Homeownership is still a major part of achieving the American Dream. I should know: I bought my first home with my husband two years ago, at age 28. So why is it that 2 out of 3 Millennials (many of whom are in their 30s) rent instead of own their homes?
Common misconceptions can make you think you can’t afford a house. Read these, and then check your finances to see if homeownership is more in reach than you thought.
Myth #1: You Need an Enormous Budget
Fans of HGTV are familiar with an eyeroll-inducing trope. A typical home-buying episode opens by introducing the friendly, young couple. One of them smiles brightly at the camera and says, “I hand-embroider luggage tags and my partner’s a part-time dog walker. Our budget is $1.7 million.”
Okay, so maybe that’s a slight exaggeration. It still often seems that young homeowners in the media have astronomical budgets available to drop on down payments or major renovations. You may be surprised to hear that even if your savings account isn’t where you want it to be, owning a home in the next few years could be an attainable goal.
First off, despite what you see on television, there are more affordable houses on the market than you might think. The U.S. Census Bureau reported median home prices around $290,000-$320,000 in 2016 and 2017. That means half of homes (including mine) fall below this price point.
Second, you don’t need a 20% down payment to get approved for a mortgage. Lenders recommend this number, in part because it helps you get approved for lower rates. But raising $60,000 to buy that $300,000 home keeps a lot of would-be homeowners off the market. The National Association of Realtors found that about 60% of first-time homeowners pay 6% or less as a down payment. That’s $18,000 on the same home, a much more achievable figure.
There are pros and cons of saving for a 20% down payment. A financial advisor can help you calculate how much mortgage you can afford, and what minimum emergency savings balance you need.
Myth #2: Student Loans and Mortgages Don’t Mix
An American Student Assistance report found that 83% of Millennials with student loan debt who don’t own a house said their loans are holding them back. For seven years, to be exact. Here’s how to improve your chances at balancing student debt and mortgage approval.
If you’re participating in a Federal reduced-payment plan, make sure lenders are calculating your debt-to-income (DTI) ratio based on your actual, lower payment. Having too much money tied up in debt hurts your chances of getting approved for mortgage. Fannie Mae’s new rules make it easier for lenders to understand what your finances really look like.
A few states, including Maryland, New York, and Ohio, offer grants or mortgage subsidies to help qualified grads buy a home. If you’re looking to settle in one of these states, applying for a program like Maryland’s SmartBuy can help you pay off debt and buy a house.
Another option to consider is refinancing to extend your student loan term. Being saddled with student debt for longer isn’t for everyone, but it has some benefits. Your payments will be lower, reducing your DTI ratio. It may also be easier to save toward a down payment. Again, consult a professional to determine whether benefits outweigh potential drawbacks in your case.
Myth #3: Avocado Toast Is Costing You Your Home
In May 2017, millionaire Tim Gurner fired shots across the Internet by claiming indulgences like brunch and European vacations were the reason young people couldn’t afford to buy homes. Cue waves of insulted Millennials, and many tongue-in-cheek articles calculating exactly how many avocado toasts you’d need to give up to buy a three-bedroom house with a deck.
Admittedly, Millennials do spend a larger share of their discretionary budget on eating out than older generations do. The thing is, you shouldn’t have to scrimp and save every dollar to make your mortgage payment. Lenders legally can’t offer a mortgage they don’t think you can reasonably repay, based on factors like your income and credit. Some experts suggest keeping your total debt–car payments, credit debt, student loans, mortgage, and anything else–under 35% of your income.
Focusing on your credit card statement, rather than your brunch order, can make a bigger impact on your progress toward homeownership. A strong credit score helps you get approved for mortgages at the best rates. Payment history accounts for 35% of your credit score calculation, so pay off your avocado toast in full and on time every month, but go ahead and enjoy it if it fits your budget.
Owning or renting your home are both valid options, depending on your life stage and goals. If you’re mentally ready to buy, but concerned that your finances are holding you back, check out homeownership workshops. Expert advising can help you make a plan that works for your life.