Though it's been tough for millennials to break into the housing market, new data from real estate service Clever indicates that they're still eager to own. But while millennials may want to buy homes, a large number are financially ill-prepared for that responsibility. In fact, more than 25% of millennials who plan to buy in the coming year have less than $1,000 in savings. That's hardly enough for a down payment on an inexpensive home, and it's certainly not enough to constitute an adequate emergency fund for anyone seeking to own.
If you're a younger buyer with limited savings, you should take it as a sign that you're not yet ready for homeownership. If you jump in too quickly, you'll risk a scenario where you fail to keep up with your housing expenses and lose the home you wanted so badly in the first place.
You need savings to buy a home
If you don't manage to come up with a sizable enough down payment for a home, you'll be denied the option to buy one. Though conventional mortgage lenders have traditionally required a 20% down payment on a home, it's possible to qualify for a home loan with a lower down payment -- as low as 3% in some circumstances, in fact. But even if you're looking to buy a $100,000 home, which is well below the median U.S. home value, you'd still need $3,000 to put down -- which means that if you have less than $1,000 to your name, you don't have enough.
The same applies with FHA loans. You can qualify with as little as 3.5% down, but again, if you're sitting on under $1,000, that's probably not going to cut it.
Even if you do manage to come up with enough of a down payment to qualify for a mortgage -- say, you're able to borrow it from a parent or grandparent -- you still need a solid emergency fund when you own property because the potential for costly repairs perpetually exists. And if you lose your job, you'll need a means of paying for your home while you're without an income.
Most people are advised to have enough emergency savings to cover three to six months of essential living expenses, but if you're a homeowner, you should really aim for the top end of that range -- which means that if you don't even have $1,000 in savings, you're clearly not ready to own.
You're better off waiting
It's true that renting means paying somebody else's mortgage instead of your own. But if you buy a home before you're ready, you'll risk losing it when it proves too expensive.
Remember, any time you fail to make a 20% down payment with a conventional home loan, you face private mortgage insurance, or PMI, which only adds to your costs. And without a decent cushion in the bank, you'll risk falling behind on those monthly mortgage payments when your other bills start to climb, thereby making foreclosure a very real risk.
Ideally, before you buy property, you should have:
- Enough money for a 20% down payment on your home if you're getting a conventional loan.
- Enough money for your loan's closing costs (generally 2% to 5% of your loan's value).
- Enough money to pay for at least three months of living expenses.
Waiting another year or two to hit these objectives could spare you a world of financial stress -- not to mention protect you from the many unfortunate consequences that come with having your home foreclosed on.