Check out these four tricks used to get you to spend more (without you knowing it).
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First-time home buyers have always been a driving force in real estate because they enable existing homeowners to trade up to bigger homes and create demand for new construction. In fact, first-time buyers typically make up 40% of the market.
But lately, many wishful buyers have been struggling to latch on to the American Dream—and that’s causing lackluster home sales to linger in spite of economic recovery. According to the National Association of Realtors (NAR), only 29% of recent sales could be attributed to first-time buyers.
So what’s holding them back? No single factor is to blame, but two factors are creating major bumps in the road to home ownership.
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Student Loans Put the American Dream on Hold
The average college graduate owes more than $27,000 in student loan debt, and this financial burden is keeping many young Americans out of the housing market. Three-quarters of young Americans say student loans have hampered their ability to buy a home, according to American Student Assistance. And buyers lucky enough to make the leap to home ownership listed student debt as the number-one hurdle to saving up a down payment in a recent NAR survey.
Student debt not only makes it hard to save a down payment but also affects buyers’ ability to obtain a mortgage because it can throw their debt-to-income ratio out of balance. Many lenders have tightened their credit requirements in the wake of the recession, making it more difficult for borrowers with high levels of debt to qualify for a mortgage.
Many Affordable Homes Are Still Underwater
As the economy pushes toward a full recovery, underwater mortgages—mortgages that are more than the homes are worth—are fewer and farther between. According to Zillow, negative equity rates have fallen to 19%, after peaking at 31% in early 2012. That’s great news!
The problem is that the market’s most affordable homes are predominately the ones that are underwater. In fact, 30% of homes with a mortgage that were priced in the bottom third were underwater, compared to 11% in the top third and 18% in the middle third. Homeowners who owe more than their home is worth usually aren’t busting down the doors to plant a for-sale sign in their yard. And that means limited choices and steeper competition for first-time home buyers.
Push Through the Roadblocks
If you still rent and wonder if you’ll ever be able to purchase your first home, don’t lose hope. You‘ll get there! It just takes a little patience in the process. Make sure your first home is a blessing and not a curse by laying the proper financial foundation first.
1. Kick Sallie Mae—and any other debt—to the curb.
2. Stockpile three to six months of expenses in your emergency fund.
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3. Save up enough cash to put 10–20% down on your home.
Then—and only then—will you be ready to buy your first home. You want to be sure your bank account can handle it if the roof springs a leak the same week your hot water heater goes out!
Once you start shopping, don’t be tempted to stretch your dollars to the next level if you can’t find a home you like in your price range. Keep your monthly payment to 25% or less of your take-home pay on a 15-year fixed-rate conventional mortgage. No home is worth sacrificing your retirement or kid’s college fund.
Success Doesn’t Happen Alone
There’s a lot to learn in your first home-buying experience. Partner with a real estate pro who has the heart of a teacher and takes time to listen to your needs and answer your questions. A good agent brings at least five years of experience to the table and knows the market well enough to find a great deal on the home that’s right for you.
Need help finding a pro you can trust? We can connect you with an agent in your area who will give you the same advice Dave would.