A survey of young renters by Fannie Mae found that the factor that delays the most potential buyers is an insufficient credit score or history (53%), followed closely behind by “affording the down payment and closing costs (50%).”
The chart on the right showcases the top 6 reasons identified by the study.
There are many potential homebuyers who have delayed their purchase because they ‘believe’ that they do not qualify with the debt they have (debt-to-income ratio), their credit score, or even the amount of savings they have.
The challenge is that many of those who delay their purchases are not aware of the opportunities available, and are not aware that they would qualify now. Instead of wasting time paying rent, they could be building their own wealth by putting their housing costs to work for them through the equity in their home.
Let’s Break Down the Top 3 Myths Holding Back 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.”
Just like we saw earlier with the average age at first marriage, Millennials are delaying the social norms that many generations before them had set. According to NAR, Millennials who purchased a home last year delayed their home purchase by a median of 3 years, with 53% of those who delayed their purchase citing student loans as the debt that held them back the most.
Student loans have only delayed their ability to own their own home, not taken away the desire to do so.
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!
“With student debt on the rise, there’s been a lot of speculation about whether the cost of a college degree hurts an individual’s ability to buy a home,” says NerdWallet’s Chris Ling. “From what we’ve seen, getting a four-year degree or higher is actually positively associated with homeownership — even when accounting for debt.”
Thousands of ‘Older Millennials’ are reaching the 10-year mark after college and paying off their student loan debt every day. Many more who may have graduated with more than average debt are one or two years out from being able to lift that financial burden, and are daydreaming about what the future will bring.
46% of homebuyers in 2017 had student loan debt at the time of purchase.
In NAR’s Student Debt & Housing Report, 19% of those with student loans were already homeowners.
Many took advantage of the first-time homebuyers’ credit and are now looking to sell their homes and move on to accommodate their more ‘grown up’ lives. For example, some may now be married, with a better job, possibly with kids or one on the way, or aging parents that they will soon need to accommodate.
According to NAR’s Generational Study, 46% of all Millennial homebuyers in 2017 purchased their homes while still paying off their student loans. Although this is a larger percentage than the 26% of all buyers who had student debt at the time of their home purchase, the distribution of the amount of debt is consistent with all buyers.
Myth 2: Student Loans are Preventing Millennials from Buying
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 percent 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%.
Below are the results of a Digital Risk survey of Millennials who recently purchased homes.
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!
61% of Millennials who purchased a home in 2017 put down 10% or less!
According to data from the last 12 months of Ellie Mae’s Millennial Tracker, the average down payment for a Millennial was 10%.
Your dream home could be within your reach much sooner than you ever thought if you only need to save up 3-10% instead of the 20% that you may have thought you needed!
Depending on where you live, median income, median rents and home prices all vary. So, we set out to find out how long would it take you to save for a down payment in each state?
By determining the percentage of income spent renting a 2-bedroom apartment in each state, and the amount needed for a 10% down payment, we were able to establish how long (in years) it would take for an average resident to save enough money to buy a home of their own.
Below is a map created using the data for each state.
What if you only needed to save 3%?
What if you were able to take advantage of one of the Freddie Mac or Fannie Mae 3% down programs? Suddenly, saving for a down payment no longer takes 5 or 10 years, but becomes attainable in under two years in many states. Shown on the map below.
Whether you have just started to save for a down payment, or have been saving for years, your dream home may be closer than you think
Myth 3: You Need ‘Perfect Credit’ 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.”
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 on the right, 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!