Smart Moves by Ellen James Martin

Tips for Younger Buyers

This spring’s college grads are entering a job market that economists say is nothing short of spectacular. Unemployment has fallen to a mere 3.6 percent, the lowest level since 1969. But are all “Generation Z” -- referring to people born after 1995 -- grads now in a good position to buy their first home? Not necessarily, say financial experts, who urge caution before taking the plunge.

“The economy ... could change dramatically, making it critically important (that) you try to plan ahead before you buy,” says James Ludwick, the founder of a financial advisory firm with offices in five U.S. cities.

Granted, many potential young buyers are better positioned financially than were their older siblings at the same age. They have only dim memories of the financial crisis that upended the economy a decade ago. But that doesn’t mean they’ll always benefit from favorable financial conditions.

Dale Robyn Siegel, a veteran mortgage broker, is enthusiastic about homeownership for people in their 20s who’ve mapped out their futures and don’t intend to return to grad school or move out of state for a career shift. But she says all buyers, regardless of age, need to plan ahead to resale when choosing a property.

“Absolutely everybody needs an exit strategy because one day you’ll be selling that home,” says Siegel, the author of “The New Rules for Mortgages.”

Here are a few pointers for first-time buyers of any age:

-- Develop a multi-year plan to see if the time is right to buy.

Ludwick stresses the importance of envisioning your future before locking yourself into homeownership.

“Unless you can visualize yourself staying in the same house for seven years, don’t buy one now,” Ludwick says.

He urges recent college graduates to think carefully about their career trajectory, including any plans they may have for graduate or professional school. Your seven-year plan should also cover your financial priorities.

Of course, you can always hire a financial planner or a life coach to help create your multi-year plan. But if such coaching is not in your budget, you can also find guidance in various personal planning books. One that Ludwick recommends is “The Seven Stages of Money Maturity,” by George Kinder.

-- Think neighborhood schools.

Like all buyers, 20-somethings who wish to make the most prudent possible housing selection should strive to buy in a neighborhood with excellent resale potential. This is often a community with strong public schools that’s also located close to a major employment center.

“Schools are tremendously important, even if you don’t want kids,” Ludwick says.

But in choosing a home in a coveted neighborhood with solid schools, you’re better off buying a small place in good condition than a larger home with significant issues, he says.

-- Investigate your credit situation.

Siegel recommends that those contemplating a home purchase take a preliminary look at their credit picture. That way, you’ll have a crack at correcting any errors on your credit reports before your lender spots them.

The three key credit reporting agencies are Equifax, Experian and TransUnion. Under federal law, you’re entitled to a free copy of all three credit reports once a year. To request these, go to annualcreditreport.com or call 877-322-8228.

It’s also wise to get a copy of your credit scores. Such scores, which draw on data from the major agencies, provide a quantitative measure of your credit risk. Most lenders use FICO scores, pioneered by the Fair Isaac Corp. For a fee, you can obtain your FICO scores through the company’s website, myfico.com.

Did you resist the temptation to sign up for credit cards or take out other loans during your college years and beyond? If so, you may be shocked to find you have no FICO score at all. Unfortunately, this could pose a significant near-term barrier to mortgage approval.

To remedy this situation, Siegel recommends you open two to three credit lines, ideally including major credit cards. Then make modest use of these lines, ensuring you make your monthly payments on time.

“Unfortunately, it can take 12 to 24 months to establish a good credit history and there are no quick shortcuts,” Siegel says.

-- Don’t depend on your parents’ help to gain mortgage approval.

The parents of many 20-somethings are willing to help their offspring amass the funds to make a down payment for a home purchase with a financial gift. And some are even willing to co-sign their children’s mortgage application, making them personally liable for repayment of the home loan.

However, in an era of stringent loan approval standards, your parents’ signatures on your mortgage application no longer guarantee that your loan will be approved, even if they’re wealthy and have sterling credit, Siegel says.

“Nowadays, the kids have to qualify for the mortgage on their own merits. Having your parents co-sign is just the frosting on the cake,” she says.

-- Attempt to steer clear of a home that needs expensive repairs and upgrades.

Young adults who are energetic and motivated can usually handle cosmetic improvements or upgrades that are reasonably straightforward, such as painting or the installation of kitchen tile. But most lack the expertise to take on major remodeling projects that involve electrical or plumbing work or extensive carpentry.

“Unless you’re exceptionally handy or have friends or relatives who are contractors, it’s usually a big mistake to buy a fixer-upper,” Ludwick says.

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