For young individuals and couples, the purchase of a first home is usually the single largest investment they will make in their 20s or 30s. While the idea of buying a home may be overwhelming for these millennials—who may also be juggling student loans, and the new found freedom of living on their own and starting their careers—we lay out a timeline of important financial guidelines in the months leading up to the purchase of a first home.
1 year from purchase: Get credit in shape.
Over the last few years, the housing and mortgage industry has changed quite a bit, and lenders are increasingly more stringent on lending standards. With this in mind, it’s important to review your credit report to get an idea of where you stand. Take advantage of annual free reports and look to see if anything raises a red flag to lenders. For those with unsecured debt—such as student loans or credit card bills—use the year to reduce these debts as much as possible. Additionally, for millennials with multiple student loans, consider loan consolidation.
3-6 months from purchase: Be realistic as you begin your search.
Understand that your first home will likely not be your “dream” home. From a financially realistic standpoint, a first home usually is a less expensive starter home. Keep your emotions and finances in check and begin to calculate what you can afford. There are numerous online mortgage calculators available that will gauge monthly payments, and can be helpful in determining “how much house” you can purchase.
Around this time, you’ll also want to determine whether you will work with a private bank or through a federal program when setting up any loans. Shop around and find out which federal program may be best, or whether you have the financial wherewithal to qualify for a private bank loan.
3 months out, and before you actually go shopping for a house, get pre-approved with a mortgage lender. Pre-approval will give you a concrete monetary idea of what loan you can secure, and will ease the process from the real estate agent’s perspective (given he/she will only show you homes within a set price range).
Weeks from purchase: Calculate (commonly overlooked) costs.
Once you have an idea of what you can afford, and as you begin your search, don’t forget to calculate additional costs that are associated with homes. For example, work with your realtor to look in locations that are both ideal geographically and financially. Taxes associated with each neighborhood can fluctuate, and it’s an important cost to consider since you have to pay yearly! Also remember to calculate your monthly mortgage insurance (if you put down less than 20 percent for a down payment) as that will be tacked onto your mortgage payment.
The purchase of a first home is an exciting rite of passage for any millennial. While the process itself may take some time, it’s critical to do your homework before the search begins. By crunching the numbers in advance, you can ensure that you are financially secure to purchase the home, and to maintain, improve, and enjoy it as the years go by.