Smart Moves by Ellen James Martin

Tips For Cost-Conscious Young Homebuyers

She's a 21-year-old college senior who's been a resolute saver since childhood, when she collected coins her older brothers carelessly let drop behind the sofa cushions in their family home. Through college, she's saved by money living with her parents and working part-time jobs.

Now with a war chest of $10,000, the young woman has a firm plan. After graduating next spring, she'll buy a modest house in a middle-income suburb near her new full-time job as a health care manager. Her savings will help fund her down payment and closing costs.

"I want to build ownership. It's ridiculous to throw money away on rent," she says.

In the years after the housing bubble burst, a number of real estate analysts asserted that many in the millennial generation -- now age 18 to 34 -- were indifferent to homeownership. But housing economists say that's no longer true, if it ever was.

"We're seeing an influx of millennials driving the market now. Almost half the buyers within the last year were in this age band," says Aaron Terrazas, a senior economist for Zillow, the real estate data firm.

Terrazas says many millennials have done the math and realize that, given high rental costs, ownership is often the cheaper option. But even though low down payment mortgages are available to qualified buyers, he says most first-time purchasers seek to amass as big a down payment as possible.

"With a larger down payment, they can decrease their monthly mortgage costs," he says. "Yet with rising rents and student loans, it's incredibly difficult for millennials to save."

Raising funds for a home purchase isn't the only challenge confronting first-time buyers. In popular areas, many also face rival purchasers competing for available homes due to a shortage of entry-level inventory.

Are you a cost-conscious homebuyer who hankers to get beyond the rental stage? If so, these few pointers could prove useful:

-- Look for a mortgage lender to help you set a spending ceiling.

Real estate specialists always advise first-time buyers to determine their mortgage borrowing capability before heading out to look at property. That way they won't get their hearts set on a property that's unreachable for them.

"Getting a mortgage is very tough for first-time buyers," says Tom Early, a veteran real estate broker. He says purchasers should make sure a lender takes them through a serious pre-approval process.

He encourages first-timers to meet face-to-face with a lender and spend up to an hour in that meeting -- or enough time to ensure all their questions are answered. Soon after this meeting, the lender should issue a "pre-approval letter" that spells out their full borrowing capacity.

-- Prepare a household budget before touring property.

Prior to granting you a pre-approval letter, your lender will likely ask about your major obligations, like payments on your credit cards and car loans. But chances are the lender won't ask about your other obligations, such as a commitment you've made to a religious or charitable institution.

"When your lender sets your borrowing limits, he doesn't see the full picture. That's why I suggest you do a personal budget before deciding how much to spend on housing," Early says.

First-time buyers should also take into account the money they'll need to spend to put their property into move-in condition.

"It doesn't matter how wonderful a house you buy, the odds are you'll want to make it more to your tastes. At the minimum, you'll probably want to paint, replace worn carpeting and improve your yard," Early says.

Also, make sure you factor in your carrying costs for homeownership -- such as your energy bills.

"Pre-approval helps you define your top limit on financing. But that's just the beginning. You have to decide for yourself how much you're comfortable spending. These days, almost all buyers stay under their borrowing ceiling," Early says.

-- Consider only a "plain vanilla" fixed-rate mortgage.

John Rygiol, a long-time real estate broker who heads his own firm, says there are few instances that justify first-time buyers taking an adjustable rate mortgage, especially with fixed-rate mortgages currently hovering near historic lows.

A traditional fixed-rate mortgage is especially helpful at a time when rates are projected to rise, Rygiol says.

"Low and stable mortgage interest rates are one of the few benefits left in this economy," he says.

-- Make sure you think about resale before choosing a home.

No matter how long you intend to live in your first home, Early says it's smart to pick out a property that should be easy to sell when it's your turn to do so.

"Think about the back end of your transition. Remember that someday that house will be on the market again," Early says.

Keeping in mind your budget constraints, what features are ideal when choosing a house that's very marketable?

"If you can afford it, always try to buy a place with plenty of bedrooms," Early says.

What other features should you look for?

"Ideally, you'll want a place with at least two bathrooms, or a minimum of a bath and a half. Also, remember that many buyers are strongly attracted to a family room with a fireplace that's big enough for a very large TV," Early says.

Even more important is finding a prized neighborhood location. Well-rated schools, prime shopping and good roadway access are all features that help define a popular neighborhood, Early says.

"Never compromise on location," he says. "You'll be vastly happier owning an asset in a strong neighborhood. Even in economic downturns, property in strong neighborhoods holds its value better."

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)