Millennials are the first generation who are entering homeownership already saddled with paying thousands of dollars in student loan debt. The average age of a first-time buyers is 33. And borrowers in their 30s and 40s have the highest levels of student loan debt of any group, owing an average of $31,000, according to the Federal Reserve. No wonder adding a mortgage payment to high student loan debt feels overwhelming for some new buyers.
It is possible to buy a home while repaying student loans if other debt like credit cards and car loans are low relative to your income. If you have been out of college for a few years and still haven’t refinanced your private student loans, now is the time to lock into a lower rate. The Federal Reserve is expected to raise interest rates three times in 2017, which will also increase other consumer rates like student loans. Refinancing now rather than later could help lower overall payments.
In a 2016 Redfin survey 25 percent of first-time buyers said that high rental prices were the number one reason they wanted to buy a home. In competitive real estate markets, timing is everything and while it would be nice to find a home as soon as your lease is up, that’s not always possible. One way to bridge the timing gap is to find a subleaser for your apartment. The first step is to determine your landlord’s termination policy. Are shorter-term leases available? Are you able to rent from month to month, and how much notice does your landlord require? If you do choose to find a subleaser, make sure the person meets the same requirements of your landlord in terms of credit score, income, and previous rental history.
Now that rates are on the rise, it make sense to play the field and compare the interest rates on checking and savings accounts of several banks. Often online banks, which are insured like traditional banks by the FDIC but have less overhead, have higher rates in savings accounts. In rising rate environments it is best to avoid certificates of deposits (CD’s), which usually do not adjust upward as rates rise.
One of the biggest surprises to new homebuyers is how many fees are associated with buying a new home. In addition to paying on the principal and interest each month, homeowners are also on the hook for mortgage insurance if their downpayments were below 20 percent of the purchase price, homeowners insurances and taxes. Make sure that you can cover all of these bases each month (as well as those pesky student loan payments, auto loans and childcare costs if you have a family). While you’re in accounting mode, now is also a good time to organize your financial documents.
Most lenders require pay stubs, bank account statements, tax filings, W2s and information about your outstanding debt and your landlord’s contact info. Having the information ready to go (in digital form, if possible) will help you move more quickly when it’s time to make an offer.
And since you resolve to be financially organized this year, go a step beyond getting preapproved for a mortgage and have your lender fully underwrite your loan. Unfortunately for many first-time buyers, home sellers will almost always choose an all-cash offer over an offer that requires a loan, because there’s less chance that the deal will fall through due to some issue with the lender.
If you’re not in a financial position to make an all-cash offer (and frankly how many of us are?!), you should get a loan commitment letter from a local bank to submit with your offer. A commitment letter is stronger than a pre-approval letter; it shows that you’ve passed the underwriting guidelines and the loan is approved. It’s the next best thing to cash.
Before you put in your first offer it’s important to understand the market you want to buy into. That requires an honest assessment of your must-haves including commute times, schools and proximity to public amenities. In addition to becoming familiar with the neighborhood characterics, it also pays to understand the common bidding strategies in your target neighborhoods. Here is where your real estate agent can help. Information is power when it comes to making a successful offer. Knowing if homes generally sell for under or over list, how quickly the typical home sells and whether or not to expect a bidding war are all key to making an offer that you can afford.
This year will be the fastest real estate market on record, especially for affordably priced homes. As the market heats up in spring and summer months, homes in a first-time buyer’s price range go quickly, sometimes in a week or less. Even in today’s fast-paced market it generally takes at least a few months to find the home of your dreams. Redfin buyers spent an average of 83 days searching for a home in 2016. Even though buyers may feel pressure to make a purchase before rates go up any further, the good news is that mortgage rates are expected to remain quite low compared to historical averages. And the biggest mistake a buyer can make is jumping on a home they can’t afford or isn’t right for them. Remember, homes are like buses. Another one will come along. When it comes to buying your first home, patience is not only a good virtue, it’s good for your wallet too.
Happy house hunting!
