You only live once, but sometimes living requires effort. If you want to buy a home (and you know you do), you may have to let go of your fear and get tough. Here, we break down some barriers that may be putting your plans on pause.
Student Loan Debt Isn’t a Deal-Killer Anymore
“But I have this huge student loan debt,” you may object, and it’s true: Millennials face a higher student loan burden than any generation before them. However, Fannie Mae — the largest purchaser of residential mortgages in the U.S. — has changed the underwriting rules around student loans to make qualifying for a mortgage easier for you.
First, your minimum payment on your student loan might be calculated based on your income. The less you make, the less you have to pay each month. In the past Fannie, recognizing that your payment would go up eventually, used a payment that would reflect full amortization in calculating your debt-to-income ratio. This disqualified many first-time home buyers, even though their actual payments were lower.
Home buyers who have been sitting on the sidelines for the last couple of years, waiting for a crash, have watched as home prices have jumped beyond their reach.
Effective as of May 2017, however, Fannie agreed to use the actual payment as reported on your credit report. Since this payment is often significantly lower than the imputed payment used before, far more home buyers with student loan debt will now qualify.
Second, many prospective home buyers with student loans have their student loans paid for by their employers or parents. Under the old rule, the underwriter still had to count the payment against the applicant. As of May, if you can document that someone else has been making the payments and will continue to do so, the payment can be excluded from debt-ratio calculations. Cool, right?
These two changes mean far more first-time home buyers will now qualify for home loans.
When the Market Gets Tough, the Tough Go Shopping
The market for home buyers is admittedly tough right now. The available inventory is the lowest it has ever been, according to a report by the National Association of Realtors, with records going back to 1999. According to the same report, however, 2016 saw the highest number of existing home sales in 10 years.
With higher sales and fewer listings, we would expect to see shorter marketing times (we are) and higher prices (also true.)
Although competing in bidding wars and making offers way over the asking price might be daunting, buying your first home has always been a stretch. If it weren't, nearly everyone would own a home, rather than rent. When you buy your first home, you will experience sticker shock. During that first year of homeownership, you will have less money to spend and less free time.
Eventually, though, you will find that your renter friends are paying more than you are for housing expenses, and the equity you’ve gained far outweighs your ability to save money on your own. Plus, you can’t be evicted, and you can decorate your home any way you want.
If you’re still a doubter, remember that home buyers who have been sitting on the sidelines for the last couple of years, waiting for a crash, have watched as home prices have jumped beyond their reach.
What If the Market Crashes?
For a number of reasons, it is unlikely that we will see, anytime soon, the kind of real estate crash that we saw in 2008. But the real estate market has always experienced occasional corrections. Real estate goes up, levels off, corrects a little (or a lot, during The Great Depression and The Great Recession) and then goes up again. It always has and likely always will, but no one can predict when the corrections will occur, or how deep they will be.
If you are only going to keep your home for a couple of years, you probably shouldn’t be buying. The cost of buying and selling a home is about 10 percent of the purchase price, give or take, so you need to see at least that much appreciation before you can make a profit.
Over time and given enough time, however, real estate always gone up in value. It’s the best forced savings account around, and a terrific hedge against inflation. So, if the time is right for you to buy your first home, and you’re confident you’ll be in it for at least a few years, don’t worry about future corrections (which you can’t predict anyway) and buy the home that suits your family’s needs.
Thinking Like Your Grandparents
There’s an interesting parallel between Millennials and their Depression-era grandparents. When grandparents share their wisdom from living through the Depression, it may hit home for those who also lived through tough times and saw their parents (or their friends’ parents) lose family homes in foreclosures. It changes how you think.
But here's one thing to remember: Grandma and Grandpa did eventually buy a home. They lived frugally to afford it — and so should you. And in most cases, their home eventually represented the largest share of their personal wealth.
Buying a home is not for sissies. You’ll pay more than you think it’s worth, live on less than you think you can and spend your time and money working on your home instead of taking exotic vacations.
But you will have a home to come home to every night.