Millennials are now the largest group of homebuyers in America, according to the 2019 Home Buyers and Sellers Generational Trends Report from the National Association of Realtors (NAR). But even with homebuyers taking advantage of lower interest rates in 2019, and the Federal Reserve’s most recent decision that rates will remain unchanged in the new year, buying a first home can be difficult.
Experts suggest that total housing costs shouldn’t exceed 28% of your budget, which makes home buying even more of a challenge if you’re trying to save for a down payment while putting money away for retirement and paying down debt.
“That’s super hard, especially for young people in an expensive real-estate market,” Heather Winston, a certified financial planner at retirement plan provider Principal, told Grow earlier this year.
Here are some things to consider that could make home buying more affordable for you in 2020.
1. Home buying assistance programs
Many city and state housing authorities have down-payment assistance programs to help first-time homebuyers. For example, Colorado offers first-time homebuyers down payment grants worth up to 3% of the mortgage, and that money doesn’t have to be repaid.
There are also nationwide programs that offer assistance to first-time homebuyers in certain professions. The Teacher Next Door program awards teachers, administrators, and other school staffers up to $10,681 to put toward their down payment.
Depending on where you work, home buying assistance may even be a job perk: Two percent of employers offer down-payment assistance, and 3% offer mortgage assistance, according to a 2018 report from the Society for Human Resource Management.
2. Low down payment mortgage programs
A lot of experts suggest you aim for a 20% down payment on a new home. But given wage stagnation and rising housing costs, that’s not always feasible.
There are a few low down payment mortgage programs for homebuyers who want to make a smaller down payment. A Federal Housing Administration (FHA) loan, which is backed by the federal government, requires that borrowers put just 3.5% down.
There are some downsides to low down payment mortgages, however. Because a mortgage lender is taking a risk by giving you more than 80% of the home’s value, you’ll probably be required to purchase private mortgage insurance (PMI) until you have more than 20% equity in the home. The cost of your PMI may equal 0.5% to 1% of the mortgage each year. Depending on interest rates, you may end up paying more in the long run.
3. Renting out part or all of your space
By renting out spare rooms or portions of their primary residence, some younger owners are earning rental income to help offset the cost of their mortgages and other housing related expense or to put toward other financial goals.
If renting out your primary residence sounds appealing, start by doing your research, says Erika Safran, a certified financial planner and the founder of Safran Wealth Advisors in New York City. That means looking at home values, real estate trends, and “assessing comparable rents” within the area you intend to buy.
“To buy property and have [to pay] $3,000 a month in mortgage and have comparable renters at $1,200 a month, that’s not going to be a great investment for income purposes,” says Safran. “It may offset some of your expenses, but ideally, a really great investment would be one that covers your entire monthly nut, as opposed to offsetting [your expenses].”
Safran also suggests “diversifying your income across different parties” by taking on more than one tenant if you can. That way, you’re lowering your risk should a tenant fail to come through with the rent. As the homeowner, you’ll still be on the hook for the mortgage and all related housing costs.
Familiarize yourself with local laws. Start by looking at the rules for tenants and landlords in your state at HUD.gov to find out how to handle a tenant’s security deposit and what to do if they don’t pay rent, for example. You’ll also need to make sure laws in your area allow for short-term rentals.
Once you find the right tenants, have them sign a lease, suggests Safran. You can find generic lease forms on Rocket Lawyer and the Nolo network, though you may want to meet with a lawyer to hash out the details or to create a personalized lease, depending on your area.
And keep in mind that as a landlord, it’s your job to expect the unexpected.
“You may have a tenant that’s a demanding person, and they always need or want something. It’s sounds so petty, but what it impacts is the building owner’s time, and you’re not going to take off your job to change a light bulb, or you’re going to have to find someone who does,” says Safran.
“Unless this is your full-time job, you may have to have someone help manage those rentals.”
4. Budgeting for all homeownership related expenses
As a homeowner, you’ll have to account for a lot of ongoing expenses, starting with annual property taxes and homeowner’s insurance. And if you put down less than that 20%, don’t forget the cost of private mortgage insurance.
Owning a home also requires upkeep. Real estate experts suggest putting aside 1% of the home’s purchase price for repairs and maintenance. And if you’re renting out your space year-round or occasionally on Airbnb, you’ll have need to make sure any broken appliances or a leaky roof gets fixed immediately to keep that income coming in.
For starters, you can use a mortgage and housing cost calculator to factor in all these expenses and help you determine whether or not it still makes sense for you to buy.
And then give your new budget a test drive, some experts suggest: Try living on the amount you would have as a homeowner for an extended period of time in advance to get used to it and to make sure you can do it comfortably.