There’s nothing like the emotional experience that is buying your first home. It’s filled with excitement, nerves, anxiety, indecision, and anticipation. And when you consider the financial ramifications, it’s enough to make your head spin.
Keep These 4 Tips in Mind
Your first home is both an investment and a learning experience. It’s where you cut your teeth, so to speak, as an adult. And while every individual has their own financial ideology, here are a few tips with nearly universal application.
- Pay Down Bad Debt First
We’re not saying you have to be 100 percent debt-free before you can buy a house, but you should pay down any bad debt you have first. For the purposes of this conversation, bad debt would be things like credit card debt, tax debt, or medical bills.
It’s also a good idea to pay off/pay down as much of your car debt and student loan debt as possible. By ridding yourself of all debt – not just some – you free up thousands of dollars in your monthly cash flow. This can be used to pay down your mortgage and cover other expenses that come with home ownership. (It also makes you a more attractive borrower and could earn you a lower interest rate.)
- Make Sure You Have an Emergency Fund
Owning a home is much more expensive than most people think. When the average first-time buyer first starts to think about ownership, they only take the monthly payment into account. But what they may not realize is that there are additional expenses. This may include taxes, insurance, HOA fees, maintenance, utilities, and other ongoing costs. If you aren’t careful, you can stretch yourself too thin.
One of the best things you can do – from a financial perspective – is to make sure you have an emergency fund in place before buying a house. (This is in addition to the cash you’ve saved up for the down payment.) When you’re debt-free and have an emergency fund equal to three to six months of expenses, you’re able to account for emergency expenses, repairs, and other issues that could emerge should you temporarily lose your job or experience a loss of income.
- Be Strategic With the Loan Type
There are numerous loan types to choose from. And while your mortgage broker or lender might suggest a certain product, it’s ultimately up to you to research the pros, cons, and features of each. This includes variable rate, fixed-rate, short-term, and long-term.
“If you want more freedom and are comfortable with the greater economy dictating your interest repayments, a variable mortgage may be the way to go,” Loans.com.au mentions. “Alternatively, if you need the ability to set a budget and make mortgage repayments of a consistent amount, a fixed home loan may be the superior choice.”
As for repayment terms, most loans fall in the 10- to 30-year range (with 15-year and 30-year terms most popular). You’ll have to decide how aggressive you want to be with paying back the mortgage balance.
- Make a 20 Percent Down Payment
If you have a good credit score and solid financials, a bank might offer you a loan product that requires less than five percent down. (Zero and 3.5 percent down loans are fairly common.) But think twice before taking the bank up on this offer.
When you make a small down payment, lenders are required by law to pull out something known as private mortgage insurance, or PMI. And guess who pays for the PMI policy? That’s right; it gets rolled into your monthly payment.
How Conventional Scores Are Stopping Most Millennials From Accessing Credit and How One Company Is Changing That
Credit scores are a barrier to entry for just about everything for millennials. Trust Science® is taking new metrics into account to expand access to credit with Credit Bureau 2.0®
What’s Keeping Millennials From Accessing Credit?
The concept behind a credit score seems simple enough. It tracks your credit history to see if you’re someone that a bank or lender can trust to pay back a loan. However, conventional credit scores just don’t account for the way that millennials and Gen Z handle their finances.
Even where a person would be fully capable and reliable in paying back a loan, the lack of an established credit score can prevent them from accessing credit, or at least from getting as much as they should be able to. That leaves millennials without an on-ramp into the modern economy and it can also jeopardize access to other “credit gated” necessities like housing.
The way that conventional credit scores are calculated is complex but boils down to 5 essential metrics:
- Payment history
- Amount owed
- Length of credit history
- Credit mix
- Hard credit inquiries
You can start to see the issue for millennials when you look at what data goes into their credit scores. For one thing, younger people don’t have a long credit history. Even without other factors, simply being young and only having had so much time to build credit puts them at a disadvantage. However, millennials have also been tending to establish credit later in life compared with previous generations, putting them at a further disadvantage.
The most significant issue here is the credit mix. Different types of credit affect credit scores differently, and millennials generally don’t have a favorable mix. While they might have a credit card or two, they generally don’t have mortgages. These are the most beneficial type of credit to have on your credit report, and millennials really have that going against them.
The student loan crisis also plays a big role. Young people today have much higher student loan debts than previous generations, meaning they have a great amount of credit owed. Not only that, but many can begin to fall behind on payments and see that amount grow. This can quickly send a credit score spiraling out of control.
Student loans aren’t the only threat. When young, some people make poor decisions. They could find themselves making credit mistakes very early on and suffering the fact that those mistakes can haunt their score for seven years in general. That means someone at 25 is still paying for a mistake made at the age of 18, even if they’ve been on the up and up ever since.
It’s clear that conventional credit scores weren’t designed with the current landscape in mind and that young people are being negatively affected. But what exactly can be done about this? One company is changing the way that lenders look at creditworthiness to make it possible for millennials to mitigate these issues.
How Credit Bureau 2.0 Fixes Those Problems
Trust Science is an innovative fintech company that has developed Credit Bureau 2.0, a scoring service that acts as an antidote for lenders, offsetting the problems posed by conventional credit scores. Instead of seeing a lack of credit history, a few negative issues from years ago, or a poor credit mix and ending any credit application, Credit Bureau 2.0 considers a wealth of additional data to generate a more accurate credit score.
Credit Bureau 2.0 expands the data used to calculate credit scores, getting the borrower’s consented, permissioned data and/or acquiring Alternative Data in order to reach a more accurate credit score. For example, those applying for credit can use Trust Science’s Smart Consent™ app to divulge their information safely and confidently to Trust Science, which is working on behalf of the lender that is trying to reach a decision about the borrower. By doing so, young people or other people without a credit history in-country can let prudent financial decisions in other areas of their lives demonstrate that they’re trustworthy for greater credit.
The service is available to a wide variety of lenders, including auto lenders, installment lenders, and single-repayment lenders. It’s in their best interest to find more reliable, deserving borrowers to give loans to, so Credit Bureau 2.0 benefits both sides of the transaction.
Trust Science CEO Evan Chrapko says that “Credit Bureau 2.0 isn’t just about giving borrowers access to more credit than they would have had otherwise. It’s about recontextualizing financial data to give both sides–lenders and borrowers–a more accurate and reliable way to enter into loans in the modern economy.”
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