As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
Millennials are savvy. We’ve come of age in an Internet revolution and had a front row seat to the rise of Facebook, Twitter and Snapchat. We text each other in emojis and GIFs to send quicker messages. We’ve even made Instagram a verb.
In a world where so much information is coming at us so fast, we have to be on our game. Given that we’re this on top of things, most of us are good at making confident decisions very quickly. With that in mind, it seems odd that many of us would delay getting our first home.
So what have we done instead? Many of us rent, giving our money to a landlord rather than gaining ownership and building equity in a place of our own. Some of us live with our parents. That’s OK, but it has its downsides.
It doesn’t have to be this way. We can get a place that’s truly ours, and most of us can do it sooner than we think. In this article, we’re going to take a look at some of the reasons millennials aren’t buying homes and why they should probably take another look at buying.
You’ve probably heard there are less jobs available than there were when your parents graduated high school or college. It certainly may be true that you’re not likely to get a job right out of high school making $50,000 a year working the assembly line.
However, if you look at the data, it’s hard to buy into the fact that there are less jobs out there on the market. I know conventional wisdom is hard to upend, so let’s take a look at the data.
If you look at the unemployment rate over the last 10 years as tracked by the Bureau of Labor Statistics, it peaked at 10.9% in 2009 at the height of the recession. It’s gone down every year since with the average unemployment in 2015 settling at 6.0%.
The most recent monthly numbers for March show the unemployment rate hovering around 5.0%. While this isn’t the lowest the unemployment rate has ever been, it’s definitely getting down there.
There are jobs out there, even if they aren’t necessarily the ones our parents had. My job probably didn’t exist as recently as five years ago. It may not exist in 10 years when we’re all downloading information directly to our brain. That’s OK. I’ll just move on to the next thing and make money that way.
This is a long way of saying there are a lot of jobs available and you shouldn’t let the job market deter you from getting a house.
I like to think millennials are pretty responsible. One of the more responsible decisions we seem to have made as a generation is that we won’t get into the debt our parents have. That’s admirable, but it has its consequences.
When you reached college and everyone was trying to sign you up for a credit card in exchange for a free T-shirt, you no doubt reacted with skepticism and probably passed the table by. Why would you buy anything you don’t have the money to pay for right now?
The problem is there are certain things that would be more difficult to buy without taking out a loan, like a car or a house. When it comes time to apply for these things, the lender will want to see that you’ve been able to manage debt responsibly and make payments.
In order to show responsible management, you should probably sign up for one of those credit cards. The best way to show a good payment history and build up your credit quickly is just to treat it like a debit card in that you only buy what you can afford and pay it off every month.
College is a great experience and hopefully most of us hone skills that we put to use in the workforce soon after graduation. However, it can get really expensive. According to a Wall Street Journal article from last May, the average class of 2015 graduate is carrying more than $35,000 in student loan debt.
Although it’s a lot of debt to pay off, you don’t have to let it cripple you. You can still go about your life and even get a house.
Let’s set up a scenario. Pretend you’re a recent college graduate with $35,000 in student loan debt trying to qualify for an FHA loan. Since there’s a certain amount of time they give you to find a job after you graduate, your loans are in deferment right now; they won’t be forever.
When you try to qualify for a loan under FHA, as long as you have evidence of what the actual student loan payment will be, that can be used. If you don’t have a statement, we use the payment reporting on your credit. If nothing shows up then, you can qualify with 0.5% of your outstanding loan balance per month. So let’s say your payment is $400 per month, you have a car payment that’s $300 and a credit card bill of $250.
Since you just got hired in an entry-level position that pays $3,000 a month, your debt-to-income (DTI) ratio is 31.67% ($950/$3,000).
One thing to keep in mind is the fact that if you don’t have evidence of the payment on a statement or credit report, you can’t use the actual payment. You’re qualified as if you have to pay back 2% of the loan amount every month. In the above example, 2% of $35,000 would be $700 per month. It would take your DTI up to 41.67% ($1,250/$3,000). You would still qualify, but it would severely limit how much house you could afford.
It definitely helps in this situation to have pretty good credit. If you qualify for a conventional loan with a 620 FICO score, even if you don’t have evidence of the actual payment, they only make you qualify with an assumption that you have to pay back 1% per month. In the above scenario, 1% is $350. This brings monthly DTI down to 30% ($900/$3000).
How your DTI is impacted by your student loans depends on the type of mortgage you’re trying to get and whether your student loans are deferred, in repayment, etc. The best thing to do is ask your lender.
Dispelling Down Payment Myths
This is probably the biggest myth that persists in the mortgage industry. You don’t have to put 20% down in order to get a house, despite what everyone might try to tell you.
There are a variety of low down payment options available. Well-qualified buyers can get a home for as little as 3% or 3.5%. In any case, the minimum down payment for a conventional loan should be no more than 5%.
There are advantages to a down payment that’s a little bit higher including better rates and mortgage insurance removal, but the idea that you have to put down 20% in order to get a house is just untrue.
I Move Too Much
The next thing you might be thinking about is the fact that you move around too much to make getting a house make sense. This could especially be a concern if you’re young and not really settled in your life yet.
Apartments are great, but you don’t have the ability to really make them your own. Good luck getting your landlord to agree to let you repaint. If you plan on sticking around for a few years, a house may make more sense.
You can get a short-term seven-year adjustable rate mortgage (ARM). The way these work is they are fixed payments for the first five to 10 years of the loan. After that, they adjust up or down based on the bond market.
The advantage to this is that you may be able to get a rate that’s lower over the fixed period of the ARM. It works best for people who know they’ll be moving out before the initial term is up and they’re at the mercy of the market. On the other hand, if you plan to be around a while, a fixed rate may work better.
It’s Hard to Shop
This stuff is confusing. When you go to shop for almost anything else, a head of lettuce, an app or a pair of earphones, there’s one price. Why is it that when you go to shop for a loan, there are two rates?
This comes up whether you’re getting a loan for a house, a car or any other type of loan, you’re going to see one rate that’s the interest rate. That’s the basic cost of borrowing the money. There’s a second rate, the annual percentage rate (APR), that’s higher. APR takes into account the total cost of the loan including any origination and appraisal fees, closing costs, lender credits, etc.
In general, the bigger the difference between the interest rate and APR, the more fees the lender is charging you in order to get this set up.
There are some other factors that go into shopping, like how comfortable you are with the company and the loan type, but knowing how to look at rates and fees can be important.
So you like what you see here, but you don’t want to put on a suit and get all dressed up to go into the bank. Let’s be honest. It’s just not our style. The good news is now you don’t have to leave the house or even pick up the phone. (The only person that calls me is my grandma.)
With Rocket Mortgage, you can get an online preapproval to buy a house. Don’t worry, if you have questions, our Home Loan Experts are still available.
I’m going to leave you with some more information on buying your first home. If you still have questions, feel free to ask us anything below and we’ll get you the answer.
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