There is a reason why home ownership is part of the American Dream. Buying a home is one of the signs of financial success. The fact that it costs a lot means the home buyer has to have a secure job, a good credit history and financial responsibility to be approved of a mortgage. It seems that everyone, regardless of the generation that they came from is meant to buy a home.
However, it seems that this is not where Millennials are headed. In an article published in Forbes.com back in March 2012, there was a speculatiion going around that this particular generation is meant to be renters and not homeowners. According to the data collected by the article, 85% of graduates are moving back home for financial reasons. A lot of them are having a tough time looking for a job and in most cases, they are buried in student debt.
The same article noted that in 2009-2011, the percentage of homeowners between the ages 29 and 34 years have gone drastically down. From 17% a decade before, it is now 9%. Despite the low housing prices back in 2011, Millennials are noticeably unable to buy a home for the first time.
What is keeping Millennials from being homeowners
Although all generations equally went through the 2008 recession, the aftermath vary. Baby Boomers had to deal with the immediate problem of their retirement and the debts that are threatening to join them in retirement. The Generation X had to deal with foreclosed homes, debt and the burden of being the sandwich generation – which basically means they are taking care of both their parents and children.
For the Millennials, the effect is more on their inability to achieve financial success. Although they are more educated than the previous generations, with a higher percentage of high school graduates pursuing higher education, they are having a hard time getting a job in the tough job market. When it comes to making investments like home buying, there are three notable reasons why they are unable to do it like their parents or grandparents.
High student loans. The first problem lies with their high student loans. Obviously, with a higher percentage of them going to college, they are bound to owe more student debts. With the rising cost of tuition, it is expected that their generation will have the most amount of debt. This is one of the reasons why, even with a secure job, they are unable to commit to paying a mortgage. In fact, this may be a reason for lenders to turn them down.
Fear of debt. When the 2008 recession happened, Millennials witnessed how their parents lost their homes to foreclosure and how their grandparents could not retire because of debt. While this taught them the destructive effects of debt, it made some of them overly cautious. In fact, some studies show that Millennials shy away from credit cards because they do not like the temptation of taking on debt. While this may be a good habit, it has some drastic effect on others. Some from this generation became scared of huge debts like mortgage loans.
Lack of credit history. Due to their fear of debt, this generation has the least amount of credit history. This makes their credit score unappealing to lenders. Although you can still buy a home with a bad credit, instead of getting a low interest, you will get a high rate. This makes home buying all the more difficult for Millennials.
These factors, although they are keeping Millennials from buying a good home for themselves, are irreversible. If you can relate to one or more of them, you should know that there are ways to keep this from making you a homeowner. You just have to work harder and make the necessary sacrifices that will help you become a first time home buyer.
Understanding the profile of first time home buyers
An article published by USNews.com claims that first time homebuyers are actually crucial to the housing market. They keep the cycle of real estate investing constantly moving. Experts say that they are the catalyst that makes the market moving on to their second homes.
The report indicates that these first time buyers make up 39% of the total housing market buyers. The average age of buyers are usually in their early 30s – precisely the age of Millennials in 2014. 55% of those you want to buy a home are married.
Here is a video about a research on Gen Y and Gen X home buyers.
It seems that both the Generation X and Generation Y know the sacrifices needed to help them afford their own homes. In fact, the USNews article reported a couple of finding that proved that first time buyers are willing to sacrifice the following just to save up for a home.
42% will cut back on luxury items.
35% will lower entertainment expenses.
27% will limit their spending on clothes.
14% will cancel vacation plans.
8% will get a second job
7% sacrificed their vehicles.
These are the usual sacrifices that determined consumers will go through if they want to pursue their dreams to buy a home. Millennials can learn a lot from this. They do not have to be afraid of the payments associated with buying their first home. It is part of their financial maturity and they should not shy away from this investment.
Tips for those who want to purchase a new home
Despite all the hurdles that make it difficult to buy a home, there are ways for a Millennial to get what they want without compromising the stability of their finances. Here are a few tips that you can follow to help you prepare to buy a home
Understand how much home you can afford to purchase. This is probably one of the most important decisions that you have to make if you want to keep your home from foreclosure. Since you will be getting a mortgage loan, your computations will rely on how much money you can pay every month. Consider your income, the monthly expenses that you make and add the amortization of your home. This will help you compute the limit of the mortgage loan that you will borrow.
Know the home requirements you need. A common mistake of home buyers is to stop with the amount of money that they can afford and buy the next home that does not go beyond it. This is correct but not the complete process. You have to keep in mind the type of home that you need. If you are a small family of 4, a 3 bedroom house is all you need. Do not maximize the home loan that you are allowed to borrow. If you are allowed to borrow a million dollars, opt to buy a home that is only $400,000. That should be enough for your family. That way, your monthly payments will not be too big or you can shorten your payment terms. Either way, you will save on the interest amount.
Consider the timing when you buy a home. Timing is very important. Learn if it is a seller or buyer’s market. Obviously, it is more beneficial if you buy in a buyer’s market. The demand is low, the supply is great and prices will be to your advantage. Sellers are more inclined to negotiate with buyers. Do not be afraid to postpone your home buying plans if you think the time is not right to make the purchase. You are still young, you have all the time in the world to make this purchase.
While saving for your down payment, there are several things that you can do to increase your contributions. You can stay with your parents or live with a roommate. You can postpone buying a car until after you have saved enough. You should also pay down your debts aggressively. Also, make sure your credit score is in good shape.
Nowadays, to buy a home means you have to understand what it takes to be a home owner. It is not just about whether or not you can afford a home. It is more dependent on how you prepare yourself for home ownership.
Diana hates debt just as much as you do. She is a finance writer for National Debt Relief. She aims to provide the best information to win the battle against debt.