The world looks very different to millennials than it did for previous generations, and their idea of being a homeowner is no exception. After seeing the struggles their parents and grandparents faced from the 2008 economic depression, many have come to distrust the housing market and lenders. And their own struggle with student loan debt has many millennials believing they'll never be able to afford a house.
They're buying fewer homes and starting families later in life, often renting or living with their parents while trying to reach a level of financial security that may not be realistic. The millennial housing market is being shaped by a new kind of buyer who delays homeownership and is interested in smaller houses than their predecessors. Here are five tips for millennials who are just wading into the home buying pool.
1. Don't be afraid of the market
Even if you weren't affected by the housing crash of 2008, there is a good chance you know someone who lost their home. The economic fallout was massive, but the market has made a steady recovery with homeownership rates close to their peak in 2004. So, while people aren't rushing into buying, there are still plenty fulfilling their homeownership dreams responsibly.
Buyers, lenders and industry professionals alike have a wariness that will hopefully prevent history from repeating itself. Real estate agents don't push buyers to purchase a house at the high end of what they qualify for, realizing that there is a big difference between affording a house and actually being able to make monthly payments comfortably. Builders face increased difficulty in securing financing for new construction, which has slowed the availability of new structures to a more manageable number. And lenders have more stringent policies for approving loans.
2. Credit scores are a driving factor in new lending practices
One of the leading causes of the housing crash was lenders approving buyers who never should have been able to get a loan, or at least not at the amount they were approved for. Current lending practices have moved away from such risky business, making it much harder for less-qualified buyers to get approved for a mortgage.
The average FICO credit score for buyers today is 751, a full 130 points higher than during the housing boom. Now it's almost unheard of to be approved for a loan if your credit score is below 620. While this is better for the market, it's bad news for millennials. With an average credit score in the 650s, many millennials are essentially locked out of buying a house.
How do you raise a credit score?
The first step is to pay off bills that have gone into collections. These have a huge impact on your credit score because it shows lenders that you can't be trusted to pay back the money you owe. Past due bills stay on your record for seven years, but their influence lessens over time.
Next, make sure you pay your bills on time. For lenders, past performance indicates future performance. If you regularly pay your bills on time, you prove you're reliable. If you struggle with remembering to pay bills, take advantage of automatic payment options or use calendar reminders to help you stay on track.
Don't take out any other lines of credit, such as a new credit card. Doing so won't improve your credit score and could actually have the opposite effect by creating too many inquiries on your account.
Check your credit report for any inaccuracies and dispute them right away. If there's an account open in your name that you don’t use, that's still negatively affecting your score.
How long does it take to raise a credit score?
There isn't a fast way to improve your credit score, and how long it takes will depend on your situation. If you have delinquencies, a bankruptcy, or too many inquiries, time is your best friend. Keep paying your bills on time and wait it out. If you don't have anything negative on your report but your credit score is still low, you may see an upward change within six months if you pay your bills on time and keep your balances low.
3. Save early because housing prices are on the rise
Housing prices are almost 40% higher than those in the 1980s. Wages haven't increased at the same rate, so millennials struggle more with affording a house than previous generations. Conventional wisdom suggests that you shouldn't look for a house until you have enough saved for a down payment, which is usually 3.5 - 20% of the purchase price. However, you should also have additional savings to cover closing costs and other fees and expenses. With other financial obligations, what can millennials do to afford a house?
Pay off student loans early
A house is one of the biggest purchases you'll ever make, so it's best not have any other loans going in. You may qualify for a better interest rate, and you can put more money towards your home once you've paid off your student loans. It may take a few years of making more than the minimum payments, but the sacrifice will pay off when you can buy a house.
Purchasing a smaller house is a popular trend in the millennial housing market, especially if you're a first-time buyer. The mini mansions that were popular years ago have a lot of extra space that many millennials don't deem necessary. Not to mention a smaller house often means lower utility bills, as well as smaller maintenance and home improvement costs.
Location drives housing prices. Expand your home search to neighborhoods you haven't considered. Are the prices affordable, but on the rise? If so, you may have found a location that's about to experience a market boom. Buying a home in a neighborhood poised for growth may be a good investment.
Try finding a more affordable house, especially in a buyer's market where prices are lower and there are more homes available than there are people looking. That may mean living in a different area than you were planning on, but the lower price may be worth it. Millennials are a commuting generation. Higher wage jobs tend to be in cities, which have higher living expenses than suburban or rural areas. So millennials are buying houses many miles away from their jobs and commuting, or finding ways to work from home to avoid the commute altogether.
4. You don't have to wait for marriage
Previous generations have traditionally waited until marriage to buy a house, and often pressure their kids to do the same. But the world is different now. More millennials are figuring out that defying convention can work in their favor.
When you and your partner go to buy a house, the mortgage application can be in one or both of your names. If you have a low credit score and your partner doesn't, they can apply for a single loan that doesn’t factor in your credit. The only downside is the mortgage will be based off one income, so the amount you’re approved for will be lower than if you both applied.
5. Be patient and learn about the market
Patience may be a virtue, but it’s hard to practice. However, if you need to increase your credit score or save for a down payment, you'll be waiting to buy a house anyway. Use that time to learn about the market. Keep your eye on housing prices in areas you’re interested in and see how much the sell for.
When you’re ready to start looking, enlist the help of a real estate agent. They’ll help you find a house that fits your expectations and lifestyle, and handle the legal aspects of purchasing a home. They have the expertise to guide you through the process and answer any questions you might have along the way. To find your best fit, be sure to interview several agents before choosing one.
Homeownership may not be as important for some millennials, but that doesn't mean it's not a worthwhile goal. It takes more planning and dedication to purchase a home than ever before, so use these tips as a springboard when searching for your perfect house.