Texas transplants Ashlea and Nick Garrison attended a Twin Cities, Minnesota, homebuying class on a Saturday in early May.
The couple met with a personal counselor the following Tuesday, got pre-approved for a loan that Friday, visited eight homes that Saturday and put in a competitive offer $5,000 above the $165,000 asking price the same evening.
The couple, both in their early 30s, learned their offer had been accepted Sunday morning. They closed on their first house — a move-in ready three-bedroom frame-house in St. Paul’s Dayton’s Bluff neighborhood — a couple of weeks later.
“I’ve been covered in paint for about a week now,” Ashlea said last week.
Realtors and lenders say those lightning speeds aren’t unusual in a competitive homebuying market.
They encourage many of their youngest buyers to follow the same steps as the Garrisons, including seeking loan pre-approval and completing first-time homebuyer classes.
And another thing — get ready for a tsunami of documentation.
The best Realtors will “let you know up front you’re going to give me more paperwork than you ever wanted to and I’m going to ask you for some paperwork you’ve already given me,” said John Horton, a vice president and senior lending manager at Associated Bank in Chicago. “I’m going to ask for it again and again.”
Does signing away the next 30 years of one’s life in triplicate sound daunting? Fast turnarounds and an oppressive amount of paperwork are just two of several twists in the journey that is buying a first home in this market.
One of the greatest gifts a Realtor, parent or mentor can give a younger person today may be perspective — an education in homebuying.
A Different Buyer
Millennials — the generation born between 1981 and 1996 — are now 22 to 37 years old.
They’re not so young anymore, but they’re young enough to go wide-eyed into the increasingly competitive market, a market many have avoided for years. That’s changing, and first-time homebuyers are hitting the market in growing numbers, however unsteadily. Nationally, millennials now make up more than a third of all buyers.
“They are a different buyer,” said Tony Haider, a sales manager with Edina Realty in St. Paul. “This is a group that came out of the great recession and watched a lot of their parents lose their houses. They are cautious about their decisions, and a lot of them are carrying a lot of student debt. They want to be informed.”
On the one hand, they’re quick studies, thanks in part to technology. But according to industry surveys, said Horton, “Thirteen percent of millennials who purchased a home felt educated about the process. The other 87 percent did it but they felt really uneasy about it.”
Minnesota’s millennial homebuyers are probably in the right place, with some studies showing the state to have the third-best market in the nation for first-time homebuyers. That’s not surprising given the strong job market and high cost of housing on the coasts.
Millennials have been the largest single group of homebuyers for at least the past four years, according to the National Association of Realtors. They added up to about 34 percent of all homebuyers in 2017, and 66 percent of them were first-timers.
“It’s an absolute growing force,” said Horton, but “the first-time homebuyers, the millennials, need education on homebuying.”
More Educated Than Their Parents?
Take, for interest, today’s interest rates.
Hovering somewhere around 4.5 percent, rates for a 30-year fixed-rate mortgage are almost a full percentage point above where they were in 2016 — but less than half of what they were in the 1990s. That’s either cause for alarm or continued celebration.
“For the first-time homebuyer — you can group millennials under there — a 4.5 percent interest rate might feel really high, because all they’ve heard all their lives is ‘rates are the lowest in 10 or 15 years,'” Horton said. That’s not much of a deterrent to older buyers like baby boomers and empty-nesters, who may recall interest rates that reached nearly 17 percent in 1981. “They’ve seen those rates up higher.”
Others call young buyers among the fastest learners.
“One of the characteristics I’ve found with millennials is that with all of the access to online data, they are much more educated coming in than their parents were as first-time homebuyers,” said Denny Bennett, a mortgage originator with U.S. Bank in St. Paul, who worked closely with the Garrisons.
Bennett, who said his views are not necessarily those of his employer, points out, however, that education is different from experience.
“[They] often come in knowing a lot of the lingo, but don’t necessarily have a great deal of depth to their mortgage knowledge,” he said.
Not Necessarily Looking for Starter Homes
And it’s important to keep in mind that after years of renting in different cities or living with family, millennials aren’t always in the market for the lowest end of the market. A third are ready for their second home. Horton said that nationwide, the average purchase price for a home bought by a millennial was $325,000.
Buyers in their 30s, for instance, may be new to the market, but that doesn’t always mean they’ll settle for starter homes and fixer-uppers, especially if they’ve saved up some cash.
“A lot of them are in the tech industry — a lot of nice degrees,” Horton said.
For the Garrisons — two of the latest homeowners in the Dayton’s Bluff neighborhood — the key take-away from their experience was the need for speed.
On a Saturday in early May, school psychologist Ashlea, 32, and technology sales specialist Nick, 31, attended a NeighborWorks class for first-time homebuyers.
The following Tuesday, they met with one of the nonprofit’s home counselors to discuss their credit reports and other particulars. U.S. Bank pre-approved them for a loan that Friday.
“The next day, Saturday, we spent the day going to different houses,” said Nick, who recalled visiting eight sites in a row. At 6:15 p.m., they called their Realtor to express interest in a property. “That’s when we found out we had less than an hour — they had already called for best and final offers.”
The next morning, they learned their offer had been accepted. Their closing took place in days. By the end of the month, they were St. Paul homeowners.
“It was such a fast process,” said Nick, who moved to the Twin Cities from Texas a year ago. “We casually looked when we first moved here, then took a break for the winter. But right after that class, things moved incredibly quick.”
Here are a few more things for buyers, sellers and Realtors to keep in mind.
Do Your Homework, Know Your Credit Score
NeighborWorks Home Partners, a nonprofit home-ownership center with offices in St. Paul and Minneapolis, offers tips, online resources and classes for first-time homebuyers.
They encourage doing your homework — knowing your credit score before you begin the homebuying journey, and taking time to improve it if your score is low enough to trigger a higher interest rate.
“Really, the main thing is we want people to know what to look for in a mortgage and in a home,” said Amanda Welliver, a spokeswoman for NeighborWorks. “We want them to know their rights as a borrower, and how to shop for a loan so they can get the best rate.”
Another piece of advice from NeighborWorks is to get multiple mortgage-rate quotes. Rates offered by lending institutions can vary widely. A single phone call could save $1,500 over the life of the loan, and five rate quotes could save twice as much, according to national mortgage-buyer Freddie Mac.
To help first-time homebuyers with down payments, there may be low interest and no-interest loans available through your city, your county or your lender’s Community Reinvestment Act officer. Some of these loans don’t have to be paid back until a home is resold or refinanced. It never hurts to ask.
High Debt, Low Inventory
As a generation, many millennials aren’t just confronting staggering student loan debt and a post-recession lending climate that has made access to credit more difficult than a decade ago.
As they enter the housing market, they should prepare to find high costs and low inventory — a limited number of homes being advertised on the open market despite a growing number of buyers in the metro areas they’re most attracted to.
“For the longest time, there weren’t homes on the market,” said Horton. “Once a house popped up on MLS (the multiple listing service), there were multiple offers before there was a sign in the ground.”
Nevertheless, Bankrate.com lists Minnesota as the third-best market in the nation for first-time homebuyers, thanks in large part to a strong job market, more affordable home prices relative to coastal states, and credit availability.
Pre-Approval Vs. Pre-Qualification
In a competitive market, one way to get ahead of the competition is to get pre-approved for a mortgage loan, Horton said.
“It makes you a much stronger buyer in the eyes of the Realtor and the eyes of the seller,” he said.
Getting pre-approved is different from getting pre-qualified.
“A pre-qualification is you calling me and saying ‘Here, John, here’s how much I make, here’s how much I can put down.’ We never pull your credit,” Horton said. “A pre-approval, on the flip side, is the file physically goes to an underwriter, who verifies your assets, verifies your employment. We pre-approve it as if it’s a live deal. The only thing missing is a property address.”
Consider a Fixer-Upper
Realtors say many millennials are open to buying smaller homes than they lived in as youngsters — but they appear less open to fixer-uppers. Loosening personal standards and thinking of that first home as a “starter home” could help.
“We’re seeing them not want as large of a house,” Haider said. “Even with new construction, they’re building smaller houses. They want more of a community, walkability, amenities close by — that’s what’s important to them, life outside of the home. It’s important for them to have a lot of the items done. They’re not as much looking for a fixer-upper. They want that HDTV-perfect house that they see. I think that goes back to being cautious — ‘Is something going to go wrong with that house?’ “
Private Mortgage Insurance
Buyers putting down less than 20 percent in down payment for a house can expect to pay for mortgage insurance — anywhere from $50 to $200 or more per month — which is intended to lower the risk to the lender.
“It really is credit-specific,” Bennett said. “And it makes a huge difference.”
Buyers might qualify for private mortgage insurance — PMI — which varies with the size of their down payment or credit score. In that case, they can ask their lender to cancel their PMI once the mortgage has been paid down to 80 percent of the home’s original appraised value — so $160,000 on a home that was appraised at $200,000 when you bought it.
PMI is supposed to go away automatically at 78 percent, but don’t leave it to the bank to police itself. It’s a good idea to monitor a PMI like a hawk.
Otherwise, home buyers will find mortgage insurance provided through the Federal Housing Administration, which is required of all FHA-backed loans. Depending upon how much down payment they are able to make, FHA mortgage insurance can be harder or even impossible to get rid of, at least until they refinance their property.
