In Debt? No Savings? You May Still Be Able To Buy A House (Not That You Should)
Whenever a study is released about millennials and money, the findings are usually depressing.
But one recent study caught my eye because it contained some good news for once.
Despite their well-publicized economic challenges, millennials represent the largest percentage of recent home buyers, according to the National Association of Realtors 2015 Home Buyer and Seller Generational Trends study.
Now if you and all of your friends have debt, aren’t making a lot money, and have little or no savings, you may tempted to call B.S. on this study.
But I promise – it’s true. Homeownership isn’t just for “adults” in their 40s. We’ll leave whether you should buy a house while in debt for other articles (see why it’s OK to rent and how to know you’re ready to buy home).
But here’s how you can stop paying rent and start paying a mortgage, if you so choose:
Consolidate your credit card debt and student loan payments
You can buy a house while in debt. It all depends on what portion of your monthly gross income goes towards paying the minimum amounts due on recurring debts like credit card bills, student loans, car loans, etc.
- Most lenders will not approve you for a mortgage if your debt-to-income ratio exceeds 43 percent.
- So let’s say you make $46,000 per year, the average full-time salary of college grads in 2012.
- Let’s say that like four in ten millennials, you spend half of your paycheck paying off your debts.
- That means your gross monthly income is $3,833.
- $1,916 goes towards debt.
- So your debt-to-income ratio is 50 percent. Learn more about how to calculator your debt-to-income ratio here.
Banks won’t approve you for a home loan, unless you do one of two things:
- Start making more money
- Lower your monthly recurring debt payments
Getting a higher paying job may seem like the obvious solution. But that could take a long time (and just think of all of those interviews). And it may actually hurt your chances for getting a bank loan, as some lenders are reluctant to provide loans to people with new jobs.
A better solution is to consolidate your debts.
“The number one thing to do to reduce the debt-to-income ratio without paying off the obligation is to consolidate debts,” says Scott Sheldon, a senior loan officer with Sonoma County Mortgages. “Consolidating credit cards or consolidating student loans will reduce the minimum monthly payment, which will lower the debt-to-income ratio and improve borrowing power.”
In other words, rather than paying off six credit cards each month, consolidate those balances into one, lower monthly payment. A growing market for personal loans makes this easier. For example, if you have good credit, you can get a personal loan of up to $35,000 to consolidate your credit cards — sometimes at interest rates that are better than the cards themselves.
Consolidate your student loans too. “Student loans have the same effect as a car loan or credit card,” Scott says.
Now recalculate your debt-to-income ratio. Is the number lower? If so, a bank may give you a home loan.
Remember: You only need a small down payment
When I started thinking about buying a house a few years ago, I assumed I would need a 20 percent down payment. Given that I had very little savings, I assumed I’d be dealing with landlords for the rest of my life.
But I didn’t need anywhere near 20 percent.
“20 percent down is what people paid 20 years ago,” Scott says. “The minimum you need today is 3.5 percent down for an FHA loan or 5 percent down for a conventional loan.”
Of course, the more you put down, the less you pay each month, and the better interest rate you’ll get.
But I only put 5 percent down and my interest rate is just shy of 5 percent.
Your retirement accounts may also offer a potential source of funds for your down payment. For example, you can use up to $10,000 of an IRA, penalty-free, to purchase your first primary residence. If you have a 401(k), you may be able to borrow money from your account and pay it back over time.
Money Under 30 would only recommend tapping retirement funds as a last resort, but according to a study by Ameriprise Financial, people do it: 17 percent of millennials have already taken a loan from their retirement plan.
Convince your family to gift the down payment
Remember when you were a kid and asked your parents for an expensive Christmas gift? This could be the time to ask them for an even bigger one – a down payment.
Banks will want to make sure it’s a gift, not a loan. “Borrowed funds for a down payment is a lending no no,” says Scott.
Of course, you could work out a deal to repay your parents at some point. Just don’t let the bank know about it.
Scott suggests the giftor sends the money directly to an escrow account, bypassing the main buyer’s account. Otherwise, the giftor will need to provide a letter verifying the money is a gift, not a loan. The giftor may also have to provide bank statements.
“The more paperwork that’s involved, the more things get dicey,” he says.
Again, just because you can get a loan doesn’t mean you should
Let’s say you take all this advice and qualify for a home loan.
Before you become addicted to Zillow or Realtor.com, spend some time mulling over if you’re really ready to commit, and how much house you want to commit to.
“Stretching your debt-to-income ratio to the maximum 45 percent allowance is a risky proposition unless your income is poised to rise in the future or any other consumer obligations you have are poised to be paid off,” Scott says. “You want to be able to buy a home you can afford no matter what economic curveballs are thrown your way.”
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SOURCE: Money Under 30 – Read entire story here.