As millennials approach home-buying age, what’s preventing them from becoming owners?
According to a recent Trulia Trends survey, 41 percent of millennials surveyed said that saving for a down payment is their biggest hurdle to home ownership. Indeed, coming up with enough cash for that down payment is a formidable task. However, the down payment is only one of the areas to target to maximize home-buying power.
Here are four significant ways that home buyers (millennials or any generation) can either increase their down payment bank balance or help build more buying power in general.
1. Build Your Down Payment Savings
A Little Help from Mom and Dad
A great and often overlooked source is … the folks. If your parents are in a position to help you, they can “gift” you money each year, tax-free. Now it’s $14,000 per year, per parent. That’s $14,000 a year that can be gifted to you tax-free from your parents. If you are married, you can double that to $54,000 a year. If you are smart and plan ahead, two years’ worth totals $108,000. A very nice start! In fact according to Trulia’s survey, 50 percent of all Millennials plan to do just that!
Generate a Second Income
It’s amazing how a few extra dollars can add up over time. A friend of mine taught high school for years and owned an amazing home. When I asked him how he was able to purchase and afford an expensive home in a wonderful neighborhood, he said he had taken on a part-time job as a copywriter for a local paper. He allocated all of that extra income to the purchase of his house. Over time, that money grew and grew.
Pay Yourself First: Try setting aside money to be saved automatically every time you receive a paycheck — no matter what. Your bank may be able to help you with this by automatically depositing a specific sum into your savings account when your paycheck clears. You will be shocked how quickly your funds will grow.
2. Change Your Lifestyle
Move Back In With Mom and Dad
You might be cringing right now, but don’t worry — it’s not forever, and chances are your folks will throw you out before you are ready to move out anyway. Consolidating housing and moving back in with parents for a short period of time is a huge way to save money.
Cut Back On Significant Spending
Sure, you can cut back on the daily latte and lose a few cable channels, but that is not going to get you enough saved before middle age. You need to cut back on the significant spending areas and big ticket items, like a fancy car (with hefty monthly payments) and yearly vacations.
If You Are a Renter, Get a Roommate
This one is a no-brainer — if you have an extra room, fill it. Let your apartment or your current home work for you. Get a roommate and sock away that extra income to bolster your down payment savings money.
3. Get Your Credit and Debt in Check
Clean Up Your Credit
A better credit score equals a better mortgage interest rate, which ultimately equals better buying power. Take the necessary steps to clean up your credit. This usually takes time, so plan way ahead.
Less Debt Gives You More Buying Power
The lower your debt levels are, the stronger your income-to-debt ratio is. That is a key factor when a bank determines how much house you can afford. Begin paying down high-interest, revolving balances on credit cards. Also, avoid any big purchases before a potential home purchase. Any big ticket buys (like a new car) can alter your financial picture and potential lenders don’t want to see that.
Student Loans Do Count
For most millennials, student loans can be very high in those early post-college years. Unfortunately, you need to remember that student loans count as debt when the bank is determining your buying power. Tackle them aggressively.
4. Downsize Your Dream Home
The Starter Home
So many people say, “How could I ever buy a decent house in this town?” Well, start thinking smaller. Instead of a $300,000 house, you need to find the one that fits your budget … today. There will be plenty of time to upgrade that starter home into a bigger dream home later. This is where the term “starter home” came from! Get into a home you can afford now. Begin to pay it down, hopefully build some equity, and then in five or more years, it’s possible that you may be able to upgrade.
Find The Same House in a Transitional Neighborhood
Buying your first home in a transitional area allows you to get into the market relatively cheaply, and increase your buying power. It may not be the most sought-after or picturesque community at the moment, but as it improves, your home value improves along with it.