Alternate post title: Mortgages for Millennials
We know a few couples who are looking to buy houses in the next few months, and have been answering a lot of questions about the mortgage process for them. It occurred to me that mortgages are confusing (we learned that first hand) and having recently (FINALLY) completed the process of buying our first house, we are in a good position to give other millennials looking to buy the rundown of how it works.
Now, our situation was different from the norm in a few ways, which should be kept in mind and which I’ll address in specific sections as we go also:
- We bought our house from my in-laws. Because of this we didn’t have to compete for the house we wanted, aka there weren’t any other buyers swooping in to try to get the house we wanted.
- We bought our house from my in-laws. Because of this they gave us a good deal, and the lower asking price allowed us to use the difference between the actual value of the house and the asking price as a down payment (this is called a gift of equity when you do it between family members). This means we didn’t need an escrow account for our down payment so we don’t know anything about escrow accounts past the basics.
- We bought a house we already lived in. Since we knew which house we were going to buy before we bought it, we didn’t use a realtor and therefore know nothing about them.
Now that you know how our situation was a little different, we can proceed. First, you need to figure out what you can afford. This has nothing to do with what you can ACTUALLY afford and everything to do with how long you’ve worked at your current job plus how much debt you have. The best (and really only) way to do this is to go get pre-approved for a mortgage. Here is a list of paperwork you should bring with you (or at least information you should have on hand):
- Most recent pay stubs from any/all jobs
- Most recent income taxes
- The full amounts owed and monthly payments for each and every loan you have, including car loans, student loans, and even credit cards
- A pretty solid idea of what your credit score is
- Start date of your current job(s)
- Your social security number if you don’t know it by heart
When you go to the bank or credit union you wish to use, you’ll sit down with a mortgage specialist. They will add up all of the monthly payments you owe. It will make you cringe. Then, they will look at your income. This part is worse. If your job is not a permanent position, it does not count toward your income. If your job is not full-time, it does not count unless you’ve worked there for TWO YEARS. If you have a full-time permanent position it STILL does not count unless you’ve been there for TWO YEARS! The only exception to this is if your job is directly related to your field of study in college and is a full-time permanent position. Then they will count your education toward that two-year requirement. If you’re like Seth and I, that took away a big chunk of our income since my day jobs are basically always contract-based work.
Anyway, they will compare the amount of money they think you have coming in every month, and subtract the monthly payments you owe. If that number is really small, they won’t let you have a mortgage that is more than the difference between those two numbers. If you’re lucky, and have a pretty good-sized cushion, they will cap your mortgage payment at about 30% of your income (still as calculated by them). If your payments are basically equal to your income, or if you can’t put 20% down, they may just tell you they’re not able to give you a mortgage at all. There are a couple of ways to try to work around this:
- If one of you has a significantly better income to debt ratio, have only that person apply for the mortgage. We totally did this. Seth’s full time job counts because it is related to his education and is permanent. He also has less student loan debt and at the time didn’t have a car loan in his name yet. Because my day job didn’t count at all and I have more debt than Seth does, removing me from the equation increased the amount we were able to spend on our mortgage. Keep in mind that if you are not married and the house is only in one name, if you break up, that person gets to keep the house, regardless of who pays the bills. If you are married and the guy buys the house, he automatically has to have his wife sign off on selling it by law, so ladies, you’re covered in that situation. However, it does not work the other way, so guys, if your wife buys the house she can sell it if she feels like it. (But she wouldn’t do that to you!) Just something to keep in mind if you go this route. It works the same way in the event of a divorce (typically). If the house is in only the husband’s name, the wife gets half. If the house is in only the wife’s name, the guy is on the street.
- You can get a cosigner. This is especially helpful for people without a big down payment. If you have parents or other trusted and generous relatives or friends who have good credit who are willing to cosign on your mortgage, you have more options. We didn’t do this so I don’t know how much it loosens up your options, but I know that it does. Just keep in mind that this affects their credit for as long as they are your cosigner, so it can be hard to find someone who can and will agree to do this.
- You can put down a larger down payment. A big down payment means the amount of your actual loan is less. That means your payment is less which means it may fall within your 30% or whatever payment your bank deems acceptable for you. This is easier said than done since you have to save up a big chunk of change, but it is something to consider.
- If you can afford the payments but don’t have at least 20% to put down, you can still get approved if you are willing to pay mortgage insurance. This essentially insures the bank against higher risk mortgages. Yes you are paying to insure the bank’s investment. Yes we agree that it totally sucks. Yes, you have to have it if you aren’t putting 20% down, even if you have a perfect credit score and have never missed a payment in your life. Seth and I couldn’t stomach this one, but if you are committed to getting into a house sooner rather than later, it is an option.
Once you’re pre-approved for a specific loan amount, you get to start shopping! We obviously didn’t need a realtor since we already had a house in mind. That said, a realtor can really streamline the paperwork process if you’re willing to pay for that. If not, know that you’ll need to:
- Draw up a purchase agreement. This is essentially a contract between you (the buyer) and the seller that negotiates the terms of the sale. This is where you specify whether they’re leaving the appliances or taking them, who pays the next property taxes, and all sorts of other stuff. This is a legally binding contract, so if you don’t have a realtor to negotiate it for you, I at least recommend having a lawyer look it over (or draft it for you if the seller doesn’t have a realtor either). We had a friend who is a lawyer draw one up for us and explain all of the details.
- Find a title company. The title company basically facilitates the closing on a piece of property. They file and issue all of the paperwork needed to transfer ownership of the property. They also issue title insurance, which essentially means they have checked to make sure there are no issues tied to a piece of property that could impact your ownership of that property down the line (and if they missed something, you don’t get screwed out of your money). They also often deal with escrow accounts. They are basically the liaison between the seller, the buyer, and the bank.
- Figure out how you want to deal with homeowners insurance and property taxes. If you have a mortgage you can set up an escrow account that handles your homeowners insurance and property taxes. This somehow rolls those two expenses into your monthly payments. Seth and I went the alternate route. We like to pay our property taxes and homeowners insurance in full ourselves. This results in our monthly mortgage payment being lower and we didn’t need to set up an escrow account at all since we also didn’t need one to handle our down payment. That said, we are pretty good savers and always make sure to have enough on hand to pay our property taxes. If that doesn’t sound like you, you may be better off rolling those payments into your monthly mortgage and forgetting about it.
After you make an offer on a property, but before you sign a purchase agreement, the bank issuing your loan will insist on an appraisal. This ensures that the home is worth the price the bank intends to lend you. You may also wish to have the home inspected. This may shed some light on any issues the home may have. You, as the buyer, are responsible for paying for both the inspection and the appraisal, and both may clue you in to issues with the house that may cause you to think twice or may at least help you negotiate a lower final sale price. Seth and I skipped the inspection because we’d been living in our house for several years and were well aware of its shortcomings. Had we been purchasing an unfamiliar house, I would definitely have wanted an inspection.
Normally you sign the purchase agreement at closing, which is scheduled with the seller and the title company and the bank. Basically you all meet to sign paperwork and shake hands. The title company then files the paperwork and you wait until you can move in (unless you’re us because we already lived in our house). Depending on where you live and the type of property you bought, you may have to file some paperwork. For example, our house was a rental property and was therefore subject to higher taxes than a primary residence. We had to file paperwork saying the house was our primary residence so our taxes would be adjusted accordingly. This may be something your realtor would take care of if you had one. I’m not really sure about that.
Now you know everything I know about the home-buying experience, from the perspective of a millennial who just did it in October. Disclaimer: I’m not a banking or real estate professional. I’m just sharing my own experience and knowledge which may not work for everyone. Additionally, there are some different property laws for different states. Any legal stuff I mentioned is for Michigan, and may not apply if you’re buying in a different state. If you have any questions, feel free to leave them in the comments section! I’ll answer them to the best of my ability. Happy house hunting!