Mortgage Readiness for Millennial's
Updated: Feb 5, 2019
A recent survey found that one of the top reasons Millennial's purchased a home was to provide more space for their dog. In fact, 33% of those surveyed said the reason they chose to buy a home was for their dog, or so they could get a dog. So what exactly do you need to think about to get yourself started on the path to providing pooch with new digs?
Unfortunately, mortgage readiness is not a class they teach in school, however, with a few steps taken at a young age you could be ready to buy your first home a lot sooner than you think.
The most important factor you will need to start working on is your credit score. Typically, lenders want to see 2 revolving trade lines reporting to your credit bureau. A revolving trade line is a line of credit or a credit card type of debt. When you are younger and have no credit to start with you may need to get a co-signer on your card, or put down a deposit in order to obtain one, but it is important to begin establishing credit at a young age.
Utilization of those cards is important as well to ensure you establish a good score. It is recommended to only use 30 - 50% of your available credit limit on a month by month basis and ALWAYS pay your bill on time. Even if you can only afford to make the minimum payment - it must be on time every month, and that goes for all of your bills as well. Late cell phone payments or utility bills will report negatively to your credit bureau which will impact your credit score. Missed/late payments or bills that are sent into collections will carry a negative impact and remain on your credit score for at least 5 years so it is important to make sure you are paying those bills on time.
Saving for a down payment is probably the largest hurdle that this generation faces. With housing costs being high in general, rents are higher and so are purchase prices meaning youth are facing a double whack on the ability to save. It costs them more to rent cutting into their ability to save, and they have to save more to get to the minimum required down payment. Fortunately, there are some options for relief for those unable to save.
Gifted down payment - Parents, siblings or grandparents are allowed to gift a down payment to use for the purposes of purchasing a home without them needing to be on the mortgage. If you are buying a property from a family member it is possible (with some lenders) for them to gift you the equity stake in the house removing the need for the down payment.
Flex-Down programs - Some lenders offer flexible down payment programs which allow you to borrow the down payment off a line of credit, credit card etc. You will need to have a solid credit score established and will need to be able to afford the payments on the borrowed amount as well as the mortgage payment, however, this option tends to work well for people who are not looking to spend at the top end of their purchasing price range.
RRSP First Time Home Buyer Plan - You can withdraw RRSP's to use as down payment under the FTHB plan. The program allows you to withdraw your RRSP without paying the taxes and gives you 15 years to repay the funds back into the RRSP before they will charge the taxes on the withdrawn amount. This program works great for people who have a work contributed RRSP benefit as your employers contribution will re-pay those borrowed funds in no time.
If one of these programs does not apply to you, then you may need to hunker down and do it the good old fashioned way. Set a recurring transaction to your savings account for a set amount of money each month and watch your savings grow.
A nice vehicle seems to be a right of passage in our province, especially since we deal with some pretty treacherous conditions in the winter months. However, before you head out and sign up for that lifted pickup truck with heated steering wheel, heated seats and a high end price tag it is important to know a few things about vehicle debt.
First - vehicle loans are not subject to the same lending rules that mortgages are, which is why virtually anyone can get a car loan but not everyone can get a mortgage. Therefore, it is likely you will be approved for a much more expensive car than you realistically should purchase in comparison to your wage.
Secondly - A vehicle loan is amortized over a short period of time, typically 5 - 8 years which means the monthly required payments are quite high- sometimes as high as a mortgage payment! That monthly payment amount dramatically affects your Total Debt Service ratios which means the higher the car loan, the lower the mortgage you can obtain.
For comparison, let's say you have landed a sweet professional gig earning $65,000/year after University.
With no debt payments, you could be shopping for a home around $320,000.
With a $600/month vehicle payment on your file, you would be looking at houses around $260,000.
And with a $800/month vehicle payment you would be looking at houses around $220,000.
The type of vehicle you choose could mean the difference between not buying at all, needing to wait 5 years until your vehicle is paid off, buying a lower budget property or buying the place with a great yard for your furry friend.
Expectations of what you want vs what you can afford can be the hardest part of the process. In Alberta particularly, the boom and bust nature of our economy has seen generations of buyers under 30 years old signing into massive mortgages on the backs of inflated paycheques due to overtime hours in the oil industry. We are seeing all too often, home owners struggling to make their mortgage payment due to a cut in wages or overtime hours.
It is important to consider that just because you CAN spend up to a certain amount of money, does not necessarily mean that you should. Your first home purchase does not need to be glamorous, it needs to be functional and affordable so that you can build equity, save more money, enjoy your life and not end up 'house poor' where you can't afford to do anything as a result of your mortgage payment.
Statistically, it is likely that you will only stay in your first home for 5 years anyway after which point you will either sell and upgrade, or buy another property for yourself and keep your first place as a rental property. So make sure you consider what your ideal monthly budget is for purchasing before you start looking at properties. You will want to factor in your mortgage payment, property taxes, home owner insurance, condo fees if applicable and utilities when considering what you genuinely can afford on a monthly basis for housing without stretching yourself too thin.
At the end of the day, buying your first home is a stepping stone to financial freedom. Channeling your money into equity rather than rent is meant to release you of a burden, not create one.
If you think you might be ready to start the journey, let me know. We can work out a plan to get you on track and you may be surprised at just how close you already are.