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How Gen Zers Can Prepare for Homeownership

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Homeownership is the American Dream and Gen Zers plan on following that dream sooner rather than later. According to a new study on Gen Z home buying, 86.2% of Gen Zers aged 18-24 want to be homeowners, with 45% planning to do so in the next five years. But what is driving Gen Zers’ determination?

52.7% of Gen Zers are viewing homeownership as more of an emotional investment as opposed to a financial asset. While millennials are characterized as a generation that deferred or decided against having children, 27.2% of Gen Zers cite starting a family as one of their top reasons for seeking homeownership. But that isn’t the only reason. 25.5% see homeownership as a vehicle to capturing a level of freedom only a home of their own can afford them. Growing wealth is the third most popular driver of homeownership for Gen Zers, with 13.2% prioritizing it. Yet even with these motivations, 73.9% see potential financial difficulties while 20.8% don’t know where to begin to prepare for homeownership. But that doesn’t have to slow Gen Zers down. With the right direction and resources, they can stay on track to buy their first home and make the American Dream a reality.

Understanding the Process of Buying a Home

A lot takes place in a home buying journey, which can make it overwhelming. When trying to figure out where to start, Gen Zers first need to know everything that goes into buying a home.  Here are a few things to factor in:

  1. Cost of the Home – This is the cost agreed upon by the homeowner and homebuyer, but it is not the only factor of a monthly payments.
  2. Mortgage Rates – Mortgage rates can change daily during the workweek. Mortgage applicants can usually get a preapproved letter from a mortgage lender to lock in rates for 3-6 months. A mortgage rate will determine how much interest a person pays monthly and over the course of a mortgage.
  3. Down Payment – While 20% is considered a traditional down payment on a mortgage many homeowners are now opting to put down less and can easily find mortgages with as low as 3% down.
  4. PMI Insurance – If a person gets a mortgage and puts down less than 20%, they will most likely be required to pay private mortgage insurance (PMI) as the mortgage is considered a riskier investment. This will be rolled into the monthly cost of a mortgage and can be an add 0.5%-1% to a mortgage yearly.
  5. Homeowners Insurance – Homeowners Insurance is a necessary part of being a homeowner and protects homeowners financially from things like a flood, fire or other damages that can occur to a home.
  6. City Taxes – Applicants will most likely have the option of rolling bi-yearly city taxes into the monthly cost of a mortgage. This is called an escrow account. A mortgage provider will then pay the taxes when it comes time. This will not only make it easier but will help make sure a person always has enough money to pay taxes.
  7. Closing Costs – A mortgage isn’t free. In addition to the interest someone will pay over the life of the mortgage, they will need to pay to get the mortgage. This can include paying for services from real estate attorneys and the mortgage lender. On average, this ranges from 3-6% of the home price.

Once someone figures out what they would be willing to pay monthly and overall, they can start to think about the area they may want to live and the features they would want in a home. This could include:

  • Number of bedrooms and bathrooms
  • Square footage
  • Outdoor space
  • Quality of the school district
  • Location
  • Updates in the home
  • Walkability

Many Gen Zers think their home will cost 38.5% less than the U.S. median home value of $363,300. By understanding what they are truly looking for and the realistic costs of that home, Gen Zers can start to see where compromises will need to be made or how much more or less they will need to save.

When it comes to the point where someone is ready to buy, try seeking out a knowledgeable realtor that knows the desired area. They can help guide Gen Zers in finding a mortgage and throughout the whole home buying process. In meantime, there are other steps Gen Zers can take to prepare.

How to Build Credit & Pay Down Student Debt

Already, 10% of Gen Zers are saving for a down payment on a home. But even if most of Gen Zers aren’t, it doesn’t mean they are behind. 74% of Gen Zers expect financial challenges when starting the process of home buying.  This includes:

  • Worrying about having enough for a down payment
  • Worrying about having enough credit
  • Thinking they have too much student loan debt

These financial challenges can often go together. One barrier to saving for a down payment can be too much student loan debt. This can also impact a credit score and even a person’s debt-to-income ratio which impacts their ability to get a mortgage. But if done right, Gen Zers can address all of these worries at once.

Building credit and paying off student loans can be a daunting prospect. Gen Zers can start by looking into consolidating their loans to get lower rates. Fixed loan rates are preferable. There are many new student loan forgiveness programs available through the Federal Government. Gen Zers can see if they qualify for these options. These actions can help their credit score over time.

When trying to build their credit, the best way is by using tiny amounts of credit that they pay off on time and consistently. Having a credit history, or even better, a clean credit report – can be a powerful tool for getting loans at a competitive rate. Even if they don't have a long credit history, it's worth taking action on a few important pieces of credit information and doing something about them. Gen Zers can get a credit card that allows them to monitor their credit score for free. It is easy to get a card with a lower credit limit to build credit. They can buy small purchases that they would normally use cash for and pay it off every month.

If Gen Zers need more help managing student loan debt and credit as they save for a down payment, American Financial Solutions’ certified credit counselors can helps find ways to reduce debts and monthly debt payments for specific situations. They listen and work to understand the financial situation to budget and then help them develop realistic options for meeting financial goals. Call or chat with a counselor today at 888-282-5811.

Published Nov 16, 2021.