Traditional wisdom to the contrary, young individuals still want to become property owners. According to recent studies conducted by the Urban Land Institute, at least 70% of Millennials expect to own a house within the next couple of years, and over 90% expect to do so sooner or later.
It is also the perfect time to purchase a house. Housing loan rates remain pretty low, and purchasing is even cheaper compared to renting in most major cities, according to an analysis by the Wall Street Journal and major banks. But are these individuals ready to embark on this journey?
It is a significant decision to make and one that can be very intimidating when they think about the commitment they are making. One way to make this decision a lot easier is to break it down into smaller segments. If people provide positive answers to these questions, then they are excellent candidates for house ownership.
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Can they afford the property?
It is the most crucial question – and it is about more than being able to cover the monthly amortization. Property ownership also has ongoing, as well as usually unexpected charges, and they need to be able to pay for these charges as well. People’s monthly payments will also cover more than just the housing debenture.
The monthly statement will include billings for their insurance, as well as property taxes. Depending on their down payment (DP) size, individuals may also have monthly charges for home debenture insurance. It can easily increase the homeowner’s monthly bill by more or less 25% or even above the cost of the home loan itself.
Individuals can easily calculate their housing debenture payment for a given property price and loan rate by using online mortgage calculators. From there, they can add a rough estimate of their additional fees or get more detailed info on insurance rates and local taxes to get a more thorough calculation of their total monthly amortization.
In addition to the buyer’s monthly home loan payment, they also need to make an allowance for repair and maintenance costs. Individuals should be prepared to spend an average of 1% of their property’s price every year. Always remember that it will differ from year to year. Significant but infrequent expenses like a new roof or furnace will inevitably happen, so buyers will spend more in a couple of years and less in most.
Can they make a DP?
This thing is related to question number one but has to do with the funds they have saved instead of what they are bringing in each month. The good news is that it is not the obstacle most individuals make it out to be. Buyers only need a 3.5% down payment to be able to qualify for a Federal Housing Admin property debenture.
They can also qualify for specific traditional housing loans backed by Freddie Mac or Fannie Mae with as little as a 3% down payment. Housing debenture with minimal DP tend to be more expensive compared to other home loans, through interest rates or fees, so there are benefits to making bigger DP if buyers can do so – even putting down 5% instead of 3% on a traditional debenture can mean a much lower IR and a lot cheaper housing loan insurance.
People will get the best IRs and avoid home debenture insurance entirely if they can put down a 20% DP or more. Even so, people do not necessarily want to use their savings to maximize their DP. They will want to keep some type of reserve to safeguard them against major and unexpected repairs or disruptions to their incomes.
Savings and other liquid assets equal to six months or home debenture monthly amortization are usually considered the minimum; twelve months is a lot better. It is worth paying some more on their mortgage every month to have the security of backup funds in case of unfortunate events.
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How are their credits?
For a lot of individuals, the credit is not the hurdle to getting a housing loan that it is usually made out to be. As a matter of fact, nearly three-quarters of individuals in the country has a credit score of at least 650, which is perfectly enough to qualify for a home debenture.
Another twelve percent have scored in the range of 600 to 649, where they might experience some difficulty, but it is still possible to get debentures. The bigger issue with lower credit scores is that it is more likely to make these things more costly for individuals to get a home debenture.
The best loan rates go to individuals with scores of at least 740 (still about 40% of the country’s adult population); as people go below that, rates people are charged on traditional credits start creeping up at accelerated rates. That is why Federal Housing Admin debentures are usually better for people with credit ratings of 700 and below.
The FHA does not charge high IRs for lower scores but charges more for loan insurance compared to what people are likely to pay on a traditional debenture. So Freddie Mac or Fannie Mae loans tend to be better deals for individuals with excellent credit, while FHA plans are usually better for people with scores of 700 or lower.
Are they planning to stay in the house for a while?
It does not make a lot of sense to purchase a house if the buyer is planning to move again in a couple of years. Why? Because they need to pay closing costs every time they purchase or sell a house. For individuals who want to buy a house, closing costs usually run between three to six percent of the property price.
The commission paid to real estate brokers or agents is usually around 6% for sellers. So, every time people move from one house to another that is going to take out of the buyer’s budget. That is not so bad if they have lived in a property long enough so that their accumulated home equity, as well as the savings they have realized compared to renting, outweigh the costs of selling the house and purchasing another.
But it is pretty challenging to do this on a thirty-year refinansiering af lån in less than four to five years unless they are in the market with rising property prices. So if an individual thinks they might be moving out again in just a couple of years, they are probably better off renting a house until they are in a good and settled location.
How secure is the buyer’s job?
The usual mortgage for first-time property buyers is thirty-year debentures. It means people want to be very confident they will have funds coming in to make these payments every month over the next thirty years. Lending firms will usually want to see that buyers have been in their current jobs or careers for at least two years before they will approve them for a home loan.
But people also want to make sure there are no storm clouds on their own horizon that could find them out of jobs with mortgages to pay. While no one can absolutely know what is going to happen with their jobs, career or business a couple of years down the road, people have a fairly good sense of what will happen in the future.
If they sense there is any uncertainty in the near future – buyers need changes in their lifestyle or change careers. If there are issues in their workplace, like a tense relationship with their manager, or the sense that they might want to change directions in their life, it might be a good idea to hold off on purchasing a house until they are on more solid ground.