Friday, November 28, 2014 / by Vanessa Saunders
If you were born between 1984 and 1992, congratulations. You’re a member of the “millennial” generation in marketing demographic-speak. The bad news is, however, that congratulations are not really in order. Your generation is the first in modern history to have a lower standard of living than your parents. Maybe it’s time to buy a house.
Home ownership is one of the keys to financial success in the future. But how, you say? If you are lucky enough to have saved enough for a down payment, usually 15 to 20 percent of the cost of a house (or 20 to 25% in New York City), have a good job that provides you with steady income, and have a credit score of 680 or more, you should be thinking about getting into the housing market.
If you’re not quite that lucky, it’s still possible, but it’s not going to be easy, especially for inexperienced first time buyers. There are several roadblocks common to your generation. Here’s how you may be able to get around the ones that apply to you.
Less than two years work experience.
It’s a common requirement of most lenders that mortgagees have two years of work experience under their belts before they qualify for a home loan. They want to be sure you have the ability to make your payments and afford your bills as well. There is one exception to this rule. If you can provide a transcript from school, a diploma and proof that you recently graduated and already have a job (pay stubs will do), lenders may relent and give you a mortgage.
Not enough cash left after closing.
If you’ve barely scraped up an acceptable down payment after going through your sock drawers, cleaning out the car and shaking down your relatives, lenders may consider whether you have enough left for emergencies, maintenance charges and other expenses. Lenders as well as co-op boards need to know that their clients can make their payments. If this is the case, maybe it would be good to hold off, save a little more and find a way to pump up your monthly income. In life, it seems there’s always something unexpected coming up. If it does and you’re not prepared, it can drain your savings faster than a hole in the gas tank.
Likewise if you are liquidating a retirement fund or plundering your 401-K for a down payment, it isn’t a great idea. Both investments, your home and your retirement funds are important to your future. Don’t empty out one to finance the other. The long and short of it is, there are pluses and minuses on both sides. Take a long, honest look at your finances including your long term plans before you start investigating mortgage options.
My files are a mess
If you’re not a neatnick, and don’t happen to have all your financial information neatly organized into folders, here’s what you can expect your lender to require to get approved. Gather together these documents in advance and be ready to impress them! Fill out a standard online pre-approval application from your mortgage broker. It will ask you for two months history of your bank accounts, savings and checking. it will also ask for an accounting of your assets (including the value of that autographed Kurt Cobain Stratocaster and your collection of Green Day CD’s). Throw in your most recent month’s payroll stubs (you wondered why you saved them, didn’t you?), your W2 for your last tax year, a copy of your employment contract and a copy of your driver’s license. If your parents are helping out, they need to write a “gift letter” explaining their magnanimity, proof of where the gifted funds are coming from and a copy of the check. Whew! Paperwork is such a bore! But get these ducks in a row and you will be on your way toward home ownership.
College debt is ruining my life!
It may well be. Student loans are often seen as the single biggest obstacle for millennials getting mortgages. It’s hard enough to save for a down payment if your student loan takes a monster chunk of your income each month. The key to survival here is your debt-to-income ratio. If your debt is 45% or less of the income you will need to pay them off, you’re probably in the clear. If you need half or more of your monthly income to service your debt, homeownership may not be in the cards for you right now.
Not enough money. Period.
Whatever the issue – too much debt, low income but high savings, high income but no savings, your best option may be a gift of money, from your parents or another relative close enough to you to give you some cash. And not loan you some cash. That would just be reflected on your debt to income statement as more debt. A large enough influx of cash can tip the scales toward getting that mortgage by increasing your liquid assets in relation to your debt.
A similar option is a co-purchase, one where your parents or relative agree to shoulder some of the responsibility for the loan. They will be liable if you default, so consider the long-term ramifications of being financially tied to your parents over the long haul.
There are some websites which can also help struggling newlywed homeowners through crowd-funding. Instead of setting up wedding gift registries at department stores or online, almost-marrieds can have well wishers pledge cash instead of toasters. Other crowd-funding websites include Hatch my House and Down Payment Dreams . Another is Present Value, in which it is estimated that half its users are funding down payments. After all, would you rather get a down comforter or a down payment? The options are yours. Stop renting. Start mowing lawns!