates in value as you pay it off.
Why do you want equity? Equity makes it easier to buy a nicer house when you are ready to upgrade to your dream house, you can take out low-interest loans against your equity if need be or use it for investments.
#4: You can achieve your financial goals
You may have heard of a mortgage referred to as a “forced savings account.” It’s cheaper in the short-term to rent because it’s easier to get approved and costs less upfront to move in. But in the long-term, becoming a homeowner is better for slowly building up your personal finances.
“Owning a home is one of the most common ways households build long-term wealth, as it acts like a forced savings account,” said Ralph McLaughlin, Deputy Chief Economist at CoreLogic. “Instead of paying your landlord, you can pay yourself in the long run through paying down a mortgage on a house.”
Becoming a homeowner is by no means a guarantee that you’ll wake up rich in 10 years. However, it provides the structure to save and invest in yourself. A mortgage forces you to work toward a financial goal rather than just pay out rent every month with no investment in your own wealth.
#5: Buying is cheaper than renting
Generally, buying is less expensive in the long run than renting. Of course, this can vary by location and the housing market in different areas. It may not seem like buying would be less expensive. It’s easier to get approved to rent, you usually don’t need a loan, a rental deposit is less than a downpayment and rent can be low if you cram enough roommates into the place.
However, after more than a year or two, the cost of renting outweighs the expenses of buying a house. A house costs more upfront: you need savings for a downpayment, closing costs and the actual move. However, your monthly mortgage payment will decrease over time as you pay more and more down, unlike rent which a landlord can hike up every year.
“But my landlord takes care of maintenance!” It’s true that one of the biggest benefits of renting is that the cost to fix a broken furnace or replace the faulty dishwasher falls to the landlord. But unless you buy a complete fixer-upper, you’ll find the financial advantage to owning a house still outweighs the maintenance and repair costs you pay along the way.
Nerdwallet has a rent vs. buy calculator that can tell you exactly when it becomes cheaper for you to be a homeowner instead of a renter and how much money stays in your pocket.
#6: There are tax benefits to buying
This benefit isn’t mentioned as much in the rent vs. buy conversation but it’s definitely worth counting. The interest and property tax you pay as part of your monthly mortgage payment are tax-deductible. The Tax Cuts and Jobs Act is in effect until 2025 and allows you to deduct interest on home loans up to $750,000, as an individual. If you file taxes jointly with your spouse, the limit is $375,000.
#7: You don’t need to have a 20% downpayment
One of the biggest misconceptions among first-time homebuyers is that you need to have 20 percent of a home’s purchase price saved up for a downpayment. Is this true?
“Absolutely not!” said Brian Swanson, the branch manager of the Des Moines office of Inlanta Mortgage. “There are so many options out there for programs with less downpayment.” Many loan programs now only require a 3 percent downpayment and some, like VA loans, may waive the need for a downpayment completely.
6 Reasons You May Not Be Ready to Buy a House
“Homeownership is a sound investment if a household can meet two basic requirements,” said McLaughlin. “One, that they’ll stay put in the home for at least 5 years, and two, that they’re not paying an unreasonable amount of their income towards their housing payment.”
Homeownership is an investment of all your resources and everyone’s financial situation is different. Can you commit to staying in your house for a number of years for the investment to pay off? Do you qualify for a reasonable home loan that won’t drain your income? While it may be financially sound for some to invest in a home, it may not be the right time for others. Consider a few of these factors before you start the homebuying process.
#1: Bad credit
You certainly don’t have to have a perfect credit score to be approved for a home loan. However, if your credit score is below 600, you may want to hold off on undergoing the credit checks required for loan approval. “Many lenders like to have a minimum of a 580 credit score for some of their more aggressive programs,” explained Swanson. “As your credit score increases, the risk for the lender decreases and the interest rates improve. A score of 740 and up will get you the A+ best-rate programs.”
What you can do: Take the time to improve your overall credit before trying to apply for a loan. Make changes to your budget to pay down any big debts and build up your savings before approaching a lender.
#2: High debt-to-income ratio
A lender will look at your debt-to-income ratio while evaluating your finances. If the ratio is 50 percent or more, i.e. half your gross monthly income goes toward debt payments, you may not be ready to take on a mortgage payment. “Keep the balance on your credit cards below 30% of the limit to get the best overall addition to your credit scores,” said Swanson. “Don’t overutilize credit, but don’t underutilize it either. The only way you can establish and build a credit history is to have debt and prove you can pay in a timely manner.”
What you can do: If most of your income is going toward debt payments, it’s time to double down on paying it off so a mortgage payment doesn’t tip you over the edge.
#3: No job security
A lender will evaluate your income during the loan approval credit check. Part-time employment, freelancing, self-employment and anything else that may result in inconsistent paychecks, while technically valid forms of income for some home loans, can really impact your ability to be approved. If you’re not usually sure how much you’re going to make in a month, a lender may be hesitant to approve you.
What you can do: Evaluate your sources of income and make sure you can afford a monthly mortgage payment.
#4: You move a lot
Do you work at a job that relocates you every year? Or do you just enjoy picking up and starting over whenever you feel like it? It’ll cost you more to buy, sell and move every year. “You should be willing to stay in a house for 3-4 years,” said Dylan De Bruin, owner and managing broker of Century 21 Signature Real Estate. “Otherwise, you’re going to eat the cost of moving and most likely won’t make back what you bought your house for. It takes time for your home to grow in value.”
What you can do: If you love being able to start fresh in a new city every year, homeownership won’t be the most viable option for you.
#5: Rent is cheap in your market
Did you luck out and find the perfect apartment with all the features you want for a rent that’s well below market rate? Congrats, hold onto it as long as you can! If renting really does suit your lifestyle and needs and your rent is at or below what a mortgage payment would be in your market, you may not see the need to spend the big bucks on a house.
What you can do: Just keep in mind, you are not building up equity or your personal wealth by renting. You may be saving money every month in the short-term, but without the long-term investment in your future that comes with homeownership.
#6: You just don’t want a house
Maybe you’ve read everything you can find on the benefits of owning over renting and you’re still not convinced because you just don’t want to own a house. You probably hear from everyone around you that you have to buy a house, that it’s a sign of being an adult, that it’s the smart financial move and so on.
What you can do: Don’t buy a house because it seems like everyone around you is or because you feel like you “should.” If you’re not ready to buy a house (financially or personally), that’s okay. It doesn’t make you less of an adult and it doesn’t necessarily mean you’re making poor financial decisions.
What Do You Need to Do to Buy a House?
Once you decide it’s time for you to buy a house, you might wonder what you actually need to get started.
Save, save, save!
If you haven’t started saving with a downpayment in mind, you better start! It’s a misconception that you have to have at least 20 percent of the house’s purchase price for a downpayment. But, you should have enough saved to cover 3 to 10 percent as a downpayment, at minimum. You also need to account for closing costs, the cost of a home inspection and other miscellaneous costs that pop up during the homebuying process.
Start saving now!
Pay off your debt.
If you have student loans, you obviously won’t be able to pay them off quickly. And that’s fine, not all debt is bad debt! Student loans are a long-term debt that takes years to pay off and lenders know that. In fact, they can look at your history of paying down student loan debt as a sign that you can make monthly payments and presumably won’t miss a mortgage payment.
But if you have outstanding credit card debt or delinquent loans hanging over you, double down and pay it off. You want as few loans and debts hanging over you as possible.
Talk to a real estate agent.
Before you start the pre-approval and home search processes, you can sit down and talk to a real estate agent. If you already have someone in mind, set up a meeting to sit down and walk through the homebuying process. Your agent will be able to tell you what to expect for a timeline, what the market looks like and what kind of financial documents you need to bring to a lender. Your agent will then send you to a home loan lender for pre-approval.
Talk to a lender.
If the world of mortgages, loans, and finance is new to you, sit down and talk to a lender. They’ll walk you through the different types of loans, the agencies that back them and what your monthly costs will look like. A good lender will take into account your financial goals and help you find the right loan to fit your needs and financial situation.
Read the first-time homebuyers’ series.
This is the first step in a 10-part series that will walk you through the house-hunting process as a first-time homebuyer. We’ll cover how to get pre-approved for a loan, how to find an agent, how to find the right home for you, how to make an offer, what an inspection covers and the closing process.
It’s a big decision to buy a house. It’s an investment of your time and money that pays off in the long run as you build up your personal wealth. “I’ve never heard anyone say they regret investing in real estate,” said De Bruin. “Within 5-10 years, you have an asset that’s grown in value. I hate to say everyone should buy a house, but when the market is good, everyone really should think about buying a house.”
Real talk: buying a house can be intimidating. So we created the first-time homebuyer series to take the mystery and anxiety out of the house-hunting process. Dive into our complete guide which covers every step of the process so you’ll have all of the information you need for a successful purchase right at your fingertips.