You’ve been saving up for a while now, and this is supposed to be the year you stop renting and finally become a homeowner. It’s a big step, but all your efforts have led to the big moment when you make an offer on a home.
But what if you waited? At least a little longer.
You may feel prepared to purchase real estate now, but there are a number of factors – some in your control and others very much out of it – that can contribute to whether you’re able to buy the home you want, or if you’ll find yourself house hunting without finding that property that calls out to you.
According to real estate information company realtor.com’s 2018 State of the Housing Union report, both home prices and sales continue to be held back due to a lack of homes on the market, making it particularly difficult for millennials who are first-time homebuyers to break into homeownership.
In a press release for the relator.com report, Joe Kirchner, senior economist for realtor.com, noted that an increase in new construction hasn’t eased inventory shortages yet.
“Builders will need to focus more on homes geared for moderate incomes, partner with the government on initiatives to transform distressed urban neighborhoods and overcome labor shortages through a combination of workforce development training and pressure to ease artificial restrictions on the supply of labor,” Kirchner said in the release.
Whether it’s a tight housing market where you currently live or you’re simply not in the right place financially to buy yet, you may benefit from holding off for a few months, or even a year, before jumping into homeownership.
Here are five reasons to wait on buying your first home.
You can’t decide where to live or what you want out of a home. Most people planning to purchase a home have given some thought to an architectural style they like, the number of bedrooms they’ll need and what neighborhood it would ideally be located in. If you can’t answer any of these questions, take it as a sign you’re probably not ready.
It’s particularly important to have answers to such questions because they’ll be some of the first ones asked by a real estate agent. Zoe Kellerhals-Madussi, a licensed real estate salesperson for full-service brokerage firm Triplemint in New York City, says she can typically tell if a buyer isn’t likely to get to a deal from the first few interactions.
“If you can’t get answers to those simple questions, that’s already a big red flag right there,” Kellerhals-Madussi says.
Your budget isn’t where you want it to be. It takes a lot of discipline to be able to save enough for a down payment, and you may find that you’re still not quite there for your desired price point.
You don’t need a 20 percent down payment to purchase a home these days, as mortgage programs for 3 percent, 5 percent and 15 percent down are gaining popularity to help homebuyers – first-time buyers in particular. For current and former members of the military, Veterans Affairs loans even allow you to put nothing down on your mortgage.
Of course, the more you put down on your home the less you'll need to pay on a monthly basis. Michael Zimmerman, senior vice president of investor relations for private mortgage insurance company MGIC, says the smaller the down payment, the riskier the loan is for a lender. “The odds of that borrower defaulting has increased,” he explains.
With lower down payments, you’ll pay more with the addition of mortgage insurance, which varies based on the program and your financial history. If the current state of your savings means you’ll struggle with higher monthly mortgage payments, you’ll have to settle for a less expensive house that you may be unhappy in or you won't have the money to pay for repairs if the furnace or fridge break. So some extra time for saving can be worth the wait.
[Read: 12 Things That Trip Up Homebuyers.]
You don’t know your timeline. A bit of information you should have nailed down before you start touring properties is your timeline to move. You may be moving from a different city and you’re on a strict deadline to find a place, or you need to wait to move until after the kids are out of school for the summer so they don’t change schools midyear.
For most first-time homebuyers, knowing your timeline also means knowing the parameters of your lease.
Kellerhals-Madussi recalls a client who was unsure when her lease was up and was either forgetful or trying to avoid answering the question. “I asked her I think probably 10 times when her lease was up, and she just kept on avoiding me,” Kellerhals-Madussi says. “Every time she said, ‘I’m going to check today, and I’ll get back to you,’ and she never did check.”
From the interaction, Kellerhals-Madussi was able to tell a purchase likely wouldn’t happen, but she allowed the client to realize in her own time. Sure enough, “she came back to me a couple months later and said, ‘Actually we just realized we’re not ready to purchase now,’” Kellerhals-Madussi says.
Your credit is bad or could be better. You don’t need perfect credit to get into the homebuying game, but if you’ve got room for improvement, you may see the benefit of raising your credit score before seeking a mortgage lender. Mortgage lender information company The Lenders Network reports borrowers typically need a minimum FICO score of 580 for an FHA loan, while a conventional loan typically requires a minimum of 620.
Mortgage lenders consider your credit score, credit history and debt-to-income ratio – including not just the mortgage, but any auto loans, student loans, credit card or other debt you may be paying off – in determining whether to issue you a loan, how much to approve you for and the details of the mortgage itself. The less impressive your financial history, the riskier you are as a borrower, and the lender will want to see a higher down payment or higher interest rate to offset the risk.
But even if you don’t see your credit score drastically improving over the next year, there are other things you can do to make yourself a more appealing financial investment to lenders. Paying down student loans and getting rid of your credit card debt can do a lot.
“[Consider] a borrower with a maybe average credit score but is putting 5 percent down, and then their total debt-to-income ratio is 36 percent or 35 percent,” Zimmerman says. “That presents a better risk than someone who has maybe a 41 percent or higher debt-to-income ratio.”
You can’t get the house you want. Many first-time homebuyers should approach their starter home with reasonable expectations. After all, the chance your first house is a 10-bedroom mansion with an infinity pool in a gated community is pretty slim.
Still, if your budget or the local real estate market make it so you’d be unhappy living where you can afford, it may be best to wait until you’ve saved more money or the right property comes onto the market.
If you’re holding out for the right property, stay connected with your real estate agent and have your financials ready to be able to put in an appealing offer with mortgage preapproval quickly. The more prepared you are, the better your chances for success.
A new generation of homebuyers
As the millennial generation, also known as Generation Y, takes a greater role in the housing market, young people’s preferences are starting to shape the way real estate business is done. The real estate portal Zillow predicts that millennials will overtake baby boomers as the generation purchasing the largest number of homes this year, making their preferences even more important. Here's a look at 10 ways millennials are changing the homebuying process.
Don’t call us, and we won’t call you.
For decades, the telephone has been the real estate agent’s tool of the trade. But younger homebuyers don’t want to talk. They want texts – and some prefer email. Dealing with these tech-savvy buyers has posed a challenge for the nation’s real estate agents, who are considerably older than the homebuying population they serve. A National Association of Realtors survey of its members in 2012 found that only 3 percent of agents were under 30 and 81 percent were older than 45, with 25 percent over 65.
We've done our homework.
More than 50 percent of millennials search for homes on their phones and, among those, 26 percent end up buying a home they found that way, according to the NAR. “With millennials, we do not control information,” says Player Murray, managing broker at Berkshire Hathaway HomeServices York Simpson Underwood Realty in Raleigh, North Carolina. “What they need is for us to interpret the information.”
We don't like surprises.
Younger buyers want to know what to expect and when. “I see them wanting to understand what’s going on at any time in the process more than any other generation,” says Paul Reid, a Redfin agent in Southern California’s Inland Empire region.
They also like timelines, checklists and charts. “If they don’t know what’s coming around the corner, it could cause paralysis when they get there,” says Murray, who's also a member of Berkshire Hathaway HomeServices’ REthink Council, a group of 15 young agents nationwide formed to help the company meet the needs of younger customers and recruit young agents.
We want customer service, and we want it now.
Millennials expect to be partners in the home search, and they want quick answers to questions. “They want information, and they want valid information, and they want it right now,” Reid says. “They’re the generation of Google at your fingertips.”
Is there an app for that?
Younger buyers live on their smartphones and use them as a key tool in their home searches. Apps are often their preferred method to check listings and collect other information. Redfin is an example of a company that's incorporating apps and other tech tools into its services. Customers can ask for home tours online or via the company’s app, as well as sign up for alerts about new listings and use their phones to search for open houses. The Redfin Deal Room lets customers keep tabs on the process of their transactions 24/7.
What did your other clients think?
Many millennial homebuyers get recommendations on agents from their parents, but they also do some research online before they ever call an agent. They want to see testimonials on an agent’s website, as well as read online reviews.
You call that social media?
As far as millennials are concerned, a Facebook page with listings is something their grandmother would do. They expect agents to engage them on social media. “They need to feel like they’re a part of your business,” Murray says. “Just reposting an article that’s been posted 1,000 times across the country isn’t enough.”
Tell us what data you want, and we’ll text it right over.
Unlike older buyers, young people are not bothered by being asked for bank statements, employment verifications or other personal data required for mortgage approvals. “The younger people are used to having to supply everything about who they are,” says Don Frommeyer, chief executive officer of the National Association of Mortgage Professionals and a mortgage broker in Indianapolis. “They’ll give you everything.”
No stainless steel appliances? Reject.
Younger buyers sometimes have trouble seeing the bones of a home and often don’t know which features can be changed easily at a minimal cost. That’s an area where they value guidance from agents. If they’re buying a home that needs work, they also value referrals to contractors and vendors. “You’ve got to be able to provide resources to them,” Murray says.
Yes, we can afford that.
Finding a home they can afford in the location they want is a challenge for many younger buyers, especially in cities, says Nela Richardson, chief economist for Redfin. Some are embracing the sharing culture by seeking homes with rental units or rooms that can be rented out on Airbnb or other services. “I think we’re going to see millennials solve that problem in a different way,” Richardson says.
See more Personal Finance slideshows:
She has appeared in media interviews across the U.S. including National Public Radio, WTOP (Washington, D.C.) and KOH (Reno, Nevada) and various print publications, as well as having served on panels discussing real estate development, city planning policy and homebuilding.
Previously, she served as a researcher of commercial real estate transactions and information, and is currently a member of the National Association of Real Estate Editors. Thorsby studied Political Science at the University of Michigan, where she also served as a news reporter and editor for the student newspaper The Michigan Daily. Follow her on Twitter or write to her at firstname.lastname@example.org.