The Home Buying 101 Guide for Millennials

Daniela Gonzalez

In 1970, the median age of first-time homebuyers was 30.6 years. Today, according to MarketWatch, the median age of American homebuyers is 47 years. Since the 2007-2008 financial crisis alone, the median age has increased by eight years, and that rise is largely attributed to the dramatic decrease of millennials entering the housing market.

The American Dream is changing, and with it, the fundamental desire to own a home.

Table of Contents:

Why Aren’t Millennials Buying Homes?

In 2019, only 43% of millennials owned the homes they lived in, compared to 66% of generation X and 77% of baby boomers. A combination of debt, high housing costs, and a generation with different priorities all contribute to millennials forgoing homeownership.

An important policy goal of the US government has long been to encourage homeownership. Historically, that’s been done through the federal tax code and residential mortgage regulation. But since these things benefit mostly higher-income, better-educated homeowners, these policies are no longer as effective as they once were.

The Brookings Institute points out that a better path to encouraging homeownership at a younger age would be implementing policies that create more opportunities for wealth-building. But until that happens, the median age is likely to keep increasing.

Here are the biggest factors contributing to the wealth gap.

Student loan debt

Student loan debt plays a massive role in millennials deciding not to buy a home. In a survey of student loan borrowers, 83% of non-homeowners cite student loan debt as the reason they haven’t bought a house. Indeed, the average monthly student loan payment is $393 a month, which leaves many unable to save for a down payment on a home.

The most recent student loan debt statistics show that in 2020, there were almost 45 million student loan borrowers who had an average debt of around $33,000.

Rent burden

Millennials are more rent-burdened than any other generation. Rent burden occurs if more than 30% of your income goes toward paying rent — and millennials spend 45% of their income on rent. And while the average living wage is $68,808 a year, the average millennial makes just $35,592 a year, and rent burden plus low wages create a double-whammy for many young people.

“Whether or not you can afford to buy a home depends on your income, the property prices in your location, how much other debt you have, and how good your credit score is.”

Delayed marriage

Marriage increases the chances of homeownership by 18%, and according to the Urban Institute, delayed marriage is one of the biggest factors for why millennials aren’t buying homes. In 1960, couples typically entered their first marriage in their early 20s, but today, the median age for a first marriage is nearly 30.

Delayed procreation

Having children is another important factor in people’s decision to buy a house — having kids increases a person’s chance of homeownership by 6%. But millennials are in no big hurry to have kids. In 1990, 37% of married couples aged 18 to 34 had children, but in 2015, just 25% of young couples were parents.

More diversity, more inequities

The millennial generation is far more diverse than previous ones. According to the Brookings Institute, the young adult age group was 73% white in 1990. In 2000, it was 63% white. Today, the millennial generation is around 56% white, with 30% of its population made up of Hispanics, Asians, and people who identify as two or more races. Historically, homeownership rates are lower among Black, Hispanic, and Asian Americans when compared with white Americans — and today, just 14.5% of Black millennials own a home, compared with 39% of their white counterparts.

What Does it Realistically Take to Buy a House or Condo?

rent a condo

Maybe you’re not interested in becoming a homeowner at a tender age, and that’s perfectly fine. Renting definitely has advantages over buying, and if you prefer the unencumbered life, apartment living frees you up to move wherever, whenever.

However, if you dream of homeownership — but feel like it’s only a pipe dream — you might want to look into homeowner rates to be sure. In many cases, a mortgage is less expensive than rent, and a number of federal and state programs exist solely to help first-time homebuyers like yourself. You might be surprised to find you can afford to buy a home, after all.

You have to use the “28/36 Rule”

Whether or not you can afford to buy a home depends on your income, the property prices in your location, how much other debt you have, and how good your credit score is.

A good starting point for figuring out whether you can afford to buy a house is to use the “28/36 rule”. This rule states that your total household expenses (including your mortgage, utilities, and property taxes) shouldn’t exceed more than 28% of your gross monthly income, and your total household debt (like credit cards and car loans) shouldn’t be more than 36% of your gross monthly income. So figure out those percentages, and you’ll have a rough idea of what you’re working with.

The lowdown on home loans: How do mortgages work?

Unless you’re loaded with cash, you’ll need to get a mortgage like most people. But what specifically is a mortgage, anyway?

A mortgage is an agreement between you and a lender (typically a bank but not necessarily) that says the lender will give you money to buy a house, but if you don’t make the monthly loan payments, they’ll take it away, and you’ll lose any equity (ownership) you’ve built up. A mortgage payment is like rent, but for homeowners. When you borrow money to purchase your home, you pay it back over, say, 15 or 30 years, with interest. The bank figures out how much this adds up to each month, and that’s your mortgage payment. Once your mortgage is paid off, you have full ownership of your home.

What’s the deal with interest rates?

Interest rates are calculated as a percentage of your mortgage loan. Each mortgage payment you make pays back a portion of the principal (the full amount you borrowed) plus the interest that accrued that month.

Fixed-rate interest means that your interest rate won’t change during the life of the loan, and you’ll pay back the same amount each month.

Adjustable-rate interest means that the interest rate may change under certain conditions, and if it does, your lender will adjust your monthly payments up or down until the next rate change.

The longer you take to pay off your mortgage, the more you’ll end up paying in interest. The best way to keep your interest rate low is to pay back the loan as soon as possible, never forget a payment, and pay more than your monthly minimum, if possible.

What Are ALL the Costs Involved in Buying and Owning a Home?

buying a home

Here is a list of important terms to learn and keep handy, even if you know them backward and forwards.

Down payment

Traditionally, people buying a home pay 20% of the price of the house up-front. It’s possible to buy a home with a smaller down payment, although that could mean increased borrowing costs and higher monthly payments.

Closing costs

Closing costs are lender and 3rd party fees and expenses that are paid at the close of the sale transaction. These costs run roughly 2-5% of the loan amount and could include things like appraisals, taxes, insurance, prepaid interest, and application, origination, and attorney’s fees.

Some lenders allow you to fold the closing costs into the loan, but that makes your loan payment higher, and you’ll end up paying interest on those costs for the life of the mortgage! Your lender will outline your closing costs in a Loan Estimate, which you’ll receive when you apply for the loan.

Monthly mortgage

Your monthly mortgage payment depends on the amount of the loan + your interest rate.

Property taxes

The Man’s gotta take his chunk, and property taxes is how it’s done. Your property taxes pay for things that make your community better, like schools and road repairs. Property taxes are based on the value of your home, and rates vary by location and fluctuate often due to changing needs and priorities in the community.

“In 2019, only 43% of millennials owned the homes they lived in, compared to 66% of generation X and 77% of baby boomers.”

Homeowner’s insurance

Homeowner’s insurance covers losses and damages to your house and assets due to theft or damage. Rates vary by state and region, but the average annual premium in 2017 was about $1,200.

Hazard insurance

Hazard insurance is a more extreme homeowner’s insurance—it protects you from structural damage caused by natural disasters. Hazard insurance is determined by local risk factors such as fires, flooding and earthquakes, and it’s usually included in your homeowner’s insurance policy.

Mortgage insurance

Mortgage insurance protects your lender against loss if you default on the loan. This could cost up to 2% of your total loan amount per year if you didn’t make a down payment of at least 20%.

HOA/Co-op/Condo fees

These are monthly membership fees used to pay for improvements like landscaping and painting and for amenities like swimming pools and gyms. The fee varies dramatically based on the organization and where you live. Upscale condos and homes typically have higher fees and stricter rules than more modest digs.


Electricity, gas, water, trash collection, recycling, internet, cable, and security monitoring are daily essentials that you pay monthly, and their costs vary depending on where you live. Bigger homes generally have higher utilities.

You better shop around!

You probably wouldn’t buy the first car you looked at, or the first pair of shoes you tried on, and so it is with the first lender you come across. Shopping around for the best mortgage takes time, but it’s time that can save you lots of money.

Mortgages don’t just come from banks—credit unions, brokers, and independent lenders also deal in mortgages. Know how much you can afford for your down payment, then choose a few institutions to approach for a loan. Ask for all of the costs involved in the loan, including all the stuff above. Compare the loans, and then approach the lender you like best. If you’re charming and savvy, you may be able to negotiate lower fees or better terms. Once you’re happy with what the lender is offering, get it in writing, or it’s not real!

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The Real Pros and Cons of Buying Vs. Renting

Studio apartment

Which is generally better, buying a home or renting? Millennials often don’t really get a choice. But let’s say you do, or are rising the economic ladder. Maybe you just want to know what your situation is affording you.

Buying a home is a big decision and a major financial commitment, but it offers more stability and the freedom to do what you please with your home. It also offers the opportunity to better accommodate lifestyle priorities, such as indoor and outdoor living and environmental sustainability.

Of course, renting is appealing because it comes with fewer responsibilities, yet you also don’t get as much autonomy or privacy as with homeownership. There’s no easier way to make sense of buying versus renting than with good, old-fashioned pros and cons lists:

The PROS of RENTING vs. buying

  • You don’t have to pay property taxes or spring for homeowners insurance
  • When the furnace breaks down or the roof leaks, you don’t have pay for new ones
  • You’re free to move out with a 30-day notice
  • You don’t risk foreclosure if you lose your job or take a pay cut
  • A rental deposit is far less expensive than a downpayment on a home
  • You have fewer responsibilities, including upkeep
  • Utilities are generally less expensive in an apartment, and some are even included in the rent

The PROS of BUYING vs. renting

  • Mortgage payments build equity in the home
  • Homeowners often enjoy more tax deductions than renters
  • Homeownership offers a sense of stability and putting down roots
  • You can do whatever you want with your space
  • Pets are always allowed
  • Monthly payments end once your mortgage is paid off
  • You have an asset to borrow against if you want to make improvements

The CONS of RENTING vs. buying

  • Rent often increases, unless it’s fixed
  • Renting offers no tax benefits
  • Less stability—if the landlord sells and the new one wants you out, you have to go
  • You generally can’t customize your space—painting, knocking out walls, etc.
  • You have to rely on someone else to get things fixed or improved
  • Rent payments never end
  • Pets might not be allowed

The CONS of BUYING vs. renting

  • It costs a lot upfront to buy a house
  • It’s more expensive to maintain a home you own than a rental
  • You have to be more responsible—making sure the mortgage is on time, your sidewalks are shoveled, you don’t alienate your neighbors
  • Your home price might lose value, making it a poor investment
  • It requires a long-term commitment, which may be scary for some people
  • It’s far more difficult to move, since you have to sell your home first
  • You may be liable for injuries sustained on your property (hence the homeowner’s insurance)
  • If something happens and you can’t pay the mortgage, your bank may foreclose on you
  • Ideally, you need to have a buffer in savings in case something goes wrong

The Pros and Cons of Buying a Condo vs. Buying a House

Well, what about condos?

Houses and condos are like apples and oranges—sure, they’re both a place you live in, but other than, that they vary quite drastically. Your lifestyle might be better suited to a house over a condo, or vice versa. Don’t just look at prices when choosing which housing situation is best for you—here are some of the differences to take into consideration.

PROS of BUYING A CONDO vs. a house

  • A condo is generally less expensive per square foot than a house
  • Many condos have concierge services
  • Landscaping and exterior maintenance and repairs are covered by the homeowner’s association or HOA
  • Amenities like a gym, pool, or clubhouse are usually included
  • Homeowner’s insurance is less expensive
  • You’re part of a community

PROS of BUYING A HOUSE vs. a condo

  • A single-family residence offers more privacy than a condo
  • A house is easier to sell than a condo
  • You have direct, easy access to a private outdoor space to build a garden or install a pool
  • You have more creative freedom with your space

CONS of BUYING A CONDO vs. a house

  • You have less privacy since other people live on the other side of your walls
  • Potentially strict HOA can make it impossible to customize your condo
  • HOA fees can be expensive, and you pay them on top of the mortgage
  • Many condos don’t allow animals
  • You can’t DIY your outdoor space

CONS of BUYING A HOUSE vs. a condo

  • You’re responsible for handling the exterior issues, like painting, landscaping, maintenance
  • Utilities are more expensive
  • Potentially strict HOA may limit what you can do with your home

Rev-Up Your Credit Score, and Drive Down Your Interest Rate

credit score

Alright, but what about credit scores? Do they matter?

Without good credit, it’s going to be virtually impossible to score a low-interest rate on your home loan. Before you embark on a home-buying journey, it’s a good idea to check your credit score and pull your credit reports. If your credit reports have incorrect information, getting mistakes resolved before you apply for a loan can raise your score and net you a better rate.

“And while the average living wage is $68,808 a year, the average millennial makes just $35,592 a year…”

Three credit bureaus maintain files on how you handle credit, including whether you pay bills on time, skip credit card payments, or have items in collection. Different lenders have different criteria for various interest rates, but even a few points on your credit score can mean the difference between half a percentage point—and thus dramatically affect your monthly payments.

Many lenders use the Fair Isaac Corp. (FICO) model for ranking your credit score. This system grades you on a scale of 300 to 850 points, with 800 points or more indicating exceptional credit and under 579 points indicating poor credit. It’s not super easy to increase your credit score—it can take a little time, but the time is well worth it if it means a lower interest rate on your loan.

If you’re worried about your credit, here’s what you can do

Find your current credit score

First, check out your current credit score so you know what you’re dealing with. Order your credit report, which will give you information on which factors are most heavily influencing your score, such as late payments, credit-to-debt ratio, and items in collections.

Focus on virtually nothing else but paying off your debts

Make a budget plan to pay off any outstanding debts you have. Pay off the most expensive debts first, and work your way down the line. Try to pay more than the minimum balance on loans and credit cards each month, and utilize low-interest, balance transfer credit cards to keep the interest low.

Make all your bills scheduled to be automatic

Everyone forgets to pay a bill now and then, but chronic lateness has a negative impact on your credit score. This goes for all of your bills, including utilities, credit cards, and loans. Set up automatic payments for your bills, or set calendar reminders to help you pay on time.

Maintain good credit card debt-to-limit ratios

Credit card companies look at your credit utilization ratio to see how well you manage credit. This is calculated by taking the total amount of all of your credit card balances and dividing that amount by your total credit limit. Keeping your credit utilization ratio low shows lenders that you’re good at managing credit.

Don’t apply for new credit accounts unless you absolutely must

As you’re remedying your old debt, try not to rack up any new debt. Avoid opening up more credit accounts unless it’s absolutely necessary. The more credit accounts you have, or the more you apply for new accounts, the riskier you appear to be.

Keep unused credit cards open

It sounds logical to close your unused credit accounts, but doing so actually increases your credit utilization ratio and lowers your credit score. Unless the unused accounts are charging you fees, keep them open.

Check your credit report at least once a year

Once you’ve got your credit score under control, make sure to check it at least once a year, and report any inaccuracies to the appropriate bureau.

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How to Save Money for a Down Payment Without “Giving Up Your Daily Latte”

You probably love it when people tell you that if you’d just quit your daily Americano or avocado toast habit, you’d be able to afford a house, but you don’t have to listen to them. With a little creativity, you can save money without giving up your favorite creature comforts.

First, set a goal. Figure out roughly how much you’ll probably spend on a house, then figure out how much a 20% down payment will be. If that amount makes you spit out your coffee, try 10%. But don’t go any lower than that. Then, open a savings account if you don’t already have one, and start socking away money as you can.

Here are a few hot tips to help you reach your goal faster.

Treat your savings like a bill

Instead of looking at your savings like an optional expense that you can put off until next month, think of it as a fixed cost that you must pay, just like your electricity and phone bills. Have the money deducted from your paycheck and sent directly to savings so it never crosses your path.

Cut recurring expenses from your budget

Look at your spending habits, and decide where you’re able to cut down. Can you cancel your $100-a-month gym membership for a few months and hit the running trail instead? Eat or drink at home most of the time instead of ordering in or going out? Pare down your digital subscriptions to just the essentials? A little here and a little there will add up faster than you think.

Find a side hustle

Make some extra scratch each month with a second job. Rideshare services or food and grocery delivery are great options for a little extra cash if you have a reliable car. Bartend one night a week at your local dive bar, or tutor online.

Focus on your high-interest debt

Start hacking away at your credit card or loan with the highest interest rate. After you’ve paid off the balance, move on to the next. Transfer your high-interest rate balances to your card with the lowest interest rate.

Try These Sweet Programs for First-time Home Buyers

first time home buyer

First-time buyers may be eligible for special grants and zero-interest loans through various state and local programs. Requirements for each program vary, so check with your state’s housing finance agency or the organization providing the loans to see what you’ll need to do. These are some of the loans available to first-time home buyers.

FHA loan

FHA loans are insured by the Federal Housing Administration and are for low-to-moderate-income buyers – they generally have lower credit score and down payment requirements than other loans.

Click here.

USDA loan

The US Department of Agriculture guarantees loans for some rural properties and offers up to 100% financing. These loans are for low-income folks who don’t qualify for traditional mortgages. USDA loans are low-interest and don’t require a down payment.

Click here.

VA loan

The Department of Veterans Affairs offers zero-down payment loans for veterans, military personnel, and their spouses. They have low-interest rates and don’t require a minimum credit score to qualify. These loans have the option of being used to refinance an existing mortgage.

Click here.

Good Neighbor Next Door

These loans are offered by the Department of Housing and Urban Development (HUD) for firefighters, law enforcement officers, teachers, and emergency medical technicians. Those who qualify receive a 50% discount off the listed price for homes located in “revitalization areas.”

Click here.

State and local first-time buyer programs and grants

States and cities provide down-payment and closing cost assistance through these programs and grants if you’re a first-time buyer. Look into your state’s housing authority program for more information on the type of assistance available to you.

Click here.

Native American Direct Loan

This is a VA-backed program that provides Native American veterans and their spouses to buy, renovate, or build houses on federal trust land. There is no down payment and the closing costs are low.

Click here.

While the average age of first-time homebuyers is rising, that doesn’t mean there’s no hope for young people to buy a house if they want to. If you’re thinking you’re about ready to put down some roots, maybe grow a garden, and stomp around all you want without disturbing your downstairs neighbors, start saving today, improve your credit score, and find yourself a little piece of the earth to call your very own.

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