How Do Millennials Qualify for Mortgages?

I know that I have written a lot about millennials and home buying lately. But, like I said before, millennials are the biggest generational group EVER! I promise I'm not just pandering to the largest group of customers that's out there. I am myself a part of that group, so these topics matter to me personally!

I came across an article from U.S. News a couple of months back that addresses some of the problems that Millennials face with obtaining mortgages and how to overcome them. I didn't get around to writing a post about it at the time, but I'm at an open house now and decided to be productive with my down time!

According to the article, "How Millennials Can Overcome Hurdles to Homebuying," written by Geoff Williams, only 36% of homeowners are 35 or younger. That is the lowest percentage for that age bracket in 33 years. That number may not seem so important, but if you consider that Millennials are to be surpassing baby boomers in volume this year, you'll understand that millennials should be achieving home ownership at a higher rate. There are a multitude of reasons for why this is not the case. Some are economical and some are lifestyle. 

There are a few economical reasons why home ownership is lacking for Generation Y. First and foremost is STUDENT DEBT. I don't want to discuss the politics or economics of student debt much on this forum. Let's just say that it is an epidemic that is going to cause another economic collapse unless it is handled with diligence. We need some student loan forgiveness packages soon or we are going to face another under stimulated economy and a massive wave of defaulters. It's obvious that swinging the finances to pay your mortgage, insurance and taxes can be made much more difficult when you're shelling out $500 per month to Sallie Mae. That one is apparent. The other reason that student debt is endemic to home purchases is that it greatly affects your debt-to-income ratio. This is the formula that a lender will look at to see how much your monthly obligations are in terms of outgoing payments. This is usually occupied by housing expenses, credit card payments, car payments, insurances, bills and student loan repayments. These loans didn't exist in such magnitude in years gone. We are now adding a new line of debt to the ratio which increases the debt total. This effectively lowers your usable income drastically. That means every dollar more that you owe Sallie is a dollar less that your mortgage provider can count on. Unfortunately, there is no real solution to this. Either there will need to be some kind of student debt refinance or one will just have to pay their principal debt down enough to satisfy their chosen lender.

The next issue that many young, potential homebuyers face is low income. Just because you have low income does not mean that you can not qualify for a mortgage. It just means that you have less options. Less income means less houses to choose from and less lenders that will lend to low earners. Fortunately, there are loans such as FHA loans that are government backed and are meant to provide home ownership to both first time homebuyers, low earners and others in similar situations. Most FHAs are accompanied by a low down payment, often only 3.5% of the purchase price and have interest rates of as low as 3.75%. There are some set backs to FHAs. The amount of paperwork involved is staggering. But, you also have to pay PMI (private mortgage insurance), which is an additional fee on top of your mortgage payment that the lender gets to keep in case the borrower defaults. This is a safety measure meant to provide the lender with some additional revenue since they are often lending to less-than-safe borrowers. This ranges from $50-150 per month. Again, there is no real way to remediate this. As any young person will tell you, optimal employment has become more difficult to secure in recent years and not for lack of trying. 

The last financial hurdle is lack of credit or bad credit. In most mortgage situations, the lender can not work with a credit score of less than 600. Sometimes they can lend to a borrower with as little as a 580 credit score, but they must have a higher income than usual. Of course, it is hard to maintain high credit when you have both a lack of income and student debt and many of these economic hurdles are cyclical. Not to mention that financial literacy is not a topic that is given much attention to our youth. In some ways a lack of credit is worse than bad credit. I know a lot of young adults that do not want lines of credit because they have not only seen their predecessors let their balances get out of hand, but many say that they do not trust themselves with credit cards. If you do not have a credit history, the bank has no way of being able to tell whether or not you are a reliable borrower and hence won't risk the chance of lending to those individuals. If you have bad credit, at least you have the foundation in which to repair your credit score and show that you are now capable of managing your debts. The solution to credit issues is fairly simple. Make you payments on time all the time and try to keep at least 50% of your available credit available! Even less of a balance or none at all, if you can! If you have no credit... Apply for it! And if you can't get approved by one of the big companies, try to get a line of credit from a store or vendor that provides one. Before long, you will receive more credit offers as long as you have treated that Target card responsibly.

There are also some lifestyle choices that millennials make that prevent them from buying a home. One being that they choose to migrate to metropolitan areas with higher concentrations of people. These metropolitans have a higher cost of living and are therefore more expensive to purchase homes in. There is nothing wrong with this. It's just presents a difficulty. Another Factor that has affected the number of Millennials buying homes is that many of them simply do not want to be tethered to one place indefinitely. The world has become a much smaller place thanks to technology and we are now able to travel more freely and work from satellite. Many young people leave one area for another in search of better or more gratifying opportunities. There is nothing wrong with this, either! 

At the end of the day, it comes down to having both the financial ability to buy a home and the desire to settle in that location. If you think that you're ready to do so, let me know! I'll be glad to help and I'd love to be your agent! Just lately, I've been approached by MANY more young people that are not only eager to buy, but are also qualified to buy. It's refreshing and hopeful. Now is just about the best time that there is to buy a home. The housing market is beginning to creep upward as we pull away from the recession. 

And I've recently utilized an MLS search function on my Facebook Realtor page®. If you would like to browse the Charleston area MLS, please visit my agent page and like me while you're there! The link is : https://www.facebook.com/troyfranklingandeerealtor

Thanks!

Troy Franklin Gandee