The Millennial Mortgage
Nothing says “you’ve made it” quite like seeing your name on the title of a home. Not the classic quilted black CHANEL bag you treated yourself to after your last promotion. Not the fact that you can actually afford to shop at Whole Foods now. It’s unlocking your door, slipping off those heels and drawing a bath in your claw foot bathtub.
Still. Qualifying for a mortgage. Eek. Just the phrase is enough to make us reach for an ice cream float (made with Jose Cuervo).
Paper bag breaths, girls. You might feel a little like a chicken with its head cut off with all this house talk, but Millennials actually make up the largest percentage of homebuyers at 31 percent. And though the Baby Boomers we kind’ve hate for reasons too lengthy to get into here, we’re being called the smartest generation for a reason. Boo-yah.
Basically, we’re saying you can do it. You Millennials (age 33 and under) can buy a loft in the city and fill it with Crate & Barrel furniture galore. But let’s not get ahead of ourselves, because first, you’ll need to get approved for a mortgage. And here are six things you’ll need to know.
1. Save up for a down payment.
Though everyone’s income will increase over time, experts suggest putting 20 percent down on a new home. So whether it’s deciding to pass on the Coachella tickets, or taking a part-time job, devise a strategy and work toward it. As our parents would say, “Do the hustle.”
2. Debt-to-income ratio.
The debt-to-income ratio is the percentage of your monthly income that goes to paying debts. It’s one of the chief things lenders look at to determine whether they’re going to give you a loan or not.
So, say you earn $4,000 a month, but you pay $700 a month in recurring debts: $300 for your Prius, $300 for a student loan, and $100 on an Amex. $300 + $300 + $100 = $700 divided by $4,000 equals 17.5 percent. That’s a groovy number.
Now, let’s say the mortgage debt you’re looking to add is $1000. $300 + $300 + $100 + $1000 = $1,700 divided by $4,000 equals 42.5 percent. Still groovy. Lenders typically approve 43 percent DTI ratios and lower. 43 percent is the magic number.
Try calculating your DTI and setting aside the payments for a few months on your own. If your DTI is north of 43 percent, a larger lender might still give you a loan. But better yet? Try to pay off some of that debt before you start seriously looking to buy.
3. Student loan factor.
Let’s be real. You probably have a student loan. It might be a big one. If it’s a big one, your DTI ratio is off the charts and no lender will look at you twice. Here’s a virtual hug.
Now. Breathe. Remember, you’re not alone. The amount owed on student loans has tripled in a decade, to nearly $1.1 trillion, according to the Federal Reserve Bank of New York. Some of us have debts scarier than The Blair Witch Project.
There are solutions. Cut back on the $12 craft cocktails. Eliminate the word “Bloomingdale’s” from your vocabulary. Pay off your debt aggressively. Student loans are a force to be reckoned with, but they’re not unworkable.
4. Do you have good credit?
We know. We want joie Kade B tops and Alexander Wang sandals, too. That said, live within your means and exercise discipline. By not carrying any credit card debt, you will not only be able to afford and get a mortgage, but it will also help keep the interest rate on the mortgage low.
5. Job stability and history qualification.
Lenders rely on a stable employment history and a couple of years of steady or increasing income to determine what kind of loan you’re capable of paying back. So if you’re thinking about taking a new job, postpone the switch until after you’ve qualified for a mortgage. This is also food for thought for the Carrie Bradshaws and Georgia O’Keefes among us.
6. Pros and Cons of a Co-Signer.
If you have weak credit, a high debt-to-income ratio or an unstable work history, Mom and Dad may be able to help you into your first home.
Using a co-signer would allow you to buy a home that would have otherwise been impossible. You would get the title to the deed, and since you pay the mortgage payments, you are the one strengthening your credit.
Downsides? Going this route puts pressure on your co-signer, aka your parents. Co-signing on the mortgage increases your parents’ DTI ratio and their debt burden. So, say they needed a new car or a refinanced mortgage. They might not be able to get it because they co-signed on your loan.