First-time homebuyer

Dear First-Time Home Buyer,

So you’re a renter. You’re part of the population that has grown so much since the financial crisis, after which homeownership rates dropped by around 7 percent across the United States.

That drop in ownership, combined with the coming of age of a large generation of Millennials, has helped increase the total number of renter households in the U.S. by about 8 million over the past 10 or so years. You probably know what that’s done to rental rates.

According to this survey you just filled out, you, like 3 of every 4 renters, wants to someday own your own home. “Wants” isn’t the same as “can,” of course, and like a lot of others in the “wants” category, you worry about affordability. In fact, it’s the No. 1 thing that stands in renters’ way.

And it’s no surprise. Even though mortgage interest rates are super-low, home prices themselves have climbed steadily in most places and skyrocketed in others. But prices and interest rates aren’t what’s causing the affordability problem for you.

Your problem, like many in the typical first-timer demographic, is centered much more around two very specific things:

1. Debt-to-income ratios

2. Down payments

I’m never going to be one of those people who blame the home-buying challenges of people like you solely on student-loan debt. I realize that a college degree is a near-guarantee of better income for a lifetime, and that for some jobs, it’s necessary. If your choice is between borrowing $50,000 for college to get a job paying $75,000 per year, or staying debt-free and working that $10-an-hour job at Kwik-e-Mart, you don’t have much of a choice. Actually, you can do the math to figure out how many years it will take of earning the two vastly different salaries to break even on the $50,000 debt.

But that debt shows up on your credit profile. If you’re trying to buy a home and your debt-to-income ratio (total monthly debt obligations divided by your monthly income) is higher than 36 percent, it’s going to be hard for you to get a home. That $250 per month might be the difference between looking at $100,000 homes and, say, $80,000. If you live in an area with no $80,000 homes, you’re out of luck.

Of course, you could pay down that debt faster, so that your DTI is lower. But every dollar you spend paying down that debt, along with paying that continuously rising rent of yours, keeps you from saving as much for a down payment. And without a down payment, you also can’t buy a home. Even 10-percent down on a $100,000 house is $10,000, and the measly $150 you put away each month will require five-and-a-half years to grow to that amount.

And maybe that’s not even the worst-case scenario. I think those in worse shape might be the ones who borrow all that money for college, then have to move to specific places because that’s where the jobs are. The problem is, where the jobs are are also the places with the highest housing costs. So while you move to get a job, and earn a good buck, you could also be netting less per month after figuring in rent.

And that leaves you with very little money to either pay down debt OR save for a down payment. Heck, there comes a point for many people in your situation where the monthly payments to own a home might be less than renting. But without a down payment, you can’t get to that point.

So what’s the answer? Well, if you really, truly want to be a homeowner, the brutal truth is this: You have to do that where you can afford it.

This might mean not moving to Houston or San Francisco or wherever the job that fits your degree is. It might mean staying in Indianapolis or Pittsburgh and making $15,000 a year less but renting a place that lets you save for a larger down payment and/or pay down that student debt. It might not be the thing you want to do, but if you REALLY want to own your own home, there are two things that have to be accomplished: Have a down payment, and qualify for a loan. That means paying down debt and saving your money.

If you can’t do those things because of how high your rent is now, you can stay there and stay a renter, or move somewhere where you can become the homeowner you want to be.

Sincerely,

The New Reality