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Financing

Beefing Up Your Finances to Buy a House: The Millennial Edition!

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Millennials -- we're kind of a different breed, aren't we?

Whether we're choosing a rough-around-the-edges urban neighborhood over a white picket fence in the burbs, or slathering our sandwiches with handcrafted white truffle mayo, this generation does things a little differently from our predecessors.

And when it comes to buying a home, we millennials need different advice, too. We've been dubbed a "generation of renters." But actually we want to buy homes! If anything, we're more interested in buying a home than other age groups.

The thing is, we've got bigger financial hurdles, bigger debts (read: massive student loan burdens), and generally smaller salaries than most Gen Xers or baby boomers. So the traditional advice may not cut it for us first-time buyers.

We need something, well, handcrafted for us. Here's what to keep in mind if you're a millennial in the market for your first home.

 

1. It's the economy, stupid

Buying your first home is scary, but knowing what's going on in the economic world around you can help soothe some of those fears -- or at least help you prepare to face those fears head-on.

First, understand that the days of steadily low interest rates might be coming to an end. The Federal Reserve's target for short-term rates (which plays a heavy hand in the mortgage rate homeowners get) has been locked at zero since 2008.

This year, the Federal Reserve Board has been considering whether the time has come to increase rates again. The board didn't do it at its last meeting in September (whew!), but it's meeting again in December to revisit the idea.

So what does that mean for you? For one, if you're planning to buy in the next year, you'll likely face a higher interest rate (and monthly payment) if the Fed's short-term rate increases. And it might also affect your ability to qualify for a loan.

"As much as 7% of mortgage applicants would have failed to get approval as a result of higher debt-to-income ratios caused by higher rates," says Jonathan Smoke, chief economist of realtor.com, based on an analysis of loans approved in the first half of this year.

But that won't matter much because you'll be prepared, right? Right!

2. Tackle those student loans ASAP

Before you jump into saving for a down payment or pre-qualifying for a mortgage, you should get a handle on your biggest debts.

If you're saddled with a monthly student loan payment, getting that under control now will have a huge impact when you apply for a mortgage.

"There are lots of ways to work toward paying off student loans while simultaneously saving for a home," says Laura Holthaus, an investment adviser (and fellow millennial) in St. Joseph, MO.

Start by creating a savings goal: Estimate how much you'll need to put down on a home, determine how long you're willing to build up your savings, and then divide the total needed by the amount of time you have to work on it.

Next: Strike a balance between the student loan payments and your savings goals.

"Implement a graduated savings plan," Holthaus says. "Pay more toward your student loan and less toward your home savings today. Then gradually adjust the rates over time so you're paying less toward your student loan and more toward your home savings."

3. Boost your credit

Millennials have an average credit score of 625 -- lower than both the national average and the average for every other generation, according to a recent study by Experian.

Lower credit scores can cause many would-be first-time buyers to shy away from the process, but if you start at least six months in advance, you still have time to boost your scores before you apply for a mortgage.

According to Holthaus, all it takes is a little determination to see a jump. Try the following:

  • Paying your bills on time -- every time.
  • Check your credit report regularly. (Mistakes can happen!)
  • Use your credit cards strategically. Put certain items on your card each month to maximize rewards, and then make sure to pay off the balance in full.
  • Don't open a credit account you don't need (even if you do get a discount on your first purchase).

4. Get that down payment ready

Much like Rome, down payments aren't built in a day. As soon as you know you want to buy, start working on your down payment. Aim for 20% of the purchase price so you can avoid that pesky private mortgage insurance.

And if the thought of coming up with all that cash on your own makes you want to lock yourself in a dark room and cry, remember, you can get help. But there are rules. If your parents offered to cover a chunk of it, you'll need proof the funds are a gift and not a loan. Your lender may also require the money to have been in your account ahead of closing, so get ready to ask mom and dad long before you actually find a home.

5. Suck it up and ask for help

We know -- you're so independent. But everyone needs help every once in a while.

A good place to start is with a mortgage broker. Even if you aren't ready to buy tomorrow, a good broker will be happy to help you navigate the path to homeownership.

And if you need help with your finances in general, look for a personal financial adviser who can offer you tailored advice to reach your goals.

Remember: When looking for guidance, be as picky about your guides as you are about your organic mayo. Read reviews. Visit the Financial Industry Regulatory Authority website to see if the adviser had any customer complaints, and ask for a list of referrals before you sign up with an adviser.

And when you do hook a pro, ask questions -- lots of questions. The more you know, the faster you'll be able to win at homeownership.