Millennials are the largest generation but have the least amount of homeowners – is that changing?
Millennials – the most tech-savvy, educated, and racially and ethnically diverse generation – are considered the largest generation in history. Even though most have now entered the traditional “homebuying phase” of their lives, to date this generation has had the smallest percent of homeowners. But why? Millennials are facing very different circumstances than Gen Xer’s and Baby Boomers, from a radically different financial climate, to an ever-increasing real estate costs. Steady increases in rent, home prices, education debt, and cost of living are leaving many Millennials cash-strapped. For many, the “American Dream” seems impossible. Researchers acknowledge, “many older millennials faced difficulty getting a stable job when they graduated from school” in the depths of the Great Recession. With an astronomically high amount of student debt, many millennials have to make ends meet by working more than one job. They also tend to be drawn to more expensive, urban areas that come with more conveniences but less supply of houses and higher costs. Most have to balance the proximity of affordable housing to the location and availability of a good-paying job.
On top of that, many Millennials are choosing to marry and start a family later in life. Traditionally, getting married and having children are triggers for home buying, and studies have shown that being married increases the probability of owning a home by a full 18 percentage points. On average, millennials are getting married in their late 20’s to early 30’s, and thus are living at home with parents longer and delaying the home buying process. While this theoretically should help them control expenses and save money, most are already burdened with student loans and other debt coupled with the high cost of living. Most can barely afford the down payment, let alone all the other costs that come along with homeownership or even a cushion for emergencies. A mortgage payment might be equal to a month’s rent, but that doesn’t seem to matter when you’re struggling paycheck to paycheck to make ends meet.
While we are starting to see a rise in Millennial homeownership, there are some things for millennial homebuyers to consider:
Understand ALL the costs of homeownership
Most first-time home buyers are used to paying rent or living with family members and paying a portion of bills, and this phenomenon is especially prevalent among Millennials. Usually this will include a rent payment, a portion of or all of the utilities, internet/cable bills and possibly renter’s insurance. In some cases, it may not include any bills at all. When you own your own home though, there are additional monthly costs to include in your budget, including: water, sewer, trash/snow removal, homeowner’s association dues (if applicable), taxes, repairs and maintenance, homeowner’s insurance, and more. Repairs and maintenance are the biggest difference, and it’s recommended to save up to 3% of the home’s purchase price annually to cover these expenses. While insurance covers most major issues, smaller issues can range from fixing a loose cabinet or changing a toilet seat to repaving a driveway, or even replacing a hot water tank.
In addition to these monthly costs, keep in mind that you will have other expenses, including the down payment, closing costs and moving costs. You’ll want to make sure you have some cash set aside for any unexpected costs or emergencies that could happen post-closing. There are some loan expenses (such as home inspection and appraisal) that you may need to pay out of your pocket before closing. It’s possible to negotiate some of the closing costs to be paid by the seller, but that doesn’t guarantee you won’t have to bring some money to the closing table. And don’t forget, you have to pack up everything you own and move it into a new place! You will need boxes, tape, bubble wrap and other supplies to pack it up, plus the expenses associated with getting it there as well.
Gifts and grants to get you going
Many successful Millennial homebuyers have been able to purchase a home by receiving or borrowing gift money from family for the down payment. Many lenders will allow “gift funds” to be used as the down payment when qualifying for mortgage financing. This money, as long as it’s properly documented, can come from an inheritance, a family loan, or even a grant. As the most tech-savvy generation, Millennials have access to a wealth of information available at their fingertips in mere seconds. A simple Google search can yield a multitude of home buyer assistance programs and grants available. There are more than 2,400 of these type of programs in the United States and they offer down payment help in the form of grants, low interest or deferred loans, forgivable loans, help with closing costs, and more.
The more educated you are on finances and the mortgage process, the better off you will be. There are organizations that provide homeownership classes, financial education, and other information you need to know to become a homeowner both in person and online. Take advantage of these resources so you understand the whole picture of the financial responsibility that comes along with homeownership.
Location, location, location
Many successful Millennial homebuyers have chosen to buy homes in areas that were less expensive. There are areas of the country that have more affordable home prices, higher wages and lower cost of living, but unless you live close to those areas, that might mean relocating, leaving a job, and moving away from family and friends. You might also consider a lesser known loan program offered by the USDA. These government backed loans help people buy homes in a rural area. While “rural” may make you think of farmers and cows, close to 97% of the country is in an eligible area, and these loans allow for less than perfect credit scores and as low as no down payment at all for qualified borrowers.
One strategy that has been successful for Millennial homebuyers is to begin with a starter home that you can put “sweat equity” into and trade up later. Consider buying a “fixer-upper” that might need some repairs, and you may be likely to get a better deal on the purchase price. There are loan programs where you can borrow money to purchase and renovate the home with one single loan. For example, the FHA 203(k) loan is a specific program for homes that need improvements. Also a government backed loan, these loans allow for renovations that can be anything from simply adding a deck to completely renovating the entire home.
Many millennials are also at the age where their parents are nearing retirement, and many more of them are considering living with family or extended family in a multi-generational home. This is an increasing trend in the real estate market, where multiple adult generations live together under the same roof. This may be a multi-family property, a single-family property with in-law setup, or even a home designed with more than one master bedroom. This living situation offers a flexible lifestyle, shared chores and expenses, and is good for the older generation to feel connected to family and less lonely. Having family living with you also helps with babysitting, especially when both parents are working outside the home.
Choosing the right loan
If you are looking to become a Millennial homebuyer, it’s important to know the options that are available when it comes to financing. There’s no one-size-fits-all loan. There are different loan terms, ranging from 10 years to up to 40 years, with the most popular being a 30-year fixed mortgage. Shorter terms mean higher payments but much less interest paid over the life of the loan. There are also different loan programs, such as government backed programs that require little to no down payment, but the trade-off is that they will be a higher risk and come with PMI and higher interest rates. You can also get a fixed-rate mortgage, which will not change over the life of the loan, or an adjustable rate mortgage, which will be fixed for a period of time and then adjust based on a margin. Both have benefits depending on your goals. It’s important to educate yourself on everything that is available, but more importantly, to take a realistic look at your financial situation and short- and long-term goals.
The Bottom Line
Millennials are the largest generation, but have the lowest percentage of homeowners. While more and more Millennials are realizing the American Dream of homeownership, costs of living, debt, and rising real estate prices are not making it easy. There are grants and loan programs that make it more within reach, as well as multi-generational living situations that are becoming more popular. The most important thing is to define your goals, understand the limits of your finances and educate yourself as much as possible on the entire process so you can make the best decision possible.
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