I know I write a lot about millennials. I don't do that because I have no interest in gen X'ers or baby boomers. I do that because I am a millennial and I know the struggles that millennials face. Like every think tank, big business and economist, I am also aware that millennials are the mot potent economic group that this country has ever seen. Unfortunately, millennials entered the work force at various stages of the recession or in the recovery process shortly thereafter. Another unfortunate event is that many millennials are burdened with crippling student debt and are finding less employment than they had hoped to find. Our generation gets a lot of flack from our predecessors, but what younger generation doesn't? It doesn't bother me. I think we're doing quite well considering the previous and current economic climates. The fantastic thing for real estate professionals is that millennials consistently state in polls that they think home ownership is important and intend to own a home. However, it is still difficult for many millennials to qualify for mortgages. Fortunately, that may not be for much longer.
I recently read an article by NAR's chief economist, Jonathan Smoke, entitled "An Economist's Letter to Millennials Who Can't (Yet) Buy a Home." Jonathan recently attended a town-hall event with HUD Secretary Julian Castro at George Washington University where they faced a number of millennials and discussed their role and concerns regarding real estate. I'm sure that these gentlemen faced a volley of questions and concerns. Thankfully, Jonathan's article expands on some of the points that tend to restrict millennials the most when it comes to purchasing a home. The following points are some of the major concerns amongst millennials:
- Debt - This is the big one. It's no surprise that millennials carry an astounding amount of student debt. The most unfortunate thing is that most young people incurred these debts in the hope that their education would make them so employable that it would outweigh their debts. While the economy has rebounded drastically, most of the individuals still hold a crippling debt load. With that being said, most lenders require that your debt ration be no higher than 43%. Mortgage providers use a debt-to-income ration to decide how reliable you are as a borrower. Their main concern is that they will be paid back and if you have too much other debt, the likelihood that you pay them back on time and in full is worrisome. Even if you do have less than 43% debt, if your income is low, you may still have a very hard time qualifying for the kind of home that you want. Currently, the only solution to this issue to not incur new debt and to be Spartan in paying off your prior debts. The current DTI for millennials that have purchased homes is around 36%.
- Credit - Credit problems are certainly not a millennial problem. People of all ages are affected by credit woes. However, I do think that young people struggle with credit more than most. For being the richest nation in the world, we door a poor job teaching our youth financial education. Many young people don't even understand how credit works before they damage their credit scores. Anyways, the good news is that the average FICO amongst millennials is actually higher than that of the national average. The bare minimum for an average lender providing an FHA is a credit score of 580. Qualifying for a mortgage with a 580 credit score will not lock in the best terms, but it will get the job done. The higher your credit score, the better you terms because it shows your ability to pay your debts on time. A 750 or higher will have the greatest effect on getting great terms.
- Down payment - There is a misconception that you need 20% down on a home. You do not. There are many loans that do require 20% down but it is not common for a first time buyer. The more you put down on a property, the better your terms will be. Even putting 10% down will make a huge difference. However, there are many loans directed at first time/lower income buyers that require only 3-5% down. While your rates will not be the most competitive if you only put down 3%, it will get you into a house. The real problem here is that most millennials are so cash strapped from underemployment and student debt that they have no real savings. The first steps here are to reduce your debt ratio, save up enough for an emergency fund and then save for your down payment. Talk to your lender about an FHA or a comparable mortgage with a low down payment.
Jonathan goes on to discuss the problem of ever-increasing rents. This is especially true in urban environments where millennials tend to flock. Rent prices have been experiencing an increase and they do not seem to be near the end of this. Unfortunately, when rent increases, it makes it even harder for people to save or to pay off their debts. Most young people have already taken to living further form their urban centers than they would like or living in less desirable properties. Unfortunately, this seems to be the only solution if you wish to manage your finances more wisely. While it is taking us longer to purchase and to reach our desired incomes than our predecessors, it is only a matter of time before we reach our goals. We are soon to make up the vast majority of the work force and we are the most adept at technological advancement and prowess. It is no secret that our economy is dependent upon technology these days and we were born in the era of the computer. Keep you chins up and your debts low (unless it's leveraged debt, of course)!
That's all for now. If you have any questions or need any help buying or selling a home, let me know! I'm more than happy to help!
Troy Franklin Gandee