Are you a millennial thinking about buying a home? Then this blog is for you!

The millennial generation is the largest generation in United States history. According to the US Census Bureau: “[Millennials] born between 1982-2000, now number 83.1 million and represent more than one quarter of the nation’s population. Their size exceeds that of the 75.4 million baby boomers.” If you are one of the millions of millennials who has seen their peers begin to buy homes recently and are wondering what it would take for you to do the same... you’ve found the right place! There are many stereotypes and myths about the millennial generation as a whole, AND about what it takes to buy a home in today’s market. These myths have prevented many millennials from even considering homeownership as an option for them and their families.

You’re not alone if you haven’t bought a home yet!

If it seems like all your friends are buying a house... it’s because they are! But don’t worry, you’re not alone if you haven’t. There has been a lot of talk about how, as a generation, millennials have ‘failed to launch’ into adulthood and have delayed moving out of their family’s home. What doesn’t seem to be mentioned in the same context, however, is the large number of millennials who have moved out of their family’s home, but have been renting an apartment, condo, or even a house! Many experts have looked at the homeownership rate among millennials and have questioned if they even want to own homes! The great news is that not only do millennials want to own... they are flocking to the real estate market in larger numbers every year! Buyers aged 18-34 years have comprised the largest share of first-time homebuyers at roughly 50- 60% for the last few years. In 2017, buyers aged 25-34 years accounted for 65% of first-time home buyers, compared to 50% in 2005. According to the National Association of Realtor’s latest Profile of Home Buyers and Sellers, the average age of a first-time home buyer in 2017 was 32. This generation will continue to be the topic of conversation A LOT when it comes to housing as more and more enter ‘average home buying age’.

Let’s break down the top 3 myths holding back millennial buyers:

MYTH 1: Student loans are preventing millennials from buying

Millennials are on track to becoming the most educated generation in history. This means they are also the generation with the most student debt. Depending on the type of degree earned, as well as the prestige of the institution attended, there are some millennials who graduate college with what equates to a mortgage payment. But that’s not the case for all. Here are some statistics about the average college graduate & their student loans:

• The age of the average college graduate is 22 years old.

• The average student graduates college with $25,000 in student loan debt.

• The terms of the average loan are 10 years, with a monthly loan payment of $280, and an interest rate of 6.8%.

Looking at these stats, the average college graduate has what amounts to a 10-year car payment after graduation. Is earning a degree worth the debt? According to a study by the Brookings Institute, the dividing line between haves and have-nots in homeownership is “education, not student debt.” “This picture accords with what we know about the growing gulf in the economic fortunes of those with and without a college education. Men with a BA earn $35,000 more a year than those without, while for women the gap is $25,000.” A study by Fannie Mae supports this fact as they go on to say: “Those who completed at least a bachelor’s degree without student debt were 43% more likely to be homeowners than high school graduates who didn’t attend college and don’t have student debt.” The College Board reports that “the typical bachelor’s degree recipient can expect to earn about 66% more during a 40-year working life than the typical high school graduate earns over the same period.”

Reasons Those with Student Loans Are Delaying Buying a Home:

• 85% - Can’t save for a down payment because of student debt

• 74% - Don’t feel financially secure enough because of existing student debt

• 52% - Can’t qualify for a mortgage due to debt-to-income ratio (DTI)

• 47% - Can’t afford their preferred house or neighborhood

• 18% - Don’t have the financial know-how to confidently navigate the housing market

Seems like there is some work to be done to educate those with Student Loan debt that they may be disqualifying themselves and may be able to buy now:

Can’t save for a down payment – What size down payment do they think they need?
Can’t qualify for a mortgage due to debt-to-income ratio (DTI) – There is a big difference between your front-end DTI and your back-end DTI. The front-end DTI measures the amount of your monthly income that you will be spending on your mortgage payment. The back-end DTI takes into consideration your entire monthly expenses (or debts) in comparison to your monthly income. According to Ellie Mae’s Origination Report, loans closed over the last year had an average front-end DTI of 25% and an average back-end DTI of 39% which is much higher than many believe they need.
The last one is where your agent comes in: Don’t have the financial know-how to confidently navigate the housing market - Your agent should be your strategic partner throughout the home buying process. He or she is there to answer your questions and put your mind at ease about the big decisions that you will be making in order to make your dream of owning a home come true!

MYTH 2: You need a 20% down payment to buy a home

Gone are the days of 20% down or no loan, but recent surveys reveal that many Americans are not aware that programs exist to put down less. Fannie Mae’s article, “What Consumers (Don’t) Know About Mortgage Qualification Criteria,” revealed that “only 5 to 16% of respondents know the correct ranges for key mortgage qualification criteria.” The survey results revealed that consumers often overestimate the down payment funds needed to qualify for a home loan; 76% of respondents either don’t know (40%) or are misinformed (36%) about the minimum down payment required. Many believe that they need at least 20% down to buy their dream home, but many programs actually let buyers put down as little as 3%. Since millennials make up the largest share of first-time buyers, it should come as no surprise that 97% of this generation financed their home purchase, compared to 86% of all buyers. What may come as a surprise to many who have not yet purchased, however, is that 16% of those who financed their home put 0% down! Check out this article for more information!

MYTH 3: You need a perfect credit score to buy a home

What is a credit score? According to Investopedia, “a credit score is a statistical number that depicts a person’s creditworthiness. Lenders use a credit score to evaluate the probability that a person repays their debts. Companies generate a credit score for each person with a Social Security number using data from the person’s previous credit history. A credit score is a three-digit number ranging from 300 to 850, with 850 as the highest score that a borrower can achieve. The higher the score, the more financially trustworthy a person is considered to be. Don’t make the mistake of disqualifying yourself by thinking you need a 780 score. Fannie Mae’s survey also revealed that 59% of Americans either don’t know or are misinformed about what FICO® credit score is necessary to qualify. Many Americans believe a ‘good’ score is 780 or higher. To help debunk this myth, let’s take a look at Ellie Mae’s latest Origination Insight Report, which focuses on recently closed (approved) loans. As you can see above, 52.7% of approved mortgages had a FICO® score between 600-749. Over the last 12 months, the average FICO® Score for home purchases by millennials was 723!

So what are the financial benefits of buying a home?

According to a report by Trulia, “buying is cheaper than renting in 100 of the largest metro areas by an average of 37.4%.” That may have some thinking about buying a home instead of signing another lease extension, but does that make sense from a financial perspective? In the report, Ralph McLaughlin, Trulia’s Chief Economist, explains: “Owning a home is one of the most common ways households build long-term wealth, as it acts like a forced savings account. Instead of paying your landlord, you can pay yourself in the long run through paying down a mortgage on a house.” The report listed five reasons why owning a home makes financial sense:

1. Mortgage payments can be fixed while rents go up.

2. Equity in your home can be a financial resource later.

3. You can build wealth without paying capital gains.

4. A mortgage can act as a forced savings account.

5. Overall, homeowners can enjoy greater wealth growth than renters.

They say the only guarantees in life are death and taxes, but it seems like they should also add rent increases to that list. A whopping $485.6 billion was spent on rents in the U.S. in 2017. This represents an increase of over $4.9 billion from the year before. There are many benefits to homeownership. One of the top ones is being able to protect yourself from rising rents by locking in your housing cost for the life of your mortgage. In an article by The Mortgage Reports, they report that “buying and owning a home is the essence of ‘The American Dream.’ Each month, your housing payments go toward owning your home instead of renting it; building your personal wealth and assets instead of someone else’s. History has shown that homeownership is a clear path to wealth-building, with homeowners boasting a net worth [that is] multiples higher than the net worth of renters.”

Ok, you’re ready to think about buying. What now?

Realtor.com shared '5 Habits to Start Now if you Hope to Buy a Home.' Below are the top three from their list with a brief description.

#1 - Automate Your Down Payment Savings One way to jump start your down payment savings is to automate your checking account to automatically save a small amount of your paycheck into a separate savings account or ‘house fund’. “Amassing enough for a down payment takes discipline & perseverance, but setting up automatic savings can make it easier. If you never see the cash, you won’t spend it.”

#2 - Build Your Credit History & Keep It Clean When you go to apply for a mortgage, lenders will want to see that you have been able to pay off past debts. This means staying on top of your student loans, credit cards, and car loans and paying them on time! Credit bureaus recommend using no more than 30% of the credit available to you.

#3 - Practice Living on a Budget Downsizing your spending now will allow you to save more for your down payment & pay down other debts to improve your credit score. A study by Bank of America showed that “95% of first time buyers were willing to make sacrifices to buy their home faster.” The top 3 sacrifices cited by millennials when saving for a home are: cutting back on new clothes, a new car, and travel.

Knowing your credit score and getting a recent copy of your credit report is one of the first steps that you can take toward knowing how ready you are to start the home buying process. Make sure all the information listed on your report is accurate and work to correct any mistakes. The higher your credit score, the more likely you will be to receive a better interest rate for your mortgage, which will translate into more ‘home for your money.' Here are some tips for improving your credit score:

• Make payments, including rent, credit cards, and car loans, on time. • Keep your spending to no more than 30% of your limit on credit cards.

• Pay down high-balance credit cards to lower balances, and consider balance transfers to free up credit.

• Check for errors on your credit report and work toward fixing them.

• Shop for mortgage rates within a 30-day period — too many spread-out inquiries can lower your score.

• Work with a credit counselor or a lender to improve your score. (We have a great counselor we can introduce you to!)

Now that you know what is required to own a home in today’s market, are you ready to own your own home? In many areas of the country, owning a home is still significantly less expensive than renting and could actually save you money every month. (Check out our blog with more info on that!) Real estate is hyperlocal. Having an agent on your team who is an expert in your area will ensure that you get the best advice and are educated on the opportunities available to you now. We’d love to talk to you about your home buying goals, contact us today!

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