Gen Z: You May Be Able To Afford a House Sooner Than You Think — Here’s How
While the current housing market is tough on every generation, it is possible for Gen Zers to achieve home ownership despite their financial circumstances. Here’s what Gen Zers need to know before they start shopping for a house and key aspects of the homebuying process to consider as they find the home of their dreams.
First: Find a Trusted Real Estate Agent
Before we dig into discussing financing the purchase of a house, it’s important that Gen Zers have a partner on their side to find their dream home.
Tate Kelly, licensed associate real estate broker with Compass in New York City, recommends finding and using a trusted real estate agent. Real estate agents are free for the buyer; with the seller paying the commission for both the seller’s and buyer’s agents. Ask around for recommendations, talk to everyone you are recommended and see who you vibe with the best. Remember: buying a house is one of the most important purchases in your life. You want to find someone who you can trust and that will give you the best advice throughout the process. Once you find a real estate agent who works for you and your needs, Kelly said to ask every question that comes to mind to be as informed as possible about the process.
Search For a Mortgage Lender
After finding a real estate agent, you’ll need to look for a mortgage lender.
“Similar to your agent search, you will want to shop around with the banks, not only to find a lender you like, but also to get the best rate,” said Kelly. “The best lenders, in my opinion, are the ones who take the time to discuss the entire process with you and present you with all the financing options their bank can offer.”
Know Your Financial Comfort Level
Purchasing your dream home can easily dissolve into a financial nightmare if you take on much more than you know you can afford. Kelly said the first thing you should find out is what you can afford. Then, figure out what you want your budget to be. Even if a bank will finance your purchase up to $500,000, you might not want to spend that much money on a down payment or monthly basis after purchase.
In addition, Gen Zers need to consider closing costs on a home. Kelly said these can vary depending on what you are purchasing and some costs can end up being quite significant.
“Often, I will see homebuyers who are shocked when they find out about their closing costs when it is too late and they’ve already signed a contract and are committed to the purchase,” said Kelly. “You may not be able to get the exact closing costs until a few days before the closing, but your real estate agent or mortgage lender can provide you with estimated closing costs before you ever sign a contract.”
Pay Attention to Your Credit Score
A good credit score plays a pivotal role in purchasing a home. Eyal Pasternak, real estate investor and CEO of Liberty House Buying Group, said to think of it like a seesaw. The higher your credit score is, the lower your mortgage interest dips.
Depending on the kind of loan you plan to take out to purchase your home, you may be required to have a specific credit score. Pasternak said Gen Zers that stay below their credit limit and pay their bills on time will be able to ensure a good credit score.
Build Equity Through Your Down Payment
Once you find a home you’re interested in making an offer on, the real estate agent will help the buyer negotiate with the seller. After the offer is accepted, the buyer must get a loan from the bank or another financial institution and begin the closing process upon approval.
As potential house buyers, Gen Zers need to build equity. Pasternak said this means you need to pay off your loan or mortgage so that your house is worth more than what you bought it for. The best way to build equity is by making a big down payment on your home. Ideally, this should be between 15% to 20%. (This percentage may already be the minimum, depending on your location and the size and age of the house. A certain percentage may be due when you sign the contract.)
In addition to affording a down payment and mortgage payment each month, Gen Zers must factor in a few more outstanding homeownership expenses. Some of these include homeowners’ insurance, property taxes and maintenance and repair costs associated with owning a home.
Homeownership Alternatives for Gen Zers
Some Gen Zers are forgoing the purchase of a traditional home for alternatives that allow for homeownership. Here are a few popular trends in real estate.
Fixer-Upper
A fixer-upper is a house that is available for a low purchase price, but requires maintenance and renovations. Gen Zers in a relationship might decide to invest in a fixer-upper as their new home together. Make sure to discuss any individual expectations and budget before buying, or renovating, a fixer-upper purchase.
Tiny Homes
Solo Gen Zers might consider purchasing a tiny home. It is possible to live in and afford a tiny home, especially since a traditional residence has a much more competitive market. Many tiny homes are prebuilt, but some Gen Zers may decide to build a tiny home to receive additional savings.
House Hacking
House hacking is where the house purchased is a multifamily property. The owner lives in one unit and rents the others out to tenants. The tenants then pay the owner’s mortgage which allows the owner to maintain the house and build equity. If you’ve had previous experience as a landlord, this might be a viable option for Gen Zers.
Kelly is seeing this trend more and more frequently. “Finding a multifamily property that they can co-purchase with friends or family and each party has their own unit is an option, while others might be able to afford to purchase a multifamily home and rent out the other units to offset the monthly costs of owning a home.”
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