Home buying can be a daunting task for anybody and it’s proved especially challenging for America’s young professionals. We’re here to change that with this home buying guide for millennials!
It’s ingrained in our heads from a young age as one of the staples of life – school, college, marriage, buy a house, have a family, etc. Buying a home seems naturally intimidating, but it doesn’t have to be.
Hours of research, interviews with industry experts, and a bunch of late evenings after work have gone into the creation of this piece. The outcome is a concise and simplified path forward in your home-buying experience. From initial considerations to the prep work required to buying and closing, we’ve got you covered here.
Welcome to the Home Buying Guide for Millennials
A home will be your place to start a new phase of life, and likely the single biggest financial transaction you’ll ever make. Keeping in mind the key drivers in your own life will make the process much easier to navigate.
Warning: This article is long. Already know what information you’re looking for? Skip right to the section:
- Initial Considerations of Buying a Home
- Preparation for the Buying Process
- Buying Your Home
Initial Considerations of Buying a Home
As this is a guide for a home BUYER, I want to make sure that this is the right decision for you before spending the time to read any further. An excellent “buy vs. rent” resource was created by the New York Times and can be found here. Have a look, as it will give you a baseline monthly rate where it makes more sense to rent or buy a home, given your inputs on price, mortgage rate, etc.
After having a look at this tool, you start to get a handle on what’s truly affordable.
For homeowners, the past decade has been a great ride. The 2008 financial crisis saw a low point in average home valuation across the United States. After dipping as much as 18-20%, home values have been on a steady climb from there. A first time home buyer in 2018 needs to face this decade of increasing prices head-on, however!
Historical appreciation of homes in the U.S. has averaged 3% per year historically, with a 6% rate more accurate since the ’08 crisis. Certain areas in the country have seen different growth rates in line with other economic factors, like population growth and GDP.
In the chart, we are looking at HPA (home price appreciation) versus GDP (gross domestic product). We see an already heavily populated and bustling city like NYC growing at a much slower pace than a newly booming city like Denver or Charlotte. This means that home prices are skyrocketing in value, relative to how developed the economy is, in cities with the larger circles.
Not only do home prices rise in growing GDP markets, but also in steady housing markets for different reasons. Many serial property owners in NYC, Chicago, and the more established cities will buy up many properties and re-sell to renters.
The net-net of this all is that home buying is just about as expensive as it has ever been. This is due to the increasing rate at which people are buying homes to rent out, rather than live in themselves. The United States is effectively a “renter’s nation” as of 2018, making it tougher than ever for millennials with simple aspirations of ownership.
Just how far have we come?
For a bit of perspective on how housing prices have evolved in the United States since the baby boomer generation; the median home value in 1940 was a staggering $2,938! This is before adjustments to inflation, but it’s such a crazy difference from what we see today.
Housing has (obviously) seen a relatively steady incline since the 40’s. A few dips saw home values drop slightly over the decades. Nothing caused more market carnage than the 2008 crisis, however – not even close. It’s generally a common sentiment that homes will appreciate in value over time, looking back historically. Almost nobody saw that 2008 crash coming, and stopgaps have since been put into place to make is highly unlikely to happen again.
To get even more granular for different areas around the country and the corresponding home price, check out Trulia’s heat map guide. This guide lets you zoom into any neighborhood across the country, giving you prices against the average in that region. Using this tool, you’ll find it much easier to determine the cheaper areas in desirable urban centers.
The heat map is a great tool to help you get an understanding of just how volatile prices can be in a small geographic area. Let’s take the city of Dallas for an example. Notice how you can get an average home almost anywhere in the greater Dallas area for $75-150k, but try your luck in the University Park or Highland Park neighborhood and you are looking at $1.5 million. Pretty incredible how a few blocks can create an entirely different buying scenario!
Identifying Your Future Home’s Characteristics: Needs vs. Wants
The current thought process by leaders in the industry is that housing costs should not take up more than 30% of your annual income. This is an industry standard baseline, however, and it’s perfectly reasonable to assume some people will feel confident with a bigger investment; let’s call it 40%. Making a plan to curtail spending and considering an additional part-time job can allow for a greater willingness to invest more up front.
Let’s assume a first-time home buyer has $70,000 in take-home pay per year (after taxes), we can do a bit of high-level math:
Yearly housing expenses: $70,000 * (3/10) = $21,000 … or 70,000* (4/10) = $28,000
Monthly housing expenses: $21,000 / 12 = $1,750 or 28,000 / 12 = $2,333
On the other hand, there are people out there who will want to be even more conservative than 30%. One size does not fit all. Using 30% as an industry baseline, a first time home buyer is going to scale up or scale down according to their appetite for NEED vs WANT. The decision all depends on the person in question – their education, work ethic, confidence and influences in life.
A great way to approach the home buying process is making sure your mortgage (aka monthly cost as estimated above) fits in your long-term plan and budget. Need vs want rears its ugly head when the market takes a downturn, as it did in the mid-2000’s during the economic recession in the United States. Millions of people were thinking WANT – not NEED – and paid dearly for it. Banks were lending to anyone who came through the doors and had a heartbeat.
Build your own foundation around the NEEDS:
- I need a property with a driveway or somewhere for my vehicle, or
- A property close to a school for my children, or
- A property with central A/C because it gets very hot in the summer
And from there, make a list of WANTS:
- I want a property close to my job so my commute isn’t as bad, or
- A property with a backyard pool, or
- A property with a three-car garage (if you really want to go for it!)
Get a feel for the average monthly mortgage of the properties in your area as it relates to the 30% we covered, or whatever your “median” percentage may be. As I said, this is a matter of personal preference and your overall situation in life. Map this percentage back to your core list of needs.
From here, it’s a matter of scaling up or scaling down with the wants and nice-to-haves. We will cover the different mortgages available in the next section. Keep your number from this section in mind as we review them.
Preparation for the Buying Process
Now that we have a solid foundation of knowledge built around U.S. market trends, it’s time to explain the process.
Understanding the Order of Operations
I realized when I began to write this guide that I personally had no clue about the correct process for a first time home buyer! Do we land a mortgage before looking at homes? After looking? How do I ensure my mortgage strategy works for the home I’m interested in? Where does a realtor come into play here?
The simplified order of operations from where we’re at now (the pre-learning stage, also known as… “oh yeah – I knew that”), all the way to closure, is as follows:
- Choose and get pre-approved for a mortgage
- Find and choose a real estate agent
- Shop for homes and make your offer
- Confirm your mortgage program
- Home inspection and appraisal
- Closing the sale!
Finding a mortgage that’s right for you is arguably the most important step in the home buying process. Beyond finding the home that’s right for you, finding a financial plan that fits as well is critical. Let’s dive into the world of mortgages.
Evaluating the Right Mortgage Loan for You
When thinking through loans you want to keep perspective on your personal situation in life. What you can afford will vary on a myriad of different things, but top-of-mind should be:
- How long do you intend to stay at this residence?
- Do you want to live in the greater city/area for a long or short amount of time?
- Does your bank account allow for a large or small upfront down payment?
- Do you have a good or bad credit score?
- Are you all about predictability?
- Can you bear the impact of a hike in interests rates on your home?
Have a solid answer prepared for each of the questions above. It will only help you in the long-run!
Know Your Interest Rates
First and foremost, as we venture into the world of home loans: make sure you have an understanding of how different mortgage types work! We will keep things straightforward for this example and cover the two main mortgage categories available to first time home buyers: Fixed and ARM (adjustable rate mortgage).
The following video provides a helpful walkthrough, which I will briefly cover below.
As you can see, the two common home loan types are pretty self-explanatory. The interest rate for fixed mortgages will remain the same over the life of your loan, commonly composed of either a 15 or 30-year term.
While a fixed rate equals long-term predictability and stability, an ARM also has specific perks of its own. As seen in the video, ARM’s provide specific advantages for “starter homes”, particularly when the resident does not have long-term plans to stick around.
The Three Primary Loan Types
The three most popular mortgage configurations available in the US today are the conventional, the FHA, and the VA. Let’s take a look at each below.
Conventional Loans (10, 15, 20, 30-year term, down payment between 5% and 20%)
A conventional loan is one that is not backed formally by any government organization. Rather, this loan comes from a standalone financial institution. The institution must abide by the standards set forth by Fannie Mae and Freddie Mac.
- Fixed – A fixed-rate conventional home loan is the most popular loan on the market. This will have you paying a set monthly amount of principal + interest, each month, for X number of years. Plain and simple.
- ARM – An adjustable rate conventional loan provides a lower upfront interest rate on your loan. This means cheaper monthly payments and can span 3, 5, or 7 years. For a first time home buyer who plans to move inside the range of the ARM expiration, some real cost savings can be realized.
FHA and VA Loans (15 or 30-year term, down payments as low as 3.5% and 0% for VA)
FHA (Federal Housing Administration) loans are backed by the full faith and credit of the U.S. government. The FHA insures these loans for the institutions that dole them out to home buyers. VA (Veterans Association) loans are also government subsidized. VA loans provide affordable solutions to former or active military members, sometimes allowing buyers to move into houses with $0 down!
- FHA 5/1 ARM – Similar to the conventional ARM, an FHA 5/1 allows the home buyer to pay a much lower rate for the first five years of the loan. Interest is subject to change in year 6 and beyond, but an FHA 5/1 caps the rate hike at 1% per year and 5% maximum. This means if you get a 5/1 ARM at an initial interest rate of 3%, your interest will never rise above 8% for the entire length of the loan. The smart play would be to sell before that happens, of course!
- FHA Fixed – Similar to a conventional fixed, you’ll have predictable mortgage payments over X number of years. The benefits of the FHA center on less stringent credit requirements, where you need to pay only 3.75% upfront.
- VA Loan – Specifically designed for the brave men and women of our armed forces, the VA loan provides a number of perks. Lower interest rates than other loan programs plus zero money down creates a powerful wealth building tool for the ex-military.
Sample Loan Programs
- Home-Flex Plus Program
- For buyers with a yearly income at or below $116,300, this program provides up to 3% in cash to help with your down payment and closing costs in the state of New Hampshire. This offer can also be combined with the Rehabilitation Mortgage Program. Borrowers in this program must complete home buyer education prior to loan approval. While Home-Flex Plus is special to New Hampshire, other programs similar to it exist in every state.
- Rehabilitation Mortgage Program
- The Rehab Program is designed with upgrades in mind! This program allows home buyers up to $35,000 cash that can be financed specifically for repairs and maintenance to the property. The big advantage of a rehab loan is the combination of both a home loan and home-fixing loan; this consolidates your financed assets under one loan rather than several. Get that much-needed kitchen renovation done easily with this program.
- HomeReady Loan
- HomeReady is a very popular Fannie Mae program designed for buyers with low or moderate income levels. HomeReady requires just 3% down on the mortgage, even lower than our typical FHA models reviewed earlier in this guide. If upfront cash is tight but a prospective homeowner has their heart set on a new property, HomeReady can be a game changer.
- USDA Rural Development Loan
- Not much of a city slicker? No problem! Have a look at the Rural Development Loan if you plan to live outside of an urban area. This program is hugely popular for a few reasons, but first and foremost is the $0 down payment option. The only other loan on the market like this is the VA. Additional perks of the rural program include low-interest rates (given $0 is put down) and also no PMI payments (see next section for an explanation of PMI).
- State-by-State Programs
- The U.S. Department of Housing and Urban Development has a concise section of their website with a state-level breakdown of housing programs. Similar to the Home-Flex Plus plan in my home state of New Hampshire, you’ll be able to find a plan specific to your own state.
While some loans are backed by the faith and credit of the U.S. government, occasionally the private sector needs to pitch in as well. PMI, or private mortgage insurance, is an insurance policy to protect lenders in the event that a homeowner defaults on their payments.
For PMI, 20% is the magic number. That means that a typical lender will require PMI payments to be made for mortgages where 20% or less is made as a down payment. As we covered above, certain conventional and FHA loans (which allow you to put down as little as 3.75%) will also require you to pay for PMI.
When the loan originates below 20%, most programs will allow you to STOP paying PMI once the total down payment plus principal you’ve paid off levels up to 20%. Not all home loan programs will track this automatically, so a home buyer needs to stay on top of PMI payments and the total amount they have paid off on their home.
PMI is a highly controversial topic and there are resources all over the web which explain the different types, advantages and disadvantages, etc. For the purposes of our guide, I want to make sure you’ve got the basic understanding of what it is. While it’s ideal to avoid PMI altogether, you now know what you’ll be on the hook for if you opt for a cheaper down payment.
Real Estate Agents
You now have a solid understanding of the options available for home loans. Next up is real estate agents, who play a pivotal role in the home-buying process from the early stages all the way to closure.
Finding a Real-Estate Agent vs. Going Alone
Opinions vary widely on the value and ability of real estate agents to have a positive impact on the buying process. Finding a solid real estate agent is highly recommended, especially for a first time home buyer. Seasoned agents have seen and done it all before, and automate many steps that you’d need to complete yourself. They can also be on the lookout for common traps or snags that an inexperienced buyer easily can fall prey to.
Let’s have a sample look at the pros and cons of buying without a realtor. While not advised, it can certainly be done if you are meticulous enough.
Pros of Going Alone
- Cut out the middleman – No commission needs to be paid at the time of closing
- Find properties to look at instantly on your computer
- Attorney’s payment for reviewing paperwork will be a fraction of a real estate agent’s would-be cut
Cons of Going Alone
- No prior experience with the home buying process
- Limited insight of market trends and demographics on a by-neighborhood basis
- Making offers is more unpredictable, especially for a competitive property
- Extremely tough to understand ALL the fine print without the help of an attorney
- Agents need to be present for the home appraisal and inspection – if you don’t have your own then the seller needs to find one
Finding a Real Estate Attorney
Getting a lawyer with a specialization in real estate provides an added cushion to the buying process. While this is optional when partnered with a real estate agent, a lawyer becomes a MUST if buying on your own. A real estate attorney will help you fully understand what you are signing up for. While not mandated by law in most states, having an attorney on hand can pay dividends in certain situations, like the paperwork-heavy purchasing process. We’ll cover that in the next section.
Most aspects of home transactions are straightforward in this day and age; Advancements in technology and document management tools have seen to it. In terms of looking for scenarios where an attorney would add value while using a real estate agent, look for abnormalities in the buying process. Certain issues will be outside the area of expertise for an agent without a law degree. If it seems like a tricky gray area, chances are you can benefit from legal advice!
When searching for a real estate attorney during the buying process, make sure you look local. Something as simple as a quick google search will get you on track with some of the legal teams in your area who practice real estate law. From there, it’s a matter of making a few phone calls and getting set up with initial consultations.
Buying Your Home
Due diligence and familiarity with the market you intend to buy in will be huge as a first-time buyer. Make sure you continue to do your research as the process develops.
Shopping the Market
While much of the selection process can be completed with the help of a realtor, you are in better shape having done the research on your own beforehand. Browsing what’s out there ahead of time will allow you to get a feel for what makes sense for you. This puts you ahead of folks who walk into an agent’s office with limited experience browsing on their own.
Sites like Trulia, Zillow, and Apartments.com are a great foundation to kick off the search process. Once you begin to work with a real estate agent, you can use the knowledge from your prior searches. Combine your own work with the geographic knowledge of a real estate agent and you’ll have a powerful combination as you tour the desired market.
Eventually, you’ll be able to choose a home that seems like a great fit for you, based on your days/weeks/months of searching, but don’t think you have a done deal just yet!
Once you find a place, the real action begins. It’s a competitive market out there, and understanding negotiation, offers, and closing will help you see it through to completion. Read on for tips on each.
Buying a home is the biggest financial transaction in most people’s lives. With huge prices and a constantly changing market for homes, negotiating becomes a key part of the game. Make sure you have a good understanding of common tactics, both for realtors and the sellers themselves.
Here are a couple of tactics you can use to get the upper hand in the buying process:
- Inspect and appraise the home independently
- Home inspections and appraisals are a standard part of the buying process, though usually not occurring until the offer has been made. Having an outside inspection and appraisal on your own dime can give you a real understanding of the positive and negative aspects of a property. This way, you’ll better understand its true value ahead of the bidding war, instead of after it.
- Look for a house’s time on the market
- Homes that are brand new to the market have excited sellers who expect a competitive bidding war and a quick sale of their property at a great price. Homes that have been on the market for 20-30 days or more will be the opposite. The longer a home lingers on the open market, the more the leverage shifts to the buyer. Taking advantage of this might get you a great deal if you know where to look.
- Have your lawyer flex their muscles
- Having an attorney in your corner to get competitive on more than just price can also tip the scales in your favor. Closing date, repairs, percentage commission paid out on closing, and more are all up for grabs. Negotiating these on your own can be tough, but with a seasoned veteran, you’ll be able to land a more favorable deal.
Making the Offer
Once you’ve found the home of your dreams, evaluated mortgage options, and worked with a real estate agent and/or lawyer to negotiate terms, it’s time to make the offer. By no means is your new home a done deal at this stage, however. Not only can other buyers on the market outbid your offer, but the seller can counter or even reject the offer outright. Here are some things to keep in mind for the offer stage.
Tips for Making the Offer
- The offer letter is a legally binding document
- Remember that an offer isn’t based on a handshake and a wink. The offer letter you submit counts as a legal document, so you’ll need to review local, state, and national laws to make sure the documents are acceptable. A “residential purchase agreement” is the letter you’ll need to fill out.
- Put your money where your mouth is
- In addition to simply making a verbal/written offer to buy, most sellers will have you show that you mean business. Being asked to put down 1% or 2% of the total purchase price in good faith is not uncommon. The seller will often require you to show mortgage pre-approval documents as well, so be sure to coordinate with your agent.
- Make your research known
- It’s one thing to simply put a number on the table of what you’re willing to spend on the home. Without context, this number can leave too much up to the imagination of sellers. Make sure to show off the comparative market analysis and trend research you (and your agent) have done. This can help frame just about any price to make sense.
- Don’t look desperate
- It’s rare that advice from the dating world crosses into the realm of home buying, but here we are. A buyer staring the home of their dreams in the face will undoubtedly give away their desire at the end stages of a purchase when emotions run high and competition is fierce. Don’t show your cards – have your real estate agent handle final offer presentation and negotiations for you, if possible.
Home Appraisals and Inspections
Appraisal and inspection are the final steps in the process before getting approval on your mortgage and moving to close. While largely similar, there are some key differences between each.
A home appraisal is conducted on behalf of the lender (the bank) to determine the overall value of the property in the long-term. An appraisal typically occurs after the inspection is completed (as that may result in price changes). This considers factors such as neighborhood, nearby schools, crime, and similar recent home purchases in the area. A home appraiser is obligated to come to an opinion on what the home is worth for a buyer.
Home inspections are a bit different, as they get more granular with a room-by-room analysis of the property. They check for things the appraiser wouldn’t, like leaky faucets. A professional home inspection is key for making sure you’re making a wise decision with your next home.
In short, the appraisal is designed to protect the lender from paying out money on a low-quality house, and the inspection is to protect the buyer from moving into a low-quality house.
What to watch out for
- FHA appraisal is different from the rest
- The federal government requires a more intense appraisal process than non-FHA loans. This means a buyer will find out more about the condition of the house from an FHA approved appraiser than they would from an appraiser working on a private bank’s behalf.
- What if an appraisal is lower than the asking price?
- Trouble can arise if the house is appraised at a lower value than the buyer and seller are ready to move forward with. This is because, in the event of a default, the lender wants to understand the true worth of the property when reselling it. The deal can still be worked through with a low appraisal value, but these situations fall under the “gray area” I described earlier. A home buyer is best suited to get the advice of a seasoned real estate agent or attorney in this situation; They will likely recommend a second appraisal or re-negotiate price.
- Trust the pros
- When it comes to the home inspection, a professional will conduct a thorough investigation of every square foot of the property. They will report red flags to you which may factor into negotiations and the final price.
- Note: Make sure to be thorough and ask your own questions to whoever is evaluating the home. When in doubt about a professional opinion, you can always use sites like Trulia Voices to ask questions to other professionals and get numerous opinions on any given issue.
- When it comes to the home inspection, a professional will conduct a thorough investigation of every square foot of the property. They will report red flags to you which may factor into negotiations and the final price.
Closing the deal in the home stretch is the most important part of the process. Attention to detail and close communication with everyone in the buying process is key here!
The paperwork and due diligence associated with closing is the most complex part of the entire process. Closing with a real estate agent (again… recommended!) allows much of the guesswork to be taken out of the equation. There will be mountains of paperwork on “closing day”, which is when ownership of a property is legally handed off between buyer and seller.
At the time of closing, there will be anywhere from 5-10 people (or perhaps more) present. Representatives from all parties (buyer, seller, agents, lawyers, lenders) will all partake in the final step. Provided that your mortgage is all approved and in order (it should be by now!), the house will be yours upon final signature of all transferring documents.
Tips for Closing
- Take your time
- You’ve gotten this far, and patience is a virtue. Home buyers are encouraged to take a half or even a full day off work for the closing day. The last thing you want on such an important day is stress coming from the office or a tight timeline to get everything signed.
- Mind the month’s end
- I know this rule better than most, being in sales myself. The end of the month will very likely tie into a real estate agent’s compensation and their ability to get you the best deal possible. If for any reason a sale slips into the next month, the discounts and advantageous selling conditions you negotiated may disappear.
- The final walkthrough
- Do you REALLY want to go through with it? After looking at a house the first time around, many buyers never see it again until they have keys in hand. The final walkthrough is an opportunity to review the property one final time to make sure it’s a perfect fit for you. Even with the inspection and appraisal taken care of, there is a personal element of the home buying process you’ll want to take advantage of at the end.
- Know your HUD-1
- This is a document required by law in the United States which will itemize everything you’ll be paying for in the transaction. Make sure to know this document as much as possible going into the meeting. Closing day will go much smoother without any financial surprises that could’ve been avoided with a bit of homework.
Congrats on the new home!!!
Following closing day, it will become official. You are the new owner of a house! This is one of the major investments many will make in their lifetime, so make sure to celebrate properly and enjoy those first couple of days.
This home buying guide for millennials was quite lengthy – I hope some people will find it useful. We spoke with several industry experts and researched hundreds of articles on the web to put the information in one location, and slanted towards the first-time buyer. I have a much more thorough understanding of the home buying process after this project, and I’m sure a few of our readers will join me after this guide!
Where are you in the process of buying a home? What problems are you facing? Let us know in the comments!
All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.
Author: Joe Savoia
Joe is a 2014 graduate of Northeastern University and currently works in a field sales role for technology company Acquia. He has worked internationally as one of Acquia’s earliest Australia-based employees and helped in the early stages to develop that region. Today Joe is based out of Boston and lives in Somerville, MA. Joe’s primary interests vary widely, including everything from robotics/AI to finance, blockchain, and the rapidly evolving world of tech we live in.