Gen Z steps into housing market — 8 tips for a first time home buyer

Zoomers are getting ready to become homeowners. Nearly 72% are planning for a home purchase within the next one to 6 years, and the majority of Gen Z savers are setting aside money for a home. The largest share are motivated by starting a family. 

But Gen Zers have a few misconceptions about the homebuying process — for example, many believe that a 20% downpayment is required. And though most Zoomers viewed income as the biggest barrier to homeownership, 5.4% said a lack of homebuying information was the biggest challenge impeding their goal.

If you have your eyes on your first home, you may have questions about the process and the requirements for getting a mortgage. Here’s what lending experts have to say about how to achieve the goal of homeownership. 

First, look at your current financial situation and assess what may need improvement. To buy a house, you’ll generally need the following:

• Cash for a downpayment and closing costs: The more cash you have saved, the better. While some mortgage types allow for a $0 downpayment, not everyone will be eligible. And, the less you pay upfront, the larger your monthly mortgage payments will be over the long term. Most buyers will need to put at least 3% down and have 2% to 6% for closing costs. “If you’re struggling to come up with the total cash to close, it’s best to look into down payment assistance programs,” says Tyler Warrick, mortgage broker and Strategic Financing Advisor at Real Estate Bees. He notes you might also ask for seller concessions. 
• A stable source of income: Lenders will want to see that you have a reliable source of income that allows you to afford your mortgage payments. If you’re jumping from one side hustle to the next, you may want to wait until you have steady employment. 
• A low debt-to-income ratio: The less debt you have, the better. Lenders will assess the share of your income you spend on your minimum debt repayments (known as back-end DTI) and the share of your income you’ll spend on housing payments (known as front-end DTI). Every lender has different requirements, but you generally can’t buy a home with a back-end DTI of more than 50% or a front-end DTI of more than 40%. 
• Healthy credit: “The higher your credit score, the better your rate,” says Kristina Morales, Chief Finance Contributor at Loanfully. It’s possible to buy a home with a credit score as low as 500, says Warrick, but it’s best to take steps to improve your credit. These can include making on-time payments, paying off debt, and correcting errors on your credit report. 

Now that you have a clear picture of your finances, it’s time to set a budget for your home purchase. Morales says aiming for a house that costs 2-3X your gross income is a great starting point, and Warrick notes there are online calculators that can help you estimate how much mortgage you can afford. But to set a firm budget, “It’s best to contact a lender to give you a more definitive answer,” says Morales. 

Morales says a good lender will discuss your options with you, since there are advantages and disadvantages to each mortgage type that vary depending on your financial situation. Warrick provides some initial guidance as to which mortgage type is best for each type of borrower:

• Conventional: Best for borrowers with great credit and plenty of cash
• FHA: Best for borrowers with less cash and a credit score below 700
• VA: Best for veterans
• USDA: Best for borrowers with little cash who are looking in a rural area

To put an offer on a house, you’ll need a letter of mortgage preapproval from a lender, so it’s best to get the letter before you start seriously house hunting. Mortgage preapproval requires a hard credit inquiry, which can impact your credit score. However, the inquiry won’t impact your FICO score for 30 days. Additionally, any credit checks collected within a 14-day period (45 days with newer scoring models) will be counted as just one inquiry. 

It’s a good idea to shop around for lenders during that two-week period. Some may offer you a lower rate than others. In fact, research from Freddie Mac shows that getting just one additional rate quote saves borrowers an average of $1,500 over the life of the loan. But you’ll also want to consider the speed and quality of service each lender provides when choosing a lender. 

While it might seem easiest to just email the listing agent on the first house you like, this isn’t the best strategy, says Morales, who is also a licensed real estate agent. “My suggestion would be to have your own independent representation distinct and separate from the seller’s agent. This is the only way to ensure that your interests are the priority for an agent.” 

So, how do you find a good real estate agent? Referrals from friends and family members are a great place to start, says Warrick. You can also conduct a Google search. “Look for agents with social proof,” suggests Warrick, such as great customer reviews or media coverage. (You can also use the tool below.) While you have the option of representing yourself, it may be difficult to navigate the process alone as a first-time homebuyer. Plus, “A buyer does not pay for real estate agents,” notes Warrick. The seller covers the cost. 

Look for a home that meets your needs. Consider factors like the location, square footage, number of bedrooms, and school district. When you’re ready to make an offer, your real estate agent can help you decide how much to offer and what contingencies to include. Most offers will require an earnest money deposit, which may be 1% to 2% of the home price, which shows that you’re seriously interested in purchasing the home (you may lose this deposit if you walk away later for reasons not outlined in your purchase contract). 

The seller could accept or reject the offer, or they may negotiate a different purchase price. Once you and the seller agree on the price, you’ll typically have 10-14 days to sign a purchase and sale agreement. At this point, you’ll be under contract, which is an important milestone in the homebuying process — but it’s not time to celebrate just yet. 

While a home inspection may not be required, it’s important to have an expert look at the home and flag any issues that might impact what you’re willing to pay for the home. The home inspector could find minor problems that you don’t mind repairing yourself, or they might identify issues with the foundation or other concerns that could prevent you from proceeding with the sale. You might also ask the seller to fix the problems or offer credits. 

You’ll also need to schedule a home appraisal as part of the mortgage underwriting process. The appraiser will estimate the current value of the home based on the condition of the home and the values of other homes in the neighborhood. If the appraised value is lower than the price you offered, you may need to pay the difference or ask the seller to lower the price. 

After taking a final walkthrough of the home, you’re ready to close. Review your closing disclosure, which will be provided by your lender at least three business days before your closing date, to make sure you’re happy with the final rate and terms. When you show up on closing day, bring your ID, proof of funds, and your closing disclosure. You might also want to have a bottle of a sparkling drink ready in your fridge at home — you’re almost ready to celebrate!

You’ll review and sign a lot of paperwork at closing, including the mortgage note and deed or trust. Your real estate agent will be there to answer your questions. If it’s a complicated sale, you may also want your own real estate attorney to be present. When everything is signed, you’ll get the keys to your new home. 

The amount of money you’ll need depends on several factors, including:

• The median home price in your area
• The type and size of home you’re looking for
• The type of mortgage you’re applying for
• Whether you plan to take advantage of first-time homebuyer programs
• Whether you’re eligible for local down payment assistance programs 
• Current mortgage rates, which will impact your monthly payment

Translation: “It’s best to speak with a mortgage professional for guidance,” says Warrick. 

“Your credit score will determine the mortgage products that will be available to you, so keep that in mind,” says Morales. “For instance, a borrower with a 580 credit score will have limited options compared to a borrower with a 780 credit score. In addition, the 580 borrower will have much higher costs (interest rate and mortgage insurance, for example) since they are deemed a riskier borrower.”

Warrick says the minimum credit score a lender will accept is 500, but you’d need to have enough money to put 10% down. And a bad credit mortgage will mean higher monthly payments as well. 

Morales says that once you have a preapproval letter, the time to get an offer accepted depends on the market. “Seller markets typically have low inventory so it may take a while for you to find a home that fits your needs and preferences,” she says. You have a better chance of finding a home quickly in a buyer’s market. “Once an offer is accepted, the typical time to close on a deal is 30-45 days,” Morales adds. But it can take longer if there are issues complicating the sale. 

• Trim your expenses: Cut out or reduce unnecessary expenses, such as dining out and buying alcohol. Look for other ways to save, too, like using cash-back apps and shopping around for cheaper car insurance coverage. 
• Increase your income: Demonstrate your value at your job and ask for a raise. You might also pick up a side hustle, sell your used furniture and clothes online, or rent out your spare room, storage space, or parking spot, if your lease allows. You can also get cash out of your car, either by renting it out or using it for an advertising campaign. 
• Stick to a budget: Add up your monthly income and subtract your regular monthly bills. With what’s leftover, devote a reasonable amount to each category, keeping unnecessary spending to a minimum. Anything left can go directly into a savings account each month. 
• Make automatic savings deposits: To make the most out of your savings, set up an automatic deposit into a high-yield savings account each month, based on what your budget will allow. The high APY will allow you to grow your money faster. Some of the best savings accounts have APYs above 5% right now.
• Ask for help: It’s not uncommon to get help from family or friends when buying a home for the first time. According to the National Association of Realtors, 22% of first-time homebuyers received a gift or loan from family or friends to help with the downpayment in 2022. 

“When you can afford the payment, it’s typically a good time to buy,” says Warrick, since home prices tend to appreciate. Mortgage rates are high right now, which means you’ll be able to afford less house. However, Morales says there’s an advantage to a high-interest rate environment — the competition is not as fierce, which gives buyers more negotiating power. 

“Remember, you can always refinance the rate but you can never change how much you paid for the home,” says Morales. “I am seeing buyers finally getting better deals and terms on their home purchase compared to what I was seeing in 2020 and 2021.” 

That said, the decision to buy a home is always a personal one. Even if you can get mortgage preapproval, you might not feel emotionally ready to purchase a home. And there’s little risk to waiting. Home price growth is expected to be slow over the next several years, according to some analysts, and mortgage rates may come down as well. 

Millennials may have waited longer than previous generations to start a household, but Zoomers are zooming ahead with plans to buy homes. Two-thirds of Gen Z are preparing to purchase a home sometime in the next six years. And with a little patience, some strict saving, and the right education about the process, we believe they’ll get there. If you’re focused on buying a home, remember that you don’t have to do it alone. Your mortgage lender and real estate agent can provide guidance, and you may even rely on your family for financial support. Before you know it, you’ll be unlocking the door to your first home. 

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Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.

This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].