They say your home is your castle. If you've been renting your castle and dreaming of owning a home, you aren't alone. Homeownership rates have tumbled to a 20-year low -- 63.9 percent in the wake of the Great Recession -- as financial issues including unemployment, underemployment, student loan debt and tight credit conditions have weighed on potential homebuyers.
There are signs that may be changing, however. People 34 and younger are the largest group of homebuyers, according to a recent National Association of Realtors study that looked at 6,572 responses from a survey of homebuyers in 2014. Millennials represented 32 percent of all recent buyers, while Generation X, including those ages 35 to 49, accounted for 27 percent. The median age of millennial homebuyers was 29, their median income was $76,900 and they typically bought a 1,720-square foot home costing $189,900, according to the NAR.
"The No. 1 reason they want to buy is just to own a home of their own," says Jessica Lautz, director of survey research and communications at the National Association of Realtors.
If you'd like to trade in your rental for a place to call your own, here are the steps you need to take.
Start saving now. It takes time to build up enough savings for a down payment. "Among first-time buyers, 28 percent save for six months or less, while 13 percent save for more than five years," Lautz says
The typical down payment for a home is generally 20 percent, but there are a variety of programs that can open the door to homeownership with as little as 3 percent or even no money down.
First-time homebuyers with low to moderate income levels may be able to qualify for a MyCommunity mortgage product through Fannie Mae with a 3 percent down payment. "Community mortgage products are better than [Federal Housing Administration] loans because the mortgage insurance is much less expensive and the down payment requirement is lower," explains Gina Pogol, consumer finance editor at Charlotte, North Carolina-based LendingTree.
The FHA backs several kinds of mortgage programs. "The 203(b) is the most commonly used. It's used to purchase or refinance homes with 3.5 percent down, as long as they have a credit score of 580 or higher and qualify for financing," Pogol says. However, she adds, "The average score of borrowers who actually get approved is closer to 700. Another FHA program is the 203(k), which can be used to buy or refinance property that needs to be built or rehabbed."
Start saving by setting up a special savings account and automatically transferring a set amount into it each month. Deposit any bonuses or gifts into this account as well. How long it will take to reach your down payment goal depends on the amount you need and how much you are able to sock away each month. "For someone buying a $200,000 property with 3 percent down, saving $500 a month, it will take a year. And there are still closing costs to deal with," Pogol says.
Consider alternative down payment sources. There are other options in addition to your personal savings, which include gifts from relatives or friends or a withdrawal from your individual retirement account for a first home purchase. If you are lucky enough to have a generous relative or friend willing to gift funds for your down payment, you are required to furnish an official letter documenting that for your lender.
Zev Fried, a senior financial planner at Los Angeles-based JSF Financial LLC, warns against tapping your retirement funds for a down payment, however. "From a planning perspective, pulling from a retirement account for a down payment is often the worst option. A retirement account is for retirement, and should only be tapped for dire emergencies, as there are usually penalties and taxes when one withdraws money from these accounts," Fried says.
Minimize payment shock. Consider how much you can actually afford, starting by looking at what you are paying in rent. If you are looking to buy more house than your current rent payment, Pogol recommends potential homebuyers "test drive" the higher monthly payment.
"If their current rent is $1,000 a month and they want to buy a home with monthly principal, interest, taxes and insurance -- called a 'PITI' payment -- for $1,400 a month, I'd recommend that they put $400 a month into savings and see how hard or easy that is," Pogol says.
Understand inventory conditions. Once you start shopping for a home, understand that current tight levels of inventory, or the number of houses on the market, could require patience and compromise.
"We are now seeing inventory is the top reason slowing down and stopping potential buyers. Among recent homebuyers, from the 2014 Profile of Homebuyers and Sellers, the hardest task in the homebuying process is just finding the right home," Lautz says. "Most first-time buyers have to compromise on some aspect of their wish list. Seventy-five percent of recent first-time buyers had to compromise on at least one wish-list item, most commonly the size and price of the home."
Although the path to homeownership can take some time, there are financial benefits, including the mortgage-interest deduction on your income taxes. However, the intangible benefits often outweigh economic factors. Soon you may be spending weekends fixing up your castle and turning it into your dream home.