With home prices skyrocketing and competition at an all-time high, it’s no surprise that for many young or first-time homebuyers, finding and purchasing a home can feel quite intimidating. According to a recent survey conducted by Michigan building company Lombardo Homes, a significant percentage of homebuyers aged 25-40 are feeling unsure about the process and what they can afford. The study found that:
- 1 in 4 underestimated their buying potential by $150k or more.
- 1 in 4 underestimated the increase in value by $100k or more.
- 47% don’t know what a good interest rate is.
Because these millennial homebuyers are feeling uncertain, it’s not uncommon for them to give up on their search and even deem the homebuying journey too difficult to embark on. For all those hopefuls interested in buying but unsure where to begin, we offer four key concepts about homeownership that they should understand before getting started.
Down payment misconceptions
Saving for a down payment is often viewed as one of, if not the largest obstacle for homebuyers – but that doesn’t have to be the case. According to Freddie Mac,
“The most damaging down payment myth – since it stops the homebuying process before it can start – is the belief that 20% is necessary.”
The most recent Home Buyers and Sellers Generational Trends Report from the National Association of Realtors states that the median down payment for homes purchased between July 2019 and June 2020 was only 12%. That number is even lower with age factored in. Buyers in the 22-30 age range paid a median down payment of only 6%. Some conventional loans aimed at first-time homebuyers with excellent credit can even allow as little as 3% down.
Other costs to keep in mind include closing costs. These are expenses that the buyer must pay to finalize the mortgage and range from 2-5% of the loan. It’s also important to factor in move-in expenses for immediate home repairs, upgrades, and furnishings required upon purchase.
You can probably afford more than you think
The Coronavirus pandemic has changed so many aspects of our home life. Working remotely, exercising, and generally spending more time than ever in our homes has altered what many people are looking for in their ideal living space. Still, many young homebuyers don’t feel they can afford a home to accommodate their needs and are renting instead. This means that they’ll miss out on some of the long-term benefits of owning a home. As an article recently published by the National Association of Realtors points out:
“Many young adults are underestimating how much they need for homeownership, the survey finds. Millennials underestimate what they can afford, how much interest they’ll pay, and how much home values appreciate.”
Knowing how much home you can afford at the beginning can help first-timers make the leap from renting to buying. Easy ways to calculate affordability are available online. These tools will help with setting a price range based on income, debt, down payment, credit score, and neighborhood.
The longer you wait, the less you may be able to afford
With mortgage rates back on the rise in conjunction with home prices appreciating, holding off on buying a home now could cost buyers much more money down the track. Chief Economist at Freddie Mac, Sam Khater notes:
“As the economy progresses and inflation remains elevated, we expect rates will rise in the second half of 2021.”
Experts forecast that interest rates will rise in the months ahead – and even the smallest increase can influence buying power. For those skeptical buyers who are on the fence, there really is no time like the present.
You can negotiate with the seller
Asking the seller to pay for repairs in advance or lower the price to cover repairs is a viable option to save money. It’s even possible to ask the seller to pay some of the closing costs. Keep in mind that lenders may limit the portion of closing costs the seller can pay.
A buyer’s negotiating power will depend on the local market. It’s tougher to drive a hard bargain when there are more buyers than homes for sale, so competition level matters.
If you are working with a young or first-time homebuyer who is feeling intimidated by the prospect of buying in today’s housing market, or fit that description yourself, don’t hesitate to reach out. We are here to connect and serve our real estate community!