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.
The generation that's taken over homebuying
The Great Recession delayed many millennials from being able to buy a home, but the generation isn’t locked out of property ownership the way it was a few years ago. The National Association of Realtors defines the millennial generation as people born between 1980 and 1998, and according to the 2019 NAR Home Buyer and Seller Generational Trends report, they make up 37% of all homebuyers in the U.S., the largest share of any generation. Over the past five years as millennials have become a significant portion of U.S. homebuyers, they’ve also helped shape trends in location and home type preference, helped usher in technological advances and embraced new platforms that make a home purchase feel more user-friendly. Here are 10 ways millennials are changing the homebuying process.
Updated on Feb. 26, 2020: This story was published at an earlier date and has been updated with new information.Text communication is key.
Text communication is key.
The telephone was once the primary form of communication between real estate agents and their clients, but the younger generation that has grown up with internet and cellphones will likely prefer more text-based modes that make it easy to multitask. “A lot of my clients already work in tech, so their expectation is they’re going to work with an agent that can at least keep up with them in terms of communication,” says Dana Bull, a Realtor with Harborside Sotheby’s International Realty in Marblehead, Massachusetts, who specializes in working with homebuyers. She says millennial homebuyers prefer to text and email their agent more often than older generations, and it’s reasonable to expect they’ll be comfortable using real estate-related apps.Research is a natural part of the process.
Research is a natural part of the process.
When it comes to researching neighborhoods, checking out listings online and doing a deep dive into the fine print of a pending deal, millennial homebuyers are known for doing their homework. Jill Levin, a Realtor with Coldwell Banker Legacy in Albuquerque, New Mexico, says she recently represented some buyers in a deal that went particularly smoothly because the buyers read every disclosure and document sent to them and asked questions beforehand – something she doesn’t see from older buyers who feel experienced enough that they don’t need to read into the details. “There’s way more information today now, and (homebuyers) really, really should be paying attention,” Levin says.The hub for advice is online.
The hub for advice is online.
While apps and online search tools are an integral part of the homebuying process for all consumers these days, millennials are the first generation to grow up using technology broadly in everyday life. The familiarity with smartphones, social media and the internet make communication, finding out information and contacting professionals easier. Millennials are also inclined to shop around for everything from real estate agents to mortgages to contractors. In HomeAdvisor’s State of Home Spending report released in June 2019, the majority of millennials, Generation X and baby boomers research home remodel project costs on the internet, but millennials do so by the largest margin (77%).Homeownership is focused on building wealth.
Homeownership is focused on building wealth.
While purchasing a home involves plenty of hurdles for younger buyers, many of them are choosing to become homeowners because it helps them build wealth in the long term. “There is still interest in buying a house because I’ve got a job, I need a place to live, rent is expensive and I should put my money somewhere,” Bull says of the millennial homebuyer mindset. As they build equity in their home, they’re in a better place to purchase a larger house in the future or use the profit of a sale for other investments.Kid-friendly housing makes a comeback.
Kid-friendly housing makes a comeback.
Homeownership isn’t the only thing that millennials are doing later in life for financial reasons. Millennials are also marrying and having children later than previous generations. But as millennials get older, more are getting to the point where they’re starting families. While a condo in the heart of downtown worked for many first-time millennial homeowners when they were single, home preferences change as soon as kids come into the picture, Bull says: “People are starting to step up into that next level of a single-family home and maybe out in the suburbs.”Walkability is a must.
Walkability is a must.
Even with many millennials leaving urban centers, one feature they won’t compromise on is walkability. “They want more activities in the area, they want walkability, they want the convenience of shopping without having to use their cars a lot,” Levin says. Even in more suburban settings, many millennials are showing a preference for areas that offer residential and commercial spaces within walking distance. Bull says the areas catering to these homebuyer preferences have been dubbed “hipsturbia,” where suburban towns offer an active downtown or main street area with the live-work-play atmosphere many people don’t want to lose when they move out of a major city center.Eyes are on garages and kitchens.
Eyes are on garages and kitchens.
Luxurious features and finishes in a house are ideal, but millennial homebuyers are making their must-have lists a bit more realistic. In a survey of 1,000 Americans who plan to purchase a home in 2020 by real estate information company Clever, millennials' preferred home features focused on details that make life more convenient, especially as they start families. When asked which features are a requirement for their new home, millennial respondents placed a garage, large kitchen and space to grow into as their top three priorities. Details like hardwood flooring, a fireplace, pool and dedicated office space were among the lesser-desired details.High home prices don't deter eager buyers.
High home prices don't deter eager buyers.
Affordability is still an issue for many millennials, especially among the younger members of the generation. But that doesn’t mean millennials are uninterested or afraid of purchasing a home – it’s just a matter of the right timing, the right location and the right home. Between consistently rising home prices and a lack of inventory as homeowners choose to remain in their homes longer, the housing market remains extremely competitive, Bull says, especially in the Boston area where she works. But the millennials who are financially ready to purchase are willing to rise to the challenge. “They’re used to being aggressive to get into the college they want, and then get the job they want,” Bull says, which primes them to make a strong offer if they see a home they like.Low down payments solve savings issues.
Low down payments solve savings issues.
The Clever survey found 70% of millennial homebuyers plan to make a down payment of less than 20%. Low down payment programs have grown significantly in the past 10 years and are now a major part of home purchases – NAR’s 2019 Profile of Home Buyers and Sellers reports that the median down payment for a home in the U.S. is 12% of the purchase price. While low down payment programs help resolve the lack of savings, homebuyers putting less than 20% down should be sure to factor into their budget the added monthly cost of private mortgage insurance.Parents play an important role.
Parents play an important role.
For younger millennials and even Generation Z, which is made up of people born in 1999 and later, coming up with the cash for a down payment is one of the biggest obstacles to becoming a homeowner, even at less than 20% of the purchase price. For millennial first-time homebuyers and the rare Gen Zer getting into the market, financial help from a loved one is often what makes a home purchase possible. “Parents are getting involved a lot – I still see a lot of situations where parents are gifting money or helping in some other way,” Bull says. “I don’t see that changing at all.”Here are 10 ways millennials are changing homebuying:
Here are 10 ways millennials are changing homebuying:
- Text communication is key.
- Research is a natural part of the process.
- The hub for advice is online.
- Homeownership is focused on building wealth.
- Kid-friendly housing makes a comeback.
- Walkability is a must.
- Eyes are on garages and kitchens.
- High home prices don't deter eager buyers.
- Low down payments solve savings issues.
- Parents play an important role.
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.