If you’re banking on two salaries to afford your dream home, here’s a suggestion that represents a smarter approach.
Many parents have gazed in wonder at the dream homes their realtors show them. The quartz countertops, reasonable commutes and fantastic school systems come with one glaring obstacle: the down payment. Realtors will bend over backwards to make a sale, regardless of the financial consequences buyers will be tasked with because… they are sellers.
Millennial parents are starting to realize that urban living, and raising children, do not always go hand-in-hand. The challenge securing space and security in tandem with an expanding litter of children are slowly pointing this generation towards the towns and villages they once shunned. The Wall Street Journal reported on this trend in July and the landscape underpinning the housing industry will respond accordingly.
What are new and young buyers looking for? Out… are homes that are distant from town centers. Walking distance to commuter trains and buses? A huge plus. I have witnessed this firsthand in the suburbs outside New York City and this trend will expand as Millennials come home to roost.
The challenge this generation faces is how to afford the down payment. With the burden of college-student loans and high urban rents, what can Millennial parents do to better position themselves to buy?
Consider the average home, and required 20% down payment in order to avoid higher mortgage rates or PMI-related fees. A home that costs $500,000 would require a $100,000 down payment. For many, this is a challenge and finding a suitable home (that’s not ransacked) for $500k can also be daunting in many big-city markets.
Here’s the best three-prong solution a couple can take:
The Two-Year Sacrifice: As hard as it may sound, and easy to recommend, consider downgrading or living with relatives two years. Many couples are opting to do this in order to lessen their debt and to save as much as they can to afford the down payments.
If you have children, this may seem impossible. It may require long commutes and longer nanny hours but if your rent can be reduced by 30%, a dual-income couple can make serious strides on the savings front.
If you can tolerate a two-year stint with a relative, which may require you to share a bedroom in tandem with a child’s crib, you can save a tremendous amount. Offering to pay a modest rent and/or the utility bills provides a benefit for your relative as well. This may enable you to take advantage of tip #2.
And why two years, you may ask? One year’s worth of savings may not be enough so set achievable expectations for yourself.
Save Enough to Afford a 40% Down Payment: Imagine you and your wife, working diligently and banking bonuses in order to have $200k to put down on that $500k house. Wow! This goal may seem out of reach but striving to do so empowers you with more options. First, the monthly mortgage payment will be reduced significantly. Second, if one of you loses your job, the risk of being foreclosed upon is less because you income-to-mortgage rate is not out of whack. Third, if you find out that pregnancy-test was positive and now you’re expecting twins, guess what – you’ll be able to afford your dream home on one salary because you invested your savings to afford your home on one salary.
Buy the Worst House on the Best Block: An old-school formula for long-term gains. Does the kitchen suck? Are all the walls ensconced in wallpaper? Do you have a 1970’s hot tub in the master bedroom? Wait… it’s on the best block in a great town with solid schools? Great! You can tackle each project one at a time and do so with sweat equity to raise the value of your home. Rome wasn’t built in a day, nor should you live like a princely Roman during the first five years of homeownership. Plus, your remodeling projects will result in a dream home – eventually.
When couples work together, financially, they can afford anything with a smart savings plan and commitment.