Millennials are expected to take a bigger share of the US housing market, based on a forecast published by CNBC. According to the forecast, many of the 4.8 million millennials will be turning 30; they are in their first or second job. With their present income levels and growing careers, they are already primed to make a major financial decision in life, such as buying a house.
Indeed, it is never too early and never too late to invest in one’s own home. To put hard-earned income into a substantial investment is always a good move. It will not be easy for the average-to-middle income earner, yet it is not impossible. It will take discipline, commitment, and a clear vision to amortize a home year after year until it is fully paid.
Some will make excuses; others will simply find a way to do it. Even a simple person who earns the average income in America today can have a chance to become a homeowner.
What is the secret?
Get the latest information and a realistic assessment from a mortgage professional. An expert from a home lending agency knows the market and the factors that affect the pricing and interest rates. These factors include the current monetary policies of the Fed and the prevailing interest rates set by banks, credit unions, and mortgage companies.
If one chooses to buy a second-hand home, it will be wise to consult an engineer regarding the structural integrity of a house you are considering to buy. A proper inspection by an electrician would also help to assess the fire safety of a home when it comes to wiring for lights, installations for air conditioning, and provisions for sockets and other electrical features.
The overall economic performance of a particular state and the country as a whole is also essential to know. Prices in the housing market and mortgage rates are affected by inflation, and that is why lending agencies also keep tabs on this economic indicator.
A home buyer need not always go into these intricate details and factors that affect the housing market. Still, one can prepare to get housing by doing these steps:
1. Manage Your Debt-to-Income Ratio
For starters, a person who has a reliable income has better chances of getting a mortgage application approved. A job or business that provides a predictable cash inflow is a good sign for lenders. It means that an applicant is most likely able to pay amortizations on time. A home buyer’s capacity to pay is crucial to the lender since the amortizations are what keep the lending company operational and profitable.
The story, however, does not end with having income from a job, profession, or business. Another facet that needs to be looked at is the mortgage applicant’s debt-to-income ratio.
To know your debt-to-income ratio, start with your gross monthly income. Gross monthly income is the total amount of money one earns before taxes, bills, and other deductions.
Next, add up all deductions, credit card payments, and other loans to be paid over one month. To get your debt-to-income ratio, divide the total amount of monthly expenses by your gross monthly income. In general, mortgage applicants get approved if their debt-to-income ratio is below 43%.
In the US, there is also what is called the 28/36 Rule. According to this rule, first, it is advisable to keep mortgage payments below 28% of one’s gross monthly income. Second, debt that includes payments for the mortgage, credit cards, and loans for a car must remain below 36% of one’s gross monthly income. While this rule is already an excellent guideline to follow when it comes to managing finances, some mortgage lenders might have stricter requirements or ratios. It is best to research this before making a mortgage application.
2. Check Your Credit Score
Mortgage companies also review an applicant’s credit score. Using a credit score as a financial measurement tool, lenders can estimate if a person can pay their loan on time. That is referred to as a risk score since it also determines how much risk the lender can take on a particular mortgage applicant. In short, payment history matters when applying for a mortgage.
3. Prepare a Budget and Stick to It
Another vital preparation that needs to be made is budget preparation. That should be the first step for any mortgage applicant. Simply put, a person seeking to buy a home must first know their regular monthly income and regular monthly payments that need to be made. The first step is to list down all active income (from one’s job or business) and passive income (from other sources such as real estate being rented out, interest income from investments in the financial market, and other similar sources).
Next, list down all obligations that need to be paid, such as rent, food, electricity and water bills, credit card and car loan payments, and other items that are part of one’s regular monthly expenses. Knowing the two sets of figures will help determine if a person has excess money left or has a deficit. With a detailed budget, a person can also avoid overspending on a particular item like dining out or buying a luxury item that is not essential. Using the budget, a person can also see if they can pay for a mortgage.
Millennial or not—knowing these three easy steps will surely help anyone prepare for that life-changing decision to get a mortgage, a stepping stone towards the dream of having a home to call your own.