As we head into spring, the housing market is heating up. That means millennials will be on the move — literally — as they tour open houses and make plans to buy a home.
The mortgage process can seem daunting from the outside. That’s why, as a lender who specializes with millennials and other first-time homebuyers, I want to provide solid guidance to make the home buying process a stress-free and successful one. Here are seven mortgage tips for millennial homebuyers.
1. Guard Your Credit Score Like a Hawk
Lenders want to see that you have a solid history of paying debt on time and in a consistent way. That’s why they refer to a credit report. It is important to note that when buying a home, different lenders have different criteria for minimum credit score. Lenders look at credit scores as well as your entire financial history like types of accounts, payment history and collections.
2. Don’t Play With Cash
Cash is difficult for lenders to source because it doesn’t have a paper trail. That’s why you should avoid depositing cash. Also, limit how often you move money from one account to another. Lenders will ask, and it may cause more issues along the way.
3. Down Payment — Not Just 20 Percent
There are various loan programs to choose from and they all require different down payment amounts. A common myth is that a 20 percent down payment is required on most loans. That is far from the truth. In some cases, your down payment could be as low as 3.5 percent. There are also loan programs where you may be able to borrow as much as 100 percent of the sales price, if you meet the guidelines. Your qualification depends on credit score, assets, debt-to-income ratios and other factors.
4. Two-year Work History
Lenders want to see a two-year work history at the same company and with a consistent schedule. If you change companies but stay in the same industry, there should be no problem. Further, if you continue to advance in income or benefits within the same line of work, lenders consider that favorable. However, if your routine changes (ex: full-time to part time, salary to commission) EVEN in the same industry, it may cause a problem.
5. Rent vs. Buy
Owning a home is an important financial responsibility, and the decision should not be taken lightly. Before you buy, you must ask yourself:
- How long do I plan to stay in the area?
- Do I have enough money for a down payment?
- What about money for unexpected repairs?
If the time is right to buy, it’s often smarter than renting month after month because you can build equity. Equity is the difference between the amount a person owes on the mortgage in relation to the current value of the property. The value of the home may increase, decrease or remain the same as the years go by. It is important to remember, though, that owning a home is a long term investment.
6. Get Pre-approved and Know Your Buying Power
When you go through the pre-approval process, it means the lender has reviewed your financial documents and understands the kind of home you can afford. To become “pre-approved,” you typically meet with a lender and provide various financial documents. Here’s a general breakdown of the documents you need based on the type of loan. Keep in mind that you may be asked to provide more than these general items, depending on the loan type and personal situation.
7. Understand Your Mortgage Payment
A monthly mortgage payment includes more than your principal and interest. It also factors in your real estate taxes, insurance (ex: homeowners and flood) and mortgage insurance (if applicable). The real estate taxes and homeowners insurance go into your escrow account, so when those payment come due, the lender makes the payments on your behalf.
Good luck house hunting this spring!