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Adult child living at home: From Mom’s basement to homeownership

Gina Pogol
Gina PogolThe Mortgage Reports Contributor

In this article:

For anyone on the road to homeownership, there are several steps to take:

  1. Create a money plan. Set goals for paying off debt and saving for a down payment. Build a clear timeline for when specific goals should be met.
  2. Focus on credit. If you have good credit, focus on making it even better by using less of your available credit, paying off any balances, and paying by your due dates. If you have poor credit, pull your credit score and report and address the factors impacting your score.
  3. Practice homeownership. The amount you set aside each month for rent, savings, and debt repayment should equal at least the amount of your prospective mortgage payment. This helps you ensure that paying this amount each month is comfortable.

Step by step guide to moving out and buying your first home

According to the Census Bureau, about one-third of millennials live at home with their parents. Sometimes it makes sense to relinquish some of your independence to get ahead. But if you’re an adult child living at home, you probably don’t plan to make that a permanent arrangement.

Here is your step-by-step guide to go from living with your parents to owning your own home.

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Create a money plan

Whether you’re finishing up school or established in a job, you’ll want to set some goals and a date for moving out. Perhaps even create a family contract. Having a definite time frame will help you stick to your plan. Your plan should include:

  • Paying off debts like credit cards, if you have them
  • Saving a down payment and closing costs
  • Establishing or improving credit

To start your plan, you’ll need to know how much house you’ll be able to afford when you’re ready to buy. You can use a home affordability calculator to see how much you can afford on your salary. And you can tweak the numbers to see how paying off debts can increase that number.

Try out The Mortgage Reports’ Home Affordability Calculator

Once you know what size loan you can afford, you’ll determine your down payment. You’ll also want to check your credit report and score to see what you’re dealing with, and then decide how you’re going to improve your score over time.

Don’t be a broke millennial! Paying down your debts usually improves your credit score, so you can kill two birds with one stone by making debt reduction a priority. Here are average down payments for home purchases for Millennials and others:

Loan Type Average LTVs (percent) Average Down Payments (percent)
All loans 79 21
Millennials 87 13
FHA Purchase 96 4
Conventional Purchase 80 20
VA Purchase 98 2

(Source: Ellie Mae Origination Insight Report and Millennial Tracker)

Here is an example of a homeownership plan:

  • Target home price: $200,000
  • Loan Amount: $192,000
  • Debt to pay off: $4,500
  • Down payment: $8,000
  • Emergency savings (lenders call this “reserves”): $2,000
  • Closing costs: $2,000
  • Current savings balance: $2,500
  • Savings needed: $9,500
  • Monthly after-tax income: $4,000
  • Expenses, including minimum credit card payments, rent to parents, food, entertainment, clothing, and other accounts like car and student loans: $2,800
  • Money available for homeownership preparation: $1,200 per month
  • Months it will take to pay off debts (3.75) and save (7.92): 11.67

How long does it take to save a 10 percent down payment?

If this was your plan, you could tell your folks that you’ll leave in a year. Circle the date on your calendar and work consistently to get there.

Improve good credit

If you are a Millennial, you may prefer to avoid credit altogether. Many Millennials don’t like to use credit because they came of age during the Great Recession, and are understandably gun-shy about debt. That’s great because you won’t have to worry about paying down accounts, but it may also leave you with a “thin file” and a low FICO score.

The time to start increasing your score is now. Simply open one or two accounts and use them for things that you normally buy anyway, like groceries and gas and the occasional night out. Don’t increase your expenses; just change the way you pay for things. Every month, pay the balance in full. This habit will serve you well for your entire life.

What is a “good” credit score, and how to make it even better

If you have friends or family who believe in you and can help, ask them to add you to their accounts as an “authorized user.” Only do this with people who have excellent credit themselves, because the history on that account will transfer to you. Note that you won’t actually use the account. It’s probably better if you don’t even know what the account number is.

The graph below shows the percentage of home loan approvals by FICO score. For government-backed mortgages like FHA, the scores do skew lower. Something to consider if your FICO is not where you’d like it to be.

If you already have a good FICO score, you can improve it by using less of your available credit. If you’re carrying balances, pay them off, and always pay by the due date. You can make this easier by setting up automatic payments with your bank so you don’t forget. Or use an app like Mint that can help you budget and manage your debts and savings.

What credit score do you need to get a mortgage?

Rehab poor credit

If your FICO score is poor or fair, you have time to improve it. FHA guidelines, for example, allow lenders to approve borrowers with no derogatory incidents in the last 12 months. If your credit is bad, you’ll need at least 12 months to get a good credit score for a mortgage.

Pull your credit and check the “reason codes,” which explain the top factors that cause your score to be low. Then, address the items listed.

Going up! Taking your credit from “fair” to “good”

However, if your problem is an older collection (more than a year or two old), be careful about paying it. Negotiate payment only on the condition that it gets expunged from your credit — not marked paid, removed altogether, from both the original creditor and the collection agency.

“Practicing” for homeownership

The amount you set aside each month for rent to your parents (if applicable), savings and debt repayment should equal at least the amount of your prospective mortgage payment, including property taxes, mortgage insurance and homeowners insurance. You want to see if paying that amount each month is comfortable for you.

If your parents don’t charge you rent, or if it’s a low amount, consider restructuring your arrangement. For instance, if you pay them $100 a month and want to direct $800 a month toward your savings and/or debt repayment, draw up a rental agreement for $900 a month.

10 ways you may qualify for mortgage approval (even if you think you can’t)

Write your parents a check for $900 each month, include it in your family contract and have them put the money aside for your homeownership plan. Why establish a higher rent? To prevent what lenders call “payment shock.” Payment shock is the percentage by which your new mortgage payment would exceed your old rent.

Lenders are leery of mortgage applicants whose payment shock exceeds 150 percent to 200 percent. So if your new mortgage payment will be $1,000 a month, and you’ve only been paying $100 a month, you’ve got a 1000 percent payment shock! But if your rent is $900, payment shock is a reasonable 11 percent.

Homeownership: Are you ready?

Following your plan will help you financially even if you decide not to buy a home. And because circumstances change, you’ll want to assess your readiness to buy a home when you are close to being able to qualify.

Are you ready to be a first-time home buyer?

  • Do you expect to live in your home (or keep it as a rental) for at least a few years? Average homeowners in the US keep their properties about ten years, but first-timers usually sell and move sooner than that. Because it costs so much to buy and sell a home, doing it in just a year or two can cause you to lose money.
  • Can you cover the maintenance and repairs that will come up? Experts estimate that these can equal one to five percent of the home value, depending on the age and condition of the property. You can deal with this by:
    • setting aside money for future repairs
    • buying a fixer with an FHA 203(k) loan and repairing or replacing major systems to avoid costly problems in the future
    • buying (or getting the seller to buy) a home warranty that covers most repairs. This way, you pay a set amount each year plus a co-pay and are less likely to be caught short in a home repair emergency
  • Are your career and income stable? If your industry or company is on shaky ground, or you are unhappy in your field, don’t obligate yourself to an expensive mortgage that may become unaffordable.
  • Do you have an emergency savings account (reserves)? You want at least two months of mortgage payments in the bank in case of an income interruption. And six months is even better.

If you determine that you’re not ready for homeownership, all this preparation will not go to waste. Budgeting, paying off debt and saving money is a valuable experience that will help you in the future. And the money you saved will provide a bit of security as you advance in your career and your life.

Finding a lender

Once you have completed your plan and determined that homeownership is for you, you’ll want to find a lender. The right one can make shopping for and buying a home the exciting and fun experience it should be. The wrong one can create nightmares.

Begin by obtaining and comparing mortgage quotes from several competing providers. Provide them all with the same information — your purchase price, down payment, and credit score. Then take a couple of the most competitive and contact them.

How to find a great mortgage lender

You’ll want to work with a loan professional who operates in your comfort zone. That means explaining programs and disclosures to your satisfaction and returning your calls, emails or texts promptly. This is a person you’ll be disclosing very personal information to. So you must like, respect and trust him or her to have an effective partnership.

Applying for mortgage pre-approval

You can get prequalified for a home loan very quickly — in many cases, the lender just takes your income and debt information and issues you a prequalification letter informing you and potential home sellers that you can probably spend X on a home.

How long does it take to get pre-approved for a mortgage?

That’s pretty much worthless. You want to go through the application process, submitting proof of income and your bank statements. Most lenders underwrite loan applications electronically, issuing decisions in a matter of minutes.

In many cases, all you need are two years of W-2 forms, your last pay stub, and copies of your bank, investment and retirement statements. If you’re self-employed or on commission, you’ll need at least two years of history, and you’ll submit tax returns and supporting documents to prove your income.

Shop for your home

With mortgage pre-approval in hand, shopping for a home should be fun and easy. You’ll know exactly what’s in your price range, and sellers will respect you because you’re pre-approved. A pre-approved buyer can close faster and is almost as good as a cash buyer.

First-time home buyer’s guide: How to work with a real estate agent

When you have an approved offer, your agent will open escrow with a title company or real estate attorney, depending on local custom. You’ll deposit “earnest money” into escrow, a deposit that the owner may be able to keep if you back out of the home purchase.

The lender will probably order a home appraisal, which you’ll pay for. If the property value comes in at or above the sales price, and the property meets the lender’s guidelines, you’ll be able to close quickly. You’ll also want to order a home inspection, even though most lenders don’t require one. It can help you avoid buying a home with big defects.

Close on your home

Once the property passes its appraisal and inspection, and you have met all the lender’s conditions, the title company or attorney will prepare a set of final documents — a final loan application and a Closing Disclosure.

Preparing for  your real estate closing

You should request these documents a few days before your signing, and review them before attending your closing. That way, you can ask any questions and correct any errors without the pressure of being in a room with the real estate agents, sellers and other parties.

Call your friends: It’s time to move!

Once you sign your documents and get your keys, it’s time to move into your new place. Rent a truck, call your friends and order pizza. You have successfully completed your homeownership plan and deserve to celebrate.

Verify your new rate (Oct 14th, 2018)