While it’s not unusual for young individuals to want to buy their own homes, the mortgage industry has gone through drastic changes since members of the Baby Boomer generation bought their first homes. To help today’s young buyers stand a better chance of being approved for a home loan and understand how the process works, Wyndham Capital Mortgage offers a few preparation guidelines to help plant the seeds of success.
How Millennials Can Prepare For a Mortgage
Low Down Payments Are an Option
Usually, it’s recommended that aspiring home owners have a down payment of at least 20 percent of a property’s asking price. Even though a large down payment reduces the full amount that needs to be borrowed, it can take a while to save up such an amount. There are now standard loans that only require a down payment ranging between three and five percent, and home loans insured by the Federal Housing Administration require a down payment of 3.5 percent. It’s worth mentioning that low down payment mortgages commonly require the borrower to have either mortgage insurance or pay a funding fee.
Start Documenting Income
A young aspiring home owner should also prepare to show lenders thorough documentation of income. Bank statements, income tax returns, W-2s and related financial statements are common examples of paperwork required to apply for a loan. It’s a good idea for Millennials to start keeping up with these documents (either electronically or with paper copies) to make them easier to find and send to lenders. This information helps lending agents determine whether a borrower would be able to pay back a loan.
Wrangle Student Loan Payments Under Control
Student loan debt has become common with young professionals, but it doesn’t have to be that big of an obstacle when applying for a mortgage, at least not when those debts are well managed. Specifically, young borrowers should stay current on their student loan payments and take care of as many of their smaller debts as possible before applying for a home loan. Lenders compare a borrower’s income with her or his monthly debts, such as student loan payments. By keeping up with loan payments and taking care of other debts, Millennials can free up their income and better their chances of home loan approval.
Give Your Credit Score an Upgrade
Lenders of all ages will do well to do everything they can to improve their credit scores. Younger home owners may not have the extensive credit history of most older mortgage applicants, but any credit experience they do have should be favorable. Copies of credit reports should be requested from Experian, TransUnion and Equifax, which are the three most prominent credit bureaus. You are entitled to one free credit report per year from each of the three credit bureaus. Any mistakes or discrepancies found on reports should be cleared up before applying for a mortgage.
Those who aren’t currently planning on buying a home but know they will be in the future should take steps to improve and protect their credit scores. It can take a while to improve a credit score, and borrowers need every advantage they can get to receive the most favorable loan terms.
Remember the Closing Costs
Millennials should also remember those pesky closing costs when determining how much they need to save for home ownership. It’s possible to convince the seller to pay some of the closing costs, but this is not something on which buyers should depend. Instead, it’s better (and often more realistic) to be prepared to pay a percentage of the closing costs up front as well as at closing. That being said, there’s still the option to factor closing costs into the mortgage, which can increase the loan’s interest rate.
Younger buyers and borrowers should arm themselves with trusted information and patience on their quest for the perfect mortgage. What they lack in experience they can make up for in preparation. Need help with preparation? Check out this First Time Home Buyer's Checklist that will help to keep you on track.