A new generation of homebuyers may shatter the myth that millennials are serial renters, according to a recent survey by Realtor.com. As cited in the survey: 61 percent of first-time buyers in the coming year will be under the age of thirty-five. It appears that despite student loans, credit card debt, and near-stagnant wages, the millennial generation is setting down roots and eschewing rent payments.
Francis John, a financial blogger living in Sioux Falls, N.D., and his wife scraped together a five-year plan to save up for a down payment on a house when their landlord informed them he was raising the rent. “And it was already very high, so signing a lease for another year for an even higher rent didn’t make sense,” shares John, whose blog, www.mybreadmoney.com, focuses on personal finance. “We wanted to start investing in ourselves. It was better for the extra $100 to go into our own home, than our landlord’s pocket.” When he and his wife began looking at homes, they worked closely with a local bank to guide them in the process.
Denisse Oceguera, a buyer specialist from The Lewis Group in Marietta, Ga., encourages all buyers to seek guidance from a professional. “I cannot stress enough the importance of having a good lender who can guide you through the loan,” she says. “Once the pre-approval is in hand, you should have an idea of your price range, as well as your estimated monthly payment,” she says.
Experts at East West Bank’s Mortgage Department say that home buyers should plan ahead, and sit down with a loan officer to find out the best program for their situation, at least two to three months before they sign the sales contact
Not everyone can afford to put 20 percent down on a 15- or 30-year mortgage, especially millennials. “As far as millennial buyers and mortgages, I see more having difficulty saving money for down payments, as many have college loans that take up a large amount of their monthly incomes,” shares Kevin Lawton, a realtor for Coldwell Banker Schiavone & Associates in Bordentown, N.J., and the host of The Real Estate Deal on 1077thebronc.com. Lawton, a millennial, says his clients are often interested in a Federal Housing Administration (FHA) loan because it gives them the ability to outlay less cash. “I see a lot of them going with FHA as it allows for a minimum down payment of 3.5 percent,” he says. But FHA loans are not the only way to prevent the dreaded 20 percent down payment.
“Keep in mind that in our current market, there are conventional programs for down payments as little as 3, 5, or 10 percent of sales price, FHA for 3.5 percent, and some grant programs that provide the down payment for the buyer. There are many options,” shares Oceguera.
Krystal Rogers-Nelson and her husband, from Salt Lake City, both millennials, bought their first house in 2013. “It was a pretty intimidating process,” she says. “Luckily, we had a great realtor who shared our values and helped us navigate the entire process. We ended up finding a house that was in our budget, easy to maintain, and way bigger than anything else we were looking at in the neighborhood.” Rogers-Nelson says even though her credit score was high enough to qualify for a conventional mortgage, she opted for the popular FHA financing instead.
The Rogers-Nelson family pays nearly the same amount for their monthly mortgage as they did in rent. Another upside? The value of the home has increased by 10 percent. “With our growing family (we have one three-year-old and are planning to have another), this has been a great decision for us. Even though it is not my absolute dream home, it's been a great starter house to help us build equity and invest in our future.”
Conventional loans typically require a 20 percent down payment. If the amount is lower, a buyer may have to take out private mortgage insurance. The down payment amount can sometimes be negotiated depending on the owner and the type of loan. For example, a Fannie Mae HomeStyle loan calls for at least 5 percent of the purchase price. A conventional mortgage loan comes with either fixed or adjustable interest rates.
A fixed-rate mortgage (typically 15- or 30-year) keeps the same interest rate for the life of the loan, and monthly payments never change. An adjustable-rate mortgage loan, an ARM, has a moveable interest rate. For example, if someone takes out a 5/1 ARM, the loan has a fixed interest rate for the first five years, and then will adjust every year.
These mortgage loans can be taken as a fixed-rate or adjustable mortgage loan, but the requirements are less of a financial burden, if buyers qualify for them. The most popular government-backed loan for millennials is the aforementioned FHA. This program, run by the Federal Housing Administration, has an advantage—it allows buyers to make a low down payment, as little as 3.5 percent of the purchase price. One caveat: borrowers must take out mortgage insurance.
There are two other government-backed loan programs: one is for veterans through the U.S. Department of Veteran Affairs, and the other (for anyone fitting the requirements) is a program through the U.S. Department of Agriculture for rural residences with low incomes. It is important for potential buyers to discuss with their bank the right loan product for their financial needs.
Millennials who need to qualify for home loans without a lot of money upfront may want to look at longer-range loans, says Liu. “A 30-year mortgage loan is easier to afford because the monthly payment will be lower than a shorter term, like a 15-year mortgage,” he shares.
For John, the FHA mortgage was the best choice. “We bought our home two years ago, thanks to an FHA mortgage. Our budget was low, so we took on a longer-term loan, a 30-year fixed rate, and because we qualified for an FHA loan, it was affordable. The loan process was surprisingly easy. I enjoyed everything from pulling my credit, to signing at the closing.”
Years later, John and his wife still feel they made the right decision to take a 30-year fixed option. “We might have been able to qualify for another type of loan, but we felt it was prudent to take out a 30-year, fixed-rate product, even with the mortgage insurance that we had to pay,” he says. “We could have put that mortgage insurance money to our principal and pay it off faster, but we wouldn’t have been able to afford a large down payment.”