Millennials, Here are your Adulting Home Saving Lessons
Growing up in such a fast-paced world it’s no wonder that we Millennials expect instant gratification in all areas of life. Have a question? Google can answer it. Want a new computer? It can be shipped to your home tomorrow. An important thing to remember however, is that not all things in life will be instantly gratifying when little work or thought is put into it. Yes, adulting can be scary and hard at times, but the effort you put into it makes it all worth it in the end. Saving money, buying a home and getting a mortgage are some of those things that you want to take the time to do right because the payoff will be that much better.
Actually getting your finances in order is not something that you can do in one Google search, or have delivered to your front door. It would be pretty cool if you woke up one day financially mature and ready to buy a home, but life doesn’t work like that.
Getting your ducks in a row financially is something that you need to start doing BEFORE you are ready to buy a home or else it will be too late. If you don’t start now, you could end up watching someone else move into your dream home while you sit on the curb drowning your sorrows in no name vanilla ice cream because that’s all you can afford.
Want to buy a home? Put down your pumpkin spice latte and start these things now!
1) Boost Your Credit Score (and learn what it means!)
Everyone talks about the importance of having good credit, but do you really know what good credit is? Or how to get it? (Hint: Your Uber rating does not count)
Credit Tip: No Credit Is Bad Credit! Think about it: If you HAD to, would you lend your favourite T&A sweater to someone you know absolutely nothing about, or to your friend who occasionally will misplace your sweater for a week or two? Exactly. The bank is not going to lend a large sum of money to someone who has no experience in borrowing and returning money. A credit score allows the bank to have some idea of how you handle money.
An easy way to start building credit for yourself is to get a credit card with at least a $2,000 limit. And you don’t need to go all out; even a card with a low limit will show the bank that you are capable of paying back money consistently and that you can meet deadlines. A great tip that I was told and (mostly) live by is to not spend money that you don’t have. If you have $100 in your chequing account, put your groceries on your credit card then pay it off using your checking account from your bank’s app. BOOM! You now paid off your credit card and are on your way to having a great credit score.
You are now adulting the right way and building credit! It’s that easy!
The credit system works on a scale ranging from around the 250 mark up to 900. The higher your number, the better your credit score.
Typically, bad credit is any number under 600 and good credit is above 700. Factors that can affect this score are payment history, credit utilization and the length of your credit history (this is why it is important to start building credit as soon as possible). It is also important to have 2 or more different types of credit. For example, a credit card and a car loan.
If you want to boost your credit score in preparation of buying a home, it is recommended that you don’t apply for any credit cards one year prior to applying for a mortgage. This tip will ensure that your payments are getting taken care of on time and your credit will go up instead of down.
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2) Know your Budget
Before settling on a budget for any financial investment you want to make sure to leave yourself some wiggle room in your wallet. Keep in mind that houses come with more bills and responsibility than just a mortgage. You need to pay for water, taxes, gas, insurance, and oh yeah, you need to eat! Eating ramen 3 times a day may have been fine in college, but you’re adulting now! If you want to lose that freshmen 15 it’s time to throw some quality food in the mix, and good food costs money. Remember that a mortgage payment should not exceed 28% of your monthly income. This ensures that you will be able to pay your bills, buy some food, and not have to use your moving boxes as furniture.
For a full outline on how to arrive at your mortgage budget check out “Home Buying for Millennials.”
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3) Save For Your Down Payment and Closing Costs
If you’re reading a millennial blog on buying a home, it’s likely that you’ve never bought one before. First time home buyers have been given a helping hand from banks in the past, but as of January 1st, 2018 the rules have changed and it has now become much harder for first time home owners to get approved for mortgages. Gone are our grandparents’ days when you could get married and buy a house for $30,000 at age 19. Like everything else in the last 50 years, house prices have gone up exponentially. Although a typical down payment on a home ranges from 3%-20% of the purchase price, it is wise to save as much as you possibly can. Every dollar you put into a down payment is a dollar you don’t have to pay interest on, and you can instead use that money to pay your own phone bill when your family inevitably kicks you off theirs (thanks mom).
Math Lesson: The average home buyer who puts 20% of the home price as a down payment with a 25 year mortgage will be paying roughly $500 a month in mortgage fees PER $100,000 of the total mortgage loan (Your “I’m too pretty to do math” shirt won’t help you get out of this one). The problem is, just like trying to find a job with your brand new 4-year Bachelor of Arts Degree, being able to afford your payments just isn’t enough anymore.
The new “Stress Test” that has been implemented means that the banks want you to be able to afford $600 per $100,000 of mortgage debt (even though you only will be paying $500) or they will not give you the mortgage. The banks want to ensure that if interest rates go up you will still be able to make your payments. This gives the bank more security with their money but means that you may not be approved for the amount you were hoping for.
Closing costs can also be expensive depending on the price of your home. Closing costs include lawyer fees, land transfer taxes, and other expenses that accumulate during the closing of a sale of a home. These typically run between $2,500-$4,000 for a $200,000 home. If the home you are looking to buy is more expensive, make sure that you are saving enough money to cover these added costs. You NEED to hire a lawyer for a real estate transaction so make sure you are saving your nickels! (Pennies sounds better, but like everything else, I’m sure it’s millennials’ fault those are gone too.)
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4) Build Your Savings Account
Also make sure that you are putting aside what you can for future mortgage payments and home expenses. This is not the time to take your four-legged fur baby to get pampered at the spa; cut their nails at home and put your money in the bank! They will forgive you, I promise. Remember that a lender will see you as a serious applicant if you have 3-5 months of mortgage payments saved up. Seeing that you have money saved gives the bank more confidence in you as a borrower as you are less likely than others to default on your mortgage. Also keep in mind that all homes (even new ones) will eventually require a new roof, furnace, or insert-expensive-upgrade-here at some point. You’re also going to need money to help make your house feel like a home! You’re going to want to buy lighting, decorate, and maybe now that you have room, finally get that life-sized Storm Trooper like Barney from HIMYM that you’ve always wanted.
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5) Get Pre-Approved
This is probably the most important step. Think about it: do you shop around the store pulling everything into your cart, have the cashier ring everything through, get your total, and THEN check how much money you have in your wallet? No. You see how much money you have and buy what you can afford. It may seems like a simple concept, but many people run into this problem when they put in an offer on a home and then have to back out on the deal because they can’t secure financing. When you’re buying a home and you know that you will need a mortgage it is important to know how much money you will be given so that you can shop appropriately. I know it was a hard day when we learned that there’s no way Monica would actually be able to afford that New York apartment, but that’s the reality. It’s ok if your first home is more like Joe and Chandler’s apartment instead!
Trying to buy a home based on what you think you can afford and not what the bank says you can afford is very stressful and a waste of time for everyone involved. Getting pre-approved is very helpful in that you will have an idea of what price range of homes you should be looking at so that when it comes time to putting in an offer you can be confident in your choice.
With these 5 steps out of the way you should be well on your way to buying your first home! Remember that your first home does not have to be your forever home. We all know that Monica and Chandler got their dream home in the end! Don’t forget to save enough money for your closing costs, future mortgage payments and all the avocados you can fit in your new fridge. Adulting isn’t easy, but you got this!
Start looking for your new home!