Millennials may question if they can own a home and eat their cake — err, avocado toast, too. The price tag can be staggering, and the fine print and paperwork might be mind-boggling. And yet, there are those who achieve this lofty goal.
How are they doing it? Is it as simple as cutting back on the lattes, taking fewer vacations, and moving to a cheaper city? That can certainly help, but sometimes a large move or significant lifestyle change is non-negotiable. Fear not, many different paths can lead to purchasing your first home.
Understand the Different Types of Mortgages
In 2008, Whitney Hansen, a millennial money coach, bought a brand new home in Boise, Idaho. She was 19 at the time and in the midst of earning a bachelor’s degree in accounting from Boise State University. Hansen says the three-bedroom home was a great deal at $147,000.
“I had saved just over $7,000,” says Hansen. “When the market crashed in 2008, I was able to get into an FHA loan with 5 percent down ($7,350).” She negotiated for the sellers to pay the closing costs and rented out two of the bedrooms, which covered $625 of her $925 monthly payments.
For Hansen, having access to a Federal Housing Administration (FHA) loan was an essential factor in being able to afford the home. Exploring understanding the differences between types of mortgages can also help you determine how much you’ll need to save up.
Common mortgage options for first-time homebuyers include:
- FHA loans. The federal government backs FHA loans, which have less strict credit score, debt-to-income ratio, and down payment requirements than conventional mortgages. You may be able to get an FHA loan with as little as 3.5 percent down if your credit score is at least 580, otherwise you may have to put 10 percent down.
- United States Department of Agriculture (USDA) loans. If city life isn’t for you, the USDA’s guaranteed loan program (similar to FHA loans) or direct loan program may be appealing. Available to low- to moderate-income buyers in rural areas, USDA loans might be available without a down payment, but you could have to pay an upfront and annual fee.
- Veterans Affairs (VA) loans. An option for active-duty and retired armed forces members, and widows of someone who died in the line of duty. VA loans may not require a down payment, but you could have to pay a 1.25 to 2.15 percent funding fee.
- Conventional loans. The federal government doesn’t back conventional mortgages. You may be able to find a conventional mortgage with as little as 3 percent down, but generally, you’ll need to put 5 percent down.
There are important differences between the types of mortgages, and you should thoroughly research your options before taking out a mortgage. But for now, knowing that you may be able to buy a home with as little 5 percent down, or no down payment in some cases, can help give you a ballpark savings goal.
Save for Your Down Payment
Zina Kumok, a personal finance writer, and her husband are saving to buy a home in Indianapolis, Indiana. “Our goal is to have between 5 to 10 percent of a down payment saved up, for a house costing $200,000 or less,” says Kumok. “We’ll use any leftover savings on furniture and decorating costs.”
“My biggest piece of advice is to set up an automatic transfer to a separate savings account,” says Kumok. “Otherwise it’s really easy to use that money for something else.” She also recommends trimming expenses as much as you can as you save for your home.
Lower your expenses. If you don’t already, tracking your income and expenses with a budgeting app can help you figure out exactly where your money goes. You can then review your purchases and look for ways to save.
Cutting the cord is a common recommendation. But maybe take it a step further. Do you need Netflix and Hulu?
Meals and entertainment can also be surprisingly expensive. Brown bagging work lunches, and planning evenings in with friends rather than meeting them at restaurants or bars can help.
As Kumok did, you can create a new savings account specifically for the home purchase and automatically transfer money each month. If you’re looking for some instant gratification, you can also make transfers from your checking account to the savings account whenever you forgo a discretionary expense.
Increase your income. In addition to cutting back, taking on additional work can help you reach your savings goal sooner.
There are many part-time, one-time, and short-term jobs — i.e. the gig economy. Dog walking, babysitting, and tutoring can be great for people who’re looking for flexibility, and there are apps that can connect you with clients. The key is finding a side gig that matches your interests and availability.
Also be sure to leverage any experience or training. Hansen says she was able to save up so much money at a young age because she trained to be a nail technician, which paid substantially more than the stereotypical college student jobs. “I also lived at home and didn’t have to pay rent,” says Hansen, “which allowed me to keep my expenses super low for a year before buying.”
Find Your Number and Get Started
You can use websites like Zillow to find estimated home prices in different areas. Use that as a basis for how much you’ll need to save for a down payment, and consider the pros and cons of buying a home with no money down. Then create and implement your savings strategy. Tracking your money, cutting expenses, and increasing your income can help turn your dream of homeownership into a reality.