They say your home is your castle. If you've been
renting
your castle and dreaming of owning a home, you aren't
alone. Home ownership rates have tumbled to a 20-year low – 63.9
percent in the wake of the Great Recession – as financial issues
including unemployment, underemployment, student loan debt and tight credit conditions
have weighed on potential homebuyers.
There are signs that may be changing, however. People 34 and
younger are the
largest
group of homebuyers, according to a recent National Association of
Realtors study that looked at 6,572 responses from a survey
of homebuyers in 2014. Millennials represented 32 percent of all recent
buyers, while Generation X, including those ages 35 to 49, accounted for
27 percent. The median age of millennial homebuyers was 29, their median income
was $76,900 and they typically bought a 1,720-square foot home costing
$189,900, according to the NAR.
"The No. 1 reason they want to buy is just to own a
home of their own," says Jessica Lautz, director of survey research
and communications at the National Association of Realtors.
If you'd like to trade in your rental for a place to call
your own, here are the steps you need to take.
Start saving now. It takes time to build up
enough
savings
for a down payment. "Among first-time buyers, 28 percent save for six
months or less, while 13 percent save for more than five years," Lautz
says
The typical down payment for a home is generally 20 percent,
but there are a variety of programs that can open the door to homeownership
with as little as 3 percent or even no money down.
First-time homebuyers with low to moderate income levels may
be able to qualify for a MyCommunity mortgage product through Fannie Mae with a
3 percent down payment. "Community mortgage products are better than
[Federal Housing Administration] loans because the mortgage insurance is much
less expensive and the down payment requirement is lower," explains Gina
Pogol, consumer finance editor at Charlotte, North Carolina-based LendingTree.
The FHA backs several kinds of mortgage programs. "The
203(b) is the most commonly used. It’s used to purchase or refinance homes with
3.5 percent down, as long as they have a credit score of 580 or higher and
qualify for financing," Pogol says. However, she adds, "The average
score of borrowers who actually get approved is closer to 700. Another FHA
program is the 203(k), which can be used to buy or refinance property that
needs to be built or rehabbed."
Start saving by setting up a special savings
account and automatically transferring a set amount into it each month.
Deposit any
bonuses
or gifts into this account as well. How long it will take to reach
your down payment goal depends on the amount you need and how much you are
able to sock away each month. "For someone buying a $200,000 property with
3 percent down, saving $500 a month, it will take a year. And there are still
closing costs to deal with," Pogol says.
Consider alternative down payment sources. There are
other options in addition to your personal savings, which include gifts from
relatives or friends or a withdrawal from your individual retirement account
for a first home purchase. If you are lucky enough to have a generous relative
or friend willing to gift funds for your down payment, you are required to
furnish an official letter documenting that for your lender.
Zev Fried, a senior financial planner at Los Angeles-based
JSF Financial LLC, warns against
tapping
your retirement funds for a down payment, however. "From a
planning perspective, pulling from a retirement account for a down payment is
often the worst option. A retirement account is for retirement, and should only
be tapped for dire emergencies, as there are usually penalties and taxes when
one withdraws money from these accounts," Fried says.
Minimize payment shock. Consider how much you can
actually afford, starting by looking at what you are paying in rent. If you are
looking to buy more house than your current rent payment, Pogol recommends
potential homebuyers "test drive" the higher monthly payment.
"If their current rent is $1,000 a month and they want
to buy a home with monthly principal, interest, taxes and insurance – called a
'PITI' payment – for $1,400 a month, I’d recommend that they put $400 a month
into savings and see how hard or easy that is," Pogol says.
Understand inventory conditions. Once you start
shopping for a home, understand that current tight levels of inventory, or the
number of houses on the market, could require patience and compromise.
"We are now seeing inventory is the top reason slowing
down and stopping potential buyers. Among recent homebuyers, from the 2014
Profile of Homebuyers and Sellers, the hardest task in the homebuying process
is just finding the right home," Lautz says. "Most first-time
buyers have to compromise on some aspect of their wish list. Seventy-five
percent of recent first-time buyers had to compromise on at least one wish-list
item, most commonly the size and price of the home."
Although the
path
to homeownership can take some time, there are financial benefits,
including the mortgage-interest deduction on your income taxes. However, the
intangible benefits often outweigh economic factors. Soon you may be
spending weekends fixing up your castle and turning it into your dream home.
