By EMMET PIERCE
Buying your first home is seldom easy, but young millennials who live in cities with highly competitive real estate markets face an added challenge.
Becoming a homeowner has long been associated with upward mobility. But home loans haven't been as easy to qualify for since the 2008 recession, especially in communities with high real estate prices, says Gary Kent, a real estate broker based in San Diego.
By comparing U.S. Census income and unemployment data to its members' mortgage debts, Credit Karma assessed how quickly 18- to 34-year-olds who already own homes might be able to pay off their existing mortgages, using 28 percent of their annual incomes, the bank-recommended limit. Using this metric, the study found that the five least-affordable communities for millennials are all in California: Los Angeles, Irvine, Fremont, Anaheim and Chula Vista.
The study also found that it could take millennials with existing mortgages in Los Angeles around 44.5 years to pay off their homes using only 28 percent of their income, about five times longer than in Buffalo, N.Y., the most affordable U.S. city for millennials according to this metric.
While some people assume they'll find the lowest prices by buying a foreclosed home, real estate agent Linda Ring of La Mesa, Calif. says lenders are usually careful to make sure they receive a fair price for the homes they've reclaimed from borrowers who couldn't pay their mortgages.
"They know what the property is worth and have to have to answer to their investors, so they'll try to get market value," she says.
Despite the challenges it poses, homeownership is attainable for some hopeful buyers, even in pricey markets. Here are six tips for making your purchase.
1. Come in with your best offer.
In competitive housing markets, sometimes agreeing to the asking price isn't enough. Consult a real estate agent about whether you should offer more than what the sellers are asking for, if you're convinced the home is worth it and it's common practice in your desired neighborhood. In markets where there are more buyers than sellers, there's often little room for negotiation. Kent says you shouldn't assume that the seller will come back with a counter offer if you try to pay less than the asking price in a competitive market.
2. Submit a preapproval letter from your mortgage lender.
When you make an offer on a home, submit a preapproval letter from a lender to show that you have the funds to buy the home, advises Kent. This letter tells how much you're authorized to borrow. It'll also show the seller that you're serious about acquiring the home and may set you apart from the competition.
If you have a high credit score, Kent recommends providing that information as well, to further demonstrate your ability to buy the home.
Make sure there are no errors in your credit reports that could make you appear less creditworthy. Kent recommends that you correct any errors you find six months before you plan to buy a home to help ensure that there are no mistakes on your reports when you apply for a loan. You can check your TransUnion and Equifax credit reports for free with Credit Karma.
3. Assess your finances.
Make sure you're prepared for the financial commitment of homeownership, says Ray Brown, coauthor of the book "Home Buying for Dummies."
Competition may be fierce, but it's important not to pad your financial situation and convince yourself that you can offer more money than you can really afford. Instead, realistically take stock of your ability to make a down payment and monthly mortgage payments, in addition to paying for the inevitable repairs and other costs that come along with home ownership. Ask a lender what you can afford based on your present income and savings, Kent says. Credit Karma also offers a free Home Affordability Calculator that can help give you a better idea of how much you can afford to pay for a house.
A good rule of thumb is that the cost of your home, including taxes and home insurance, should not exceed 28 percent of your monthly income, Kent says. And don't forget to factor in association fees if you're moving into a community that's governed by a homeowner association.
In addition to paying your mortgage costs, you may also need to pay closing costs, which are typically are 2 to 3 percent of the house price, Kent adds.
As you're assessing your finances, you may also want to gather the paperwork you'll need to apply for a mortgage, which can include:
- W-2 forms from the previous two years, if you receive paychecks from an employer.
- Your last two federal tax returns.
- Two months' worth of bank statements.
- A list of debts for such things as credit cards, loans and child support payments.
- A list of assets, including investment accounts and retirement accounts.
- Canceled checks that document your rental costs. Kent says the amount of checks you'll need may vary, so ask your lender. Central Bancompany in Jefferson City, Mo., for example, requests a year's worth of canceled checks.
4. Save for a down payment.
To get the best terms on a conventional mortgage, lenders generally require you to make a down payment of 20 percent of the purchase price. However, there are alternatives.
Veterans may qualify for Department of Veterans Affairs loans that allow them to purchase with no down payment, Kent says. Also, a Federal Housing Administration (FHA) loan may require a down payment of only 3.5 percent. (Although keep in mind that FHA loan limits can vary by state and county and you must meet certain requirements to qualify.)
In addition, some cities offer down payment assistance for low- and moderate-income people who are buying their first home. For example, there is a program that offers down payment and closing cost assistance to low-moderate income first time homebuyers purchasing a single family home in the city and county of San Francisco.
An experienced mortgage broker can help you find a loan with the lowest available down payment for you. It's best to meet with several mortgage professionals, however, to find out which home loan best suits your needs. A qualified real estate agent generally can recommend lenders and mortgage brokers in your area.
To save for your down payment, especially in a competitive market where you may need to offer more than the asking price, you may need to adopt some frugal habits, Kent says. This can be accomplished by:
- Dining at home, not restaurants.
- Delaying expensive vacations.
- Borrowing from relatives. If you have a supportive family, this can be a good way to shorten the time you need to save to for a down payment.
- Creating a savings account dedicated to your down payment.
- Moving in with your parents to save on rent. This may not be ideal, but "it's a good idea if your parents welcome it," Brown says.
5. Understand PMI.
Competitive markets can drive up the prices of homes. If you don't have the funds to come up with a 20 percent down payment, your lender may require you to buy private mortgage insurance, or PMI. This protects the lender if your loan goes into default. It typically costs 0.5 to 1 percent of the loan amount on an annual basis. Brown recommends avoiding PMI when possible, as it can significantly increase the cost of your loan.
6. Beware of unexpected costs.
Kent says a variety of costs often pop up and surprise first-time homebuyers, especially those who were solely focused on outbidding the competition. They include:
- Home appraisal fee: These are required by the lender and typically range from $400 to $500. Your home may also need other inspections before closing, which can cost a few hundred dollars each.
- Refundable earnest money deposit: This is required by the seller to show your good faith, and it's typically 1 to 3 percent of the purchase price.
- Move-in costs: These include renting a van or hiring a moving company to take your possessions to the new home.
- Homeowner association fees: If you move into a development governed by a homeowner association, you'll likely be charged a monthly fee that typically ranges from $200 to $400, but it can be up to $1,000 in some places, Kent says.
- Homeowners insurance: This is required if you take out a home loan. The cost is tied to your home's value.
- Taxes: Some local governments charge thousands of dollars in transfer taxes that become due at closing.
Buying a home is complicated, and saving for first-time homeownership requires fiscal awareness. The more you understand about home prices, loan fees and your own finances, the easier it'll be to prepare to make a purchase.
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