Average Age Of The First Time Home Buyer reaches a new high...again
The average age of the first time home buyer is now 37 years old. This is insane! Today I actually read an article put out by a Deutsche Bank that is saying it's actually 47. The sources that I use and get most of my information from though are stating 37 so i'm going to stick with that number. Either way it's high and that number keeps getting higher and higher every year.
The more and more I talk to young adults it's easy to tell why this is happening. Most young adults think owning a home is just a pipe dream that will never become reality, and if it does it's way down the road. Most of this is due to either a lack of knowledge or an abundance of misinformation. Unfortunately a lot of the misinformation is told to them by the people they trust most, their parents. It's not that their parents are doing this on purpose, it's just that most of them haven't bought a house is 20, 30, 40 plus years and a lot has changed since then.
Below i'm going to answer some of the most common questions I get and go over why it's actually easier to get a home when you're 18 than it is to get one at 37.
What Do I Need To Qualify For a Home Loan?
There are four main things that lenders look at when factoring how much, or if, you'll qualify for mortgage. There's your credit score, income, debt and debt to income ratio.
- Credit Score - Typically lenders are going to average out your TransUnion, Equifax, and Experian scores to come up with an average. Some lenders will just use one of these though depending on their companies policies. This is always changing, but currently most lenders are requiring a 620 credit score. I've seen some go as low as 580, but it also depends on what type of loan you're getting. Each type of loan has their own requirements. Some require less of a credit score than others and some lenders have lower or higher credit minimums than others.
- Income - Pretty self explanatory here, but this is how much you make in a year. This is probably the biggest push back I get from young adults. Typically they won't even look at buying a home because they don't think they make enough money. Income is really the last thing you should be worried about though when getting approved for a mortgage. There's no minimum income required for getting approved for a home loan.
- Debt - This to me is the biggest reason as to why it's easier to buy a home at the age of 18 than it is at the age of 37 and older. When you're 18 you probably don't have any debt and if you do it's probably not much. As we get older we typically get ourselves into more and more debt. We buy cars, get into credit card debt, schooling, or have personal loans for weddings etc. One of my favorite insights is that 99.7% of Americans have a higher net worth when we are born than we do when we die. This is because we have no debt when we are born but just continue to accumulate debt as we get older.
- Debt to Income Ratio (DTI) - This is how much you make in comparison to how much debt you have. Again, typically as we get older this number get worse. When we are 40 we generally make more money than when we are in our 20's and 30's, however we usually have more debt so our debt to income ratio is actually worse. Standards and guidelines vary on this, most lenders like to see a DTI below 35─36% but some mortgage lenders allow up to 43─45% DTI, with some FHA-insured loans allowing a 50% DTI.
Probably the most misinformed information I see, especially from older adults, is how much money you need as your down payment. It's still always shocking to me that so many people think you need 20% down to purchase a home. This was true a long time ago when homes were a lot cheaper but that is not the case now. It depends on these four factors but generally you will only need 0 to 3.5% down. The only time you need 20% down is if you are buying a home that isn't going to be your primary residence. Usually this is an investment property you intend to rehab and flip or to rent out to a tenant.
How Much Money Do I Need To Buy A Home?
Here is a breakdown of all of the costs you will accrue when buying a home. Chances are it's not as much as you think.
- Down Payment - I like to start with this because it's probably the most misinformed information I see, especially from older adults. It's still always shocking to me that so many people think you need 20% down to purchase a home. This was true a long time ago when homes were a lot cheaper but that is not the case now. The exact number depends on the four factors mentioned above, but generally you will only need 0 to 3.5% down. The only time you need 20% down is if you are buying a home that isn't going to be your primary residence. Usually this is an investment property you intend to rehab and flip or buy and rent out to a tenant.
- Closing Costs - Closing costs are going to be things like insurance, title fees, taxes, appraisal fees etc. A good rule of thumb is 1% of the price of the home you're purchasing. The good thing about closing costs is that, unlike the down payment, these can be paid for by the seller, and they often are. We have gotten just under 80% of all of our buyer's closing costs paid for by the seller. As the market shifts from a strong seller's market to a more even market, it gets even more common that the seller pays for this.
- Earnest Money - This is what's needed to officially go into a binding contract on a home. This is basically just a good faith deposit letting the seller know you are serious about buying their home. This is made out too and held onto by the title company and is typically 1% of the purchase price of the home. This is cashed within a few days but will go towards your closing costs at the end. If your closing costs are being paid for by the seller than this amount will go towards your down payment.
- Inspections - These are not mandatory but always highly encourage. I've had many buyer's over the years not do any inspections but it is certainly a risk, especially for how much it cost compared to how much it could cost you down the road. There are many inspections that you can have done. Your main inspections is going to be your building inspection, but then you also have other options like sewer, termite, septic, well, chimney, radon etc. A building inspection is anywhere from $350 to around $600 depending on the size of the home. Termite, sewer, septic, chimney, radon are all between $100 to $150 each.
A few weeks ago I sold a home to a couple who had zero out of pocket costs. Great young couple who had good credit but not much for money so they assumed they couldn't qualify for a mortgage. We got them over to our preferred lender and they got approved. Not only were they approved but they were approved for a zero percent down home loan. The only money they had out of pocket was their earnest money check, but we were able to get the seller's to pay for their closing costs. That combined with their zero down loan, they actually got their earnest money back at closing. This may seem like a very rare scenario but it happens more often than you might think.
First Steps To Buying A Home?
Talk to a lender. Another big objection we get is people just don't know where to start. The first step you should take when buying a home is to talk to a lender. There are many reasons for this.
- One common mistake I see people make is that they'll get on Realtor.com or Zillow or the thousands of other home search sites and start looking at homes several months or years before they're ready to buy. This may not seem like a big deal, but the problem we run into a lot is buyer's will start looking at homes around a certain price point and then when they go to apply for a mortgage they're approved for less. The issue with this is say you've been looking at $300,000 homes and you're only approved for $225,000. Doesn't seem like a big deal but the difference between a $300,000 house and a $225,000 is pretty significant and will just leave you discouraged right off the bat.
- I see a lot of people waste their money on credit repair companies. Almost all of these are fraudulent companies, and even the ones that are not aren't doing anything that you couldn't do on your own. Even if you don't think you have the credit to qualify for a mortgage, talk to a lender. Lenders will tell you exactly what you need to do to raise your credit and good lenders will actually help you in hopes that you'll use them when you can qualify for a mortgage.
Don't go through your bank. It seems like it would be best to get a mortgage through the bank that you use, right? The only time i've seen it be a good idea to go through your bank is if they have down payment assistance programs that a mortgage company can't match. For the most part banks won't have as many options for you when it comes to a mortgage loan. Also banks are open Monday through Friday 9-5 and usually a few hours on Saturday. You won't need your lender much throughout the home buying process, however when you do it's usually going to be after work and on the weekends when they aren't open. Mortgage lenders from mortgage companies works 100% on commission and as a result are available nearly 24/7. Mortgage companies also typically only hire experience loan officers where as banks are generally where you go to start out your career.
Conclusion
There are lots of reasons the average age of a first time home buyer keeps rising, but don't let the fact that you think you're too young be one of them. You are never too young to buy a home, as long as you're 18. The sooner you buy a home the better off you'll be down the road. With inflation and mortgage rates on the rise for the unforeseeable future it's only going to be harder to get a mortgage the longer you wait.
If you ever have any questions about anything real estate related or need a recommendation for a good lender don't hesitate to reach out to me anytime.