Millennials have generally been slow to enter the housing market, largely due to the fact that many are saddled with student debt. The fact that starter homes are far from abundant these days has also kept millennials stuck in the rental market. But if you're a younger member of the workforce who's eager to buy a home, you're no doubt aware that a mortgage is your ticket to ownership. And if you follow these tips, you'll increase your chances of getting approved and snagging a favorable rate to boot.
1. Knock out some unhealthy debt before you apply
You may not have the option of paying off your student loans in their entirety before buying a home -- but that doesn't mean you shouldn't aim to knock out some credit card debt. The lower your existing monthly debt payments are, the more likely you are to get approved for a home loan. That's because mortgage lenders look at your debt-to-income ratio when determining how desirable a loan candidate you are, and the less money you owe, the more that ratio drops (which is a good thing).
Furthermore, if you pay off some revolving debt (that of the credit card variety), you'll lower your credit utilization, or the extent to which you use your available credit. That, in turn, could help your credit score improve, which leads to our next tip.
2. Get your credit score into decent shape
The higher your credit score, the more likely you are to get approved to borrow money for a home. And the best way to bring your credit score into favorable territory is to pay all of your bills on time. Doing so will reflect well on your payment history, which is the single most important factor in calculating your score.
Paying off some existing debt will also help, as just mentioned. The same holds true for correcting errors on your credit report that work against you. You're entitled to a free copy of your credit report every year from each of the three major bureaus: Experian, Equifax, and TransUnion. Read those reports before you apply for a mortgage, and if any details look off (say, a debt you don't remember incurring), investigate and take steps to correct information that's actually inaccurate.
3. Have a steady source of income
Taking out a mortgage means borrowing what's likely to be quite a lot of money, so you'll need to be prepared to show lenders that you earn enough to keep up with those monthly payments. One tricky thing some millennials may be up against is not being salaried workers, but rather, self-employed.
If you're part of the gig economy, the good news is you're not doomed just because you don't have a steady paycheck to point to. All you really need to do is provide details of your recent earnings history that show you're financially equipped to handle a mortgage payment -- namely, copies of the past few years' tax returns.
Another option? If you have an ongoing contract with a high-paying client, showing that to potential lenders could help make the case that you do, indeed, have a steady stream of money coming in.
4. Amass some savings
The more money you're able to put down on a home, the less risk prospective lenders take on (and the less expensive your mortgage payments will be). Ideally, you should aim to come up with a 20% down payment, not only to increase your chances of getting approved for a mortgage but also to avoid private mortgage insurance (PMI), which can get quite expensive.
If you're low on cash reserves, delay homeownership for a bit and boost your savings so you're applying for a mortgage with more money in the bank. You can do so by trimming your spending or by getting yourself a side hustle.
5. Shop around
As a millennial, you might assume that your chances of getting a mortgage are somewhat slim. But if you have little debt, great credit, a solid income, and healthy savings, you're actually quite an attractive loan candidate. As such, you shouldn't hesitate to shop around for a mortgage, because you never know what offers you might wind up eligible for.
Buying a home is a great way to build equity in a place of your own, reap some tax benefits, and avoid throwing money away on rent. Follow these tips, and with any luck, you'll be well on your way to securing a mortgage.
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