Military Millennials: How Much Home Can I Afford?
By Briana Hartzell for USAA. Used with permission.
Greg Jaeger, former real estate agent and current president of USAA Residential Real Estate Services shared last month that Millennials represent “68 percent of first-time homebuyers, and over 64 percent bought their first home with less than a 20 percent down payment.”
This is great news for Millennials who think they cannot afford their first home. How do you become one of those homeowners? I asked JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ with USAA, to help answer some important questions to help you decide if you can afford to buy a home.
How much home can I afford?
JJ: Shoot for a total mortgage payment (including principal, interest, taxes and insurance) of less than 28% of your gross income (before taxes or any other deductions).
- This is a common ratio called the "housing ratio." To calculate the number, add your mortgage payment (principal, interest, taxes and insurance) along with any association fees and divide that by your gross income. Aim for this number to be no more than 28%, but of course lower is better.
- Use a calculator. USAA has a mortgage affordability calculator that compares your income to your debt obligations to come up with an amount you can “afford.” I used this and was a bit surprised at how big the number was, but it can certainly provide a starting point. Just because someone will lend you a certain amount of money, doesn’t mean you should borrow that much.
Do I have to have a 20% down payment?
JJ: No, but if you are putting less than 20% down payment, most types of loans will require you to pay MI (Mortgage Insurance) which is a policy that protects the mortgage lender from losing money if you fail to pay and end up in foreclosure. However, if you’re eligible for a VA loan, you can have less than a 20% down payment and not pay PMI as the loan is backed by the VA, which is a wonderful benefit. Even if you’re using a VA loan, it makes sense to build up some cash before you make the leap to home ownership.
Consider the big financial picture. Owning a home goes well beyond a mortgage payment. Maintenance and upkeep will be your responsibility (not an easy phone call to the landlord), and at your expense. Of course, you have closing costs and all the expenses associated with making the house your home. These items can have big financial implications that you need to be prepared for.
How long do I need to live in the house to make purchasing a home make financial sense?
JJ: When you buy a home, your upfront costs, such as the down payment and closing costs, can be substantial. It usually takes about three years to build up enough equity in your home to break even. However, there are no guarantees and if you’re uncertain and unprepared to own the home, as your residence or as a landlord, a cautious approach makes sense. Consider any future events — such as PCS or a job transfer — that could limit your time in this home. It is also important to consider the state of the housing market in the area you are thinking of buying.
Why is buying a home considered an investment?
JJ: I don’t necessarily agree with that sentiment. By definition, an investment is deploying your money to generate gains or income. In that context, purchasing a home could be an investment, but for most folks its more of a lifestyle decision.
Any closing advice for military millennials looking to buy a home?
JJ: Preparation is the key to success. Doing your homework on everything from what you can afford to where you’re going to buy and the loan you’re going to use can help make the decision to buy a home a good one.
Thanks for all the tips JJ! Owning a home is a rewarding but intimidating experience. Are you a military millennial who has purchased a home? Share how you decided whether it was right for you to buy in the comments.
Ready to Buy Your First Home-Now what?
Author Bios: JJ Montanaro is a Certified Financial Planner® professional and part of the Military Affairs team at USAA. He’s a graduate of the U.S. Military Academy and has over 20 years of financial planning experience.
Briana Hartzell is a Navy spouse, mother to two beautiful girls (3 years and 1 year), a former full time USAA employee and a graduate of Texas A&M University. Briana writes at Being Briana, a blog focused on the joys that military life and parenthood can bring.
*Views and opinions expressed by members are for informational purposes only and should not be deemed as an endorsement by USAA. *Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.