Many studies cite different reasons why the millennial generation hasn’t bought into home ownership. Some say this age group doesn’t hold the same interest in buying a house; that they don’t put the same value in property. While this may have some merit, specifically because they watched their parent’s home values plummet and mortgage loans skyrocket, the studies and observations by mortgage professionals like us suggest there are actually three big reasons for lower home ownership among millennials.
Reason #1: Lack of a Down Payment
The adage goes, never walk into your house without owning the front door. Traditionally, a mortgage loan has covered only around 80 percent of a home’s value. For a house that costs $200,000, that means you need to come up with around $40,000. Areas with higher concern about down payments usually have higher average home prices — such as the west and east coasts.
Solution: Pay yourself before you pay others. Open a savings account and set up automatic transfers from each paycheck. Whenever you want to buy that nice jacket or those sweet shoes, fight the urge and instead transfer that same amount into your savings account. Downsize your space, whether that’s your residence or items you own. Live on nothing but cash. At the beginning of the week, take a certain amount of cash out and put whatever you don’t spend into your savings account.
Last, look into down payment assistance programs in your area. Many require only three to five percent down payment or provide grants that don’t need repayment, giving you the ability to save faster. First Mortgage Solutions can offer information in our service areas. It’s easy to get started, just apply for a loan online to get the ball rolling.
Reason #2: Burdened by Student Debt
Earning a college education is a major financial burden, and many millennials are concerned that their college debt is too great to afford home ownership. This is truest for those in the Midwest, where the average debt is more than $25,000 and incomes tend to be smaller.
Solution: It’s a myth that student loan debt prevents you from getting a mortgage loan. Lenders typically look for total debt-to-income, minus a mortgage, to be 28 percent of your income. If your debt takes up more than this, there are some simple, smart ways to pay it down.
If you have multiple loans, focus on paying off the smallest ones first. Each loan that gets knocked off your to-do list will do wonders for your credit score. Double your payments on those each month. When you pay one off, apply that saved payment to your next smallest loan, and so on. Once you get your debt under 28 percent threshold, it’s time to start budgeting for a house.
Reason #3: Mediocre Credit Scores
A major issue facing millennials is the lack of a good credit score – or worse – of credit history at all. Around 67 percent of those under 30 have a credit score of below 680, and with tighter lending restrictions, many are left out.
Solution: Credit scores should not be the nightmare they’ve become. Focus on three things to build your credit score quickly: student loan debt, percentage of credit used, and delinquent accounts. Government student loans hit your credit score the quickest, so the faster you pay them down, the quicker your score increases. Another big factor − a third of what influences your score − is how much of your current credit available is used up. Say you have a credit card with a $5,000 limit. If you’re consistently using more than 30 percent of that credit, it looks bad. Last, it takes years to have delinquent accounts taken off your credit history. Pay those debts ASAP, and follow up with creditors to ensure they’ve taken the steps to have the account adjusted to say “Closed” instead of “Open.”
If you lack a credit history, bring examples of payment history such as rent, bills and other recurring payments to show your level of responsibility in taking care of debts. It’s not a guarantee, but it may tip the scale in your favor.
In a lot of cases — even adding in mortgage insurance, homeowners insurance, increased utilities and more home-related expenses — it’s still cheaper to buy a home than it is to rent. In most states, it’s no less than 20 percent cheaper to buy than rent. All it takes is a few minutes to apply for a loan online, even if it’s just to discover your options. With a little education, a little work and a clear goal in mind, you will be searching for the place of your dreams in no time.
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