real estate

How I Bought My First Home

Millennials came of age as the housing bubble burst and lenders put credit in a vise. Now we make up the largest group of home buyers.

After more than five years in the Washington, D.C., area, three apartments and eight roommates, I became a homeowner last summer. Sharing the rent with others had kept housing costs affordable, and I made several good friends along the way. But ultimately I craved the stability that would come from saying farewell to rent-hiking landlords, slapdash maintenance and the roommate revolving door. And I was excited to experience the benefits as well as the responsibilities of homeownership.

For a long time, millennials weren’t buying homes at the same rate as previous generations–largely because we came of age as the housing bubble burst and lenders put credit in a vise.

But if you’re unsure where a job, relationship or life may take you in the next few years, renting likely beats buying. You’ll also want to check out the buy-to-rent ratio in your area–that is, the median sale price of a home divided by the average annual rent for a similar one. In general, if the ratio is less than 15, the market favors buyers; more than 20 and it rewards renters. Ratios in-between can go either way, depending on taxes and the rate of appreciation. To assess your situation, use an online calculator, such as Trulia’s Rent vs. Buy Calculator.

The mortgage grind. To qualify for a mortgage, your monthly housing expenses–including principal and interest, real estate taxes, homeowners insurance, and homeowners or condo association dues–usually can’t exceed 28% of your gross monthly income. For many millennials, that isn’t the biggest challenge; it’s coming up with the cash at the beginning. You can probably get a mortgage with a down payment of just 3% to 3.5% of the purchase price, but you’ll need an extra 2% to 4% of the purchase price to cover the appraisal, taxes and other costs you’ll have to pay to close the deal. If you put down less than 20%, you’ll need private mortgage insurance, which usually costs 0.5% to 1.5% of the loan amount each year.

I had been toying with the idea of buying for years, and I funneled as much cash as I could (from a raise and the extra money I had after paying off my student loans and moving to a cheaper apartment) into a savings account. To cover a shortfall, you may be able to borrow from your 401(k) or tap your IRA. Before I found my one-bedroom condo (two blocks from Metro!), I made sure I was preapproved for a mortgage. I have a strong credit history, so qualifying for the mortgage went smoothly. But lenders did put my finances under a microscope. I had to explain everything that was a little outside the norm, from a PayPal transfer to a reimbursement check from a work trip.

Help from Mom and Dad. Parents are often willing to extend a helping hand. The simplest strategy is for them to give you money to put toward your down payment or closing costs. Your lender will require a letter stating that the money is a gift, not a loan, since a loan from your parents increases your total debt, making it harder to get a mortgage. Alternatively, if your parents are comfortable putting their credit on the line, they can jointly apply for a mortgage as a “non-occupant co-borrower,” which means they have an interest in the property and can add cash of their own to the mix. My parents and I preferred the second option, but we had several conversations to outline a repayment plan and other specifics to make sure everyone was comfortable with the arrangement.

So far, homeownership is great. The biggest change? The amount of time–and money–I spend at the hardware store.

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