Tips for Millennial Home Buyers: How to Overcome Your Home Shopping Fears

If you’re under 40, buying a home might be next on your to-do list. However, if you’ve been putting this decision off recently, it may be because you feel a little overwhelmed by the home buying process. 

At a certain age, buying a home is just the next item on that “adulting” to-do list. However, if you’ve been putting this decision off because of how financially overwhelming it feels, you’re not alone. Especially for Millennials and people in Generation Z.

But, why do millennial home buyers often feel intimidated and scared when buying a home? 

The truth is, their fears are the same as aspiring homeowners of other generations…except those fears are heightened by a few factors.

Let’s take a look at millennials’ financial history

Realistically, Millennials (and even Gen Z) have more financial concerns than older generations did. That’s because they were tossed into a challenging economy, riddled with student loan debt, and left struggling to start their own careers. Since the reality of younger generations’ financial struggles didn’t end up matching with the vision of what life might look like after college, making large financial decisions can feel paralyzing to some.

Combine all of that with an unpredictable housing market, where property prices have grown astronomically and many home values have inflated, and it’s easy to see why many younger adults find the prospect of home ownership daunting.  

The good news is, Millennials can overcome their home ownership hesitations with a little research and financial planning. 

Often millennial home buyers become fixated specifically on one of two things: saving up for a down payment or figuring out if they can afford their future mortgage payment. Then they realize there other costs involved in home ownership, like real estate taxes, homeowner’s insurance, home association dues, and the costs of maintaining the property.

It can be easy to spiral out of control when reviewing all of these numbers — especially if you don’t have a budget in place or a financial plan to grow into. After all, those student loans are NO JOKE.

There’s no way around it: you have to build a budget

Although the word budgeting may not be fun or exciting, it’s absolutely essential for any millennials home shopping. You have to first figure out how much money you have coming in each month (income), how much money you have going out (expenses), and how much is being routed to savings, retirement, and investment plans.

Once you know these numbers, it can make your home shopping feel less overwhelming. You’ll be able to better understand how much home you can afford and make plans to increase your income or decrease expenses (or both), if necessary.

How much should millennials plan to spend on a home?

Having a guideline is always helpful when making large financial decisions. As a general rule of thumb, your housing expenses should pan out to around 28% of your gross income. Your gross income refers to your salary before taxes are taken out. 

So, for instance, if you make $60,000 per year, your gross monthly income would be $5,000. Based on the above guideline, you should plan to spend no more than $1,400 per month on home ownership costs.

These costs are made up of a few different expenses:

• Principal loan amount. The total amount borrowed for your home, broken into monthly payments.
• Interest. The fees (as a rate) paid to the lender for borrowing, charged each month.
• Real-estate property taxes. You can typically find this in your city’s public records.
• Homeowner’s insurance premium. This could include standard coverage, as well as fire, theft, and flood insurance.
• Private mortgage insurance (PMI). This might be required if you do not put down a 20% down payment. In most cases PMI can be eliminated once you reach 20% equity in your home.
• Homeowner’s association (HOA) dues. This expense usually only applies to owners of condos or homes in certain developments.

Once you find a home you’re interested in, you can begin running these numbers to see if you are within the 28% rule of thumb. 

What if you fail the 28% rule of thumb test?

Although this standard is only a guideline, you might be worried if your home expenses are much higher than 28%. In this case, there are a few options worth considering:

• Wait and save up more money for a down payment. This can eliminate PMI insurance which will save you in monthly fees, while also reducing the principal and interest you pay per month.
• Look for a more affordable home. You may have the idea that home ownership is forever, but many millennials home shopping are looking for starter homes that they’ll eventually outgrow and sell. If you can’t afford your dream home, downsizing or compromising on some features could help make your home purchase more realistic for your current budget.
• Review your expenses. Let’s say you’re close to 28% but a bit higher than you’d like to be. There may be a way to cut back on your expenses or plan ahead for when those expenses will end. For instance, maybe you’ve almost paid off a credit card or loan, which will reroute more money back into your account in a few months. If this is the case, your dream home might still be a possibility.
• Increase your income. If your expenses aren’t an issue, you might be able to boost your income by asking for a raise or promotion, searching for a higher paying position, or freelancing in addition to your full-time job for additional income.
• Consider purchasing a duplex. By purchasing a two-family home, you can rent out the other unit and use some of this return on your investment (ROI) to help afford your mortgage and other housing expenses. Be sure to calculate local rent prices nearby and build this into your budget before jumping the gun on this one. In addition, becoming a landlord is also no small feat, so make sure you’re up for the challenge first.

What about if you don’t have enough for a down payment?

Home loans have different down payment requirements. Conventional loans (through a bank) typically require 20% down, while FHA (Federal Housing Administration) loans only require 3.5%. Other loans might also only ask for 3% down, while USDA and VA loans may waive down payment requirements.

It’s worth exploring your mortgage options before panicking about a down payment. Once you know how much you’ll need to pay, make a goal to save that amount. If you want to avoid paying mortgage insurance, though, it can be worthwhile to wait and save 20% for your down payment.

What else should millennial homebuyers know?

In addition to having a budget and financial plan, it’s important to review your credit score. Most lenders look for scores above 670 and often offer you lower interest rates if you maintain a good credit score. It’s important to review your credit report (you can pull this for free once a year from one of the three credit agencies) to understand where you stand. If your score is lower than you’d like, work on making on-time payments, reducing your debt, and showing a strong history of paying down balances before applying for a mortgage.

There are many resources across the web to help millennials navigate the home buying process. Talking to family and friends who have been through the mortgage process before can also be beneficial. You may also want to reach out to local real estate agents and experts to learn as much as you can as you embark upon your millennial home buying journey.

Last but not least, it’s okay to be anxious about home ownership. You should weigh the pros and cons of this decision before jumping into it, and getting serious about your finances is a great place to start.

And that’s where we come in. Let’s talk about getting that goal of home ownership checked off your list.