Some real estate professionals believe that millennials (18-29 year olds) have little interest in purchasing a home. However, research by the Demand Institute found that about 75 percent of millennials believe that owning a home is an important long-term goal. The reality is that this younger generation faces unique challenges, such as difficulty when it comes to successfully applying for a mortgage. If you’re a millennial, and you’re ready to dive into home ownership, here are three tips to follow before you apply for a mortgage:
1. Deal With Your Credit
Most mortgage programs require a credit check and have minimum FICO score requirements. To see where you stand, check your credit score. You can order your report (from all three major bureaus) for free online. If your score is under 620, you may have difficulty applying for a mortgage.
One cause of low credit scores in younger applicants is the lack of credit history. Millennials tend to use credit less than preceding generations, and it’s understandable that a post-recession generation would shun credit. However, lenders want to be sure that you have some experience managing debt before trusting you with a six-figure loan. You can head off this problem by applying for credit cards about six months before buying a home and using them responsibly.
It’s also acceptable if you don’t have a credit score yet. In that case, lenders are required to manually create a credit report using rent, utility payments and other records. And if your credit is thin, but not bad, having a cosigner may help you be approved for a mortgage.
2. Consider Your Job History
Standard mortgage lending guidelines require applicants to provide at least a two-year job history. For example, here are guidelines from the Federal Housing Administration (FHA):
To be eligible for a mortgage, FHA does not require a minimum length of time that a borrower must have held a position of employment. However, the lender must verify the borrower’s employment for the most recent two full years, and the borrower must explain any gaps in employment that span one or more months.
Self-employed applicants or those whose income is commission-based do need at least two years on the job to qualify in almost any program.
You many not want to quit or change jobs right before applying for a mortgage unless it’s a promotion, in the same field, industry or company, paying as much or more than your previous job.
3. Nail Your Down Payment and Closing Costs
If you’re a first-time homebuyer, there are many programs to help you with your down payment. Many are sponsored by the government and charitable organizations. To find programs in your area, look to the U.S. Department of Housing and Urban Development, which lists many helpful sources for first-time buyers.
You also might be able to negotiate to have the seller cover some, or all, of your closing costs. One thing you should do yourself, however, is save at least two months of reserves. These savings can help you pay your mortgage if you temporarily lose some or all of your income. Even if your lender doesn’t require it (though many do), reserves can prevent foreclosure if you experience a financial emergency.
Before taking the steps listed above, make sure that buying a home is the best option for you right now. Ilyce Glink, award-winning syndicated real estate columnist, advises, “Don’t buy if you’re unsettled about money. It just adds a lot of stress. You may want to rent if your personal life isn’t quite settled. The time to buy is when you know you’re going to be in the same home for at least the next five years.”
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