Financial Education Is Key To Smoothing The Home-Buying Process For First-Time Buyers

Etta Money, President & CEO of InCharge Debt Solutions.

Homeownership is the “American Dream” handed down from generation to generation, and millennials have taken the baton. In its annual homebuyers report, the National Association of Realtors stated millennials (those currently aged 22-40) have been the largest share of homebuyers since its 2014 report. Of homebuyers surveyed, they accounted for 37% of those who bought homes between July 2019 and June 2020.

However, a separate survey of about 2,650 U.S. adults found that 64% of millennial respondents who bought into homeownership regretted their decision. Their biggest regret was not being prepared for home maintenance costs.

Prospective homebuyers can overcome barriers to homeownership, even in a seller’s market. It starts with education.

There are three critical barriers to homeownership buyers must address before they take on a new address:

• Cost: How much can you really afford? 

• Down payment: Is 20% down realistic anymore? 

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• Competition: Do you really want to get in a bidding war for a home? 

How Much Will My First House Cost? 

Cost is the starting point for every big purchase, but it hits harder with housing than anything else. The median sales price of homes in the U.S. jumped roughly 35% from Q1 2016 to Q3 2021. The median price for homes sold in the third quarter of 2021 was $404,700, according to the Federal Reserve Bank of St. Louis.

If you’re looking to buy but are concerned about home affordability, one smart move is to downsize expectations. Maybe you (or your family or friends) have some handyman skills that could turn a low-cost fixer-upper into a nice, livable home. This option requires lots of research, but it can be a cost-effective option when trying to get into a starter home. Or, look a few steps outside the box and look into manufactured homes, which have a lower price starting point. States have significantly improved their building codes to make these a safe and affordable alternative.

How Much Do I Need For A Down Payment? 

Coming up with a down payment is the tallest obstacle for first-time homebuyers. For decades, traditional home loans came with a traditional down payment of 20%, but not anymore.

As housing prices soared, so did down payments. The government, and some lenders, recognized this hurdle to housing and created more programs to help homebuyers, especially first-timers, get in the door. The most popular ones are loans backed by the Federal Housing Administration, Veterans Affairs and USDA that let you qualify with as little as 3.5%, and in some cases 0%, down. Some conventional mortgage lenders followed suit and now make loans with a 3.5% down payment, but require borrowers to pay private mortgage insurance (PMI) until the mortgage balance falls below 80%.

Less known, but an increasingly popular option, are down payment assistance programs that have grant money set aside for first-time buyers. Buyers can learn more about these programs in a homebuyer education course.

Competition For Homes Is Rough 

The race to get in the front door of the housing market took an unkind turn for buyers in 2020. Too many buyers and not enough sellers made bidding wars break out all over the country. In California and Colorado, for example, 60% of the homes sold in March went for more than the list price.

Preparation can help first-time homebuyers increase the odds of making a successful bid on their first home. Prep work may include:

• Getting a pre-approval letter from a lender for an amount you can afford to spend.

• Taking a homebuyer education course that not only helps you understand the costs of buying and maintaining a home but should help you get a lower interest rate on your loan.

• Taking steps to improve your credit score, which also can reduce the interest rate on a mortgage.

• Seeing if you can find a few places to trim expenses in your budget and put that money in a savings account dedicated to a down payment.

According to Freddie Mac, 6.5 million homes were sold in 2020, and the National Association of Realtors says millennials purchased 37% of them, or about 2.4 million. Freddie Mac predicts the number for 2021 will be slightly higher at 6.8 million.

If employers can help millennials understand the process better, maybe 64% of them won’t regret the decision.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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