A MILLENNIALS GUIDE TO GETTING A MORTGAGE
According to the Pew Research Center, millennials, those 32 years old and younger, have "the unhappy distinction of being the first generation in modern history to have a lower standard of living than their parents’ generation." But if you have tucked away a down payment (usually 20 to 25 percent), plus have a stable, solid income to pay the monthly bills and a credit score of at least 680, it makes sense to consider buying a house instead of throwing away money on rent. But how do you actually get a mortgage? The process is complicated for young, first-time buyers with little experience in the real estate market. Challenges millennials face come mortgage-hunting time and ways for you to solve them follow.
• Limited work experience
While a lot of banks typically require gainfully employment for at least two years, if you can produce a transcript from school, a diploma, and current pay stubs, proving that you recently graduated and have a job, you should be alright.
• Disorganized paperwork
Your financial stability is a far bigger factor than your age. As far as lenders go, it doesn’t matter if you’re 19 or 97, if you qualify, end of story. Get your paperwork together.
To fill out a standard online pre-approval application with a mortgage broker, you'll need
two months' worth of complete history for your checking and savings accounts;
an asset account statement;
your current month's pay stub(s);
your W2 from the past year;
a copy of your employment contract; and
a copy of your driver's license.
Also be prepared for a credit check. If your parents are helping out, the bank will also require a formal "gift letter" from them confirming the infusion of cash, documentation of where the funds are coming from, and a copy of the check. More on this under “inadequate savings.”
• Not enough liquid cash post-close
While the down payment is certainly a big accomplishment, the lender will want to see that you'll be able to handle maintenance charges, your monthly mortgage payments, and any of the other expenses that inevitably come up when you own a house. Just because you can buy a place doesn't always mean you should. If you've got enough for a down payment but not much else, it might be wise to hold off a while to build up better savings and hopefully find a way to boost your monthly income. Both the home and your 401k are important long-term financial investments, and it won't end well to drain one to pay for the other, so liquidating your retirement accounts to come up with the down payment is not a good choice. On the other hand, with interest rates comparatively low, waiting to buy could end up costing you money in the long run or leave you only able to afford less house..
• College debt skewing your debt-to-income ratio
Student loan debt is often the biggest obstacle between millennials and home ownership. Whether or not you qualify for a mortgage depends almost entirely on your debt-to-income ratio, which you can figure out with an online calculator. If yours is below 45 percent (meaning that 45 percent or less of your income will need to go towards your debts), you'll likely be approved for a standard conforming loan. If your ratio is above 50 percent, a mortgage is not going to happen.
• Inadequate Savings
If you do not have enough for both a down payment and a healthy debt to income ratio, a gift from the parents can make the difference. But it really does have to be a gift. If it's a loan of any kind, the extra money will just go into the 'debt' category" of your debt-to-income ratio, and thus won't be a help. Banks also require that it come from a relative.
Another similar option is a co-purchase, which is just what it sounds like, and will leave your parents liable if you default on payments, or vice versa. As such, if you take the family-friendly route, it's worth considering the long-term ramifications of an ongoing financial relationship with your parents.
Finding out whether you qualify for a loan and how much of a loan is where the home buying hunt starts. At Stallings & Smith, we can guide you to highly qualified mortgage lenders and smooth the process. Give us a call or email and let us help.
Walt Smith, Broker
Coldwell Banker Residential Brokerage
803 622 5210