What Millennials Need to Know About Getting a Mortgage
Millennials are one the largest segments of the population but they have been slow to embrace home buying due to several factors. The challenge of saving for a down payment, rising rents and economic trends have caused millennials to wait longer than preceding generations to enter the housing market. In fact, the lack of home buying by millennials contributed to a significant dip in the homeownership rate. As millennials continue to establish their financial footing and make gains in the job market, however, they are increasingly looking to buy their first homes.
Some like to unfairly characterize millennials as living in their parents homes, not having credit cards, buying everything online and spending all their free time on their phones. While these points may or may not be true, there are actually some elements of these (mis)characterizations that are relevant and potentially even helpful to the mortgage process. First, because it is harder than ever to save for a down payment due to rising rents and limited wage growth, it is important to highlight that you do not need to make a 20% down payment to buy a home. Plus, you can use a gift from your relatives to pay for all or part of your down payment and closing costs. Certainly having your parents help you buy your own home is better than living with them.
It is also important to understand that millennial home buyers have more financing options than ever including a wide range of no or low down payment programs. Several programs also enable you to buy multi-family properties that can be occupied by relatives or rented out to help you afford the mortgage. For example, these programs are ideal if you want to live near your parents but not in the same home. Several programs also allow the use of income from boarders to help you qualify for the loan. In some ways this is an extension of the sharing economy embraced by millennials.
Millennials are also accused of being addicted to their phones and only shopping online but this is a great thing when it comes to getting a mortgage. It is easier than ever to use your phone or computer to shop lenders and compare loan quotes, which is the best way to save money on your mortgage. Additionally, many lenders offer online or mobile applications which make it easier to upload your information and process your loan. In this context being device-addicted may actually be a good thing.
While the home purchase and mortgage processes are the same for all borrowers, there are several key points that millennials should keep in mind in light of the unique characteristics that define this demographic. Below we outline everything millennials need to know about getting a mortgage and offer advice on how members of this important generation can choose the loan that is right for them.
You Do Not Need to Put 20% Down to Buy a Home
One of the primary reasons that millennials have been slow to buy homes is that saving money for a down payment can be very challenging. Rising rents and relatively flat incomes can make it hard to come up with the funds to put down on a home. The good news is that you do not need to make a down payment of 20% to purchase a home. While it remains true that if you put 20% down you pay the lowest mortgage rate and avoid paying private mortgage insurance (PMI), you can actually buy a home with a down payment as low as 3% and even no down payment in certain cases.
Understand the Down Payment Required for a Mortgage
Down payment grants and other home buying assistance programs may even enable you to buy a home with minimal personal financial contribution. Many homebuyers of all generations decide to put down 20% but it is certainly possible to buy a home with a significantly lower down payment. For millennials with less financial resources, this may open the door to homeownership.
Review Best Low Down Payment Mortgage Programs
You Have Mortgage Options
Millennials borrowers have more lender and mortgage options than ever. Having more choices benefits borrowers by improving your ability to find the loan program that is right for you. There is a wide array of low and no down payment mortgage programs including FHA, VA, USDA and conventional home loan programs. Additionally, there are programs that address several social trends that may be applicable to millennials.
For example, the HomeReady Mortgage Program enables you to use non-traditional sources of income such as income from relatives who live in a home or rental income from boarders to qualify for a mortgage. This unique qualification guidelines addresses the increase in the number of multi-generational households. The Home Possible Mortgage Program also enables borrowers to include income from boarders and offers lower mortgage rates for certain borrowers and properties. There are many mortgage programs designed to meet the unique financial needs and characteristics of millennials.
Review the Best Mortgage Programs for Millennials
There are also different types of loans including fixed rate, adjustable rate mortgages (ARM) and interest only loans. Each mortgage program offers both positive and negatives, depending on your financing goals. For example, many people choose a fixed rate mortgage because of the certainty it provides as your interest rate and payment remained fixed for the entirety of the mortgage.
With an adjustable rate mortgage, sometimes called a variable rate mortgage, your payment is usually lower during the first part of the loan, but then your mortgage rate and payment are subject to change and potentially increase for the duration of the loan term. Interest only mortgage offer the lowest initial payment because your payment does not include principal. This means you can afford the highest loan amount, but interest only mortgages expose borrowers to significant payment shock. Be sure to understand the positives and negatives to select the loan program that meets your needs.
What Mortgage Program is Right for Me?
Your Parents Can Pitch In
Everyone can use a little financial help every now and then and that holds true for millennial homebuyers. There are many ways parents can help you qualify for a mortgage and buy a home. Parents can provide a gift to assist you with your down payment and parents with strong financial and credit profiles may be co-borrowers to help you qualify for a mortgage. With the HomeReady Program referenced above, parents who live in the home you purchase can also help you qualify for the loan without being a co-borrower. Some millennials need an extra nudge and parents can provide the financial support necessary to help you buy a home.
You Can Still Live With Your Friends (or Strangers)
Many mortgage programs enable borrowers to purchase a multifamily home such as a duplex, three or four unit property. In some cases it may be more financially feasible for millennials to buy a multifamily property, live in one unit and then rent out the other unit(s). The rental income from the units you do not occupy may make it easier for you to afford a mortgage and own a home. For example, you could buy a three unit property and rent out the other two units to friends, which could be beneficial to everyone.
Learn How to Get a Mortgage on a Multifamily Property
Keep in mind that the qualification requirements for the mortgage on a multifamily property are different than for a single unit property but the financial advantages can be compelling. Additionally, if you want to keep your friends really close, the HomeReady and Home Possible mortgage programs enable you to include rental income from boarders in your mortgage application. In this scenario you share the same residence with your friends (or randoms) and their rent helps you qualify for the mortgage. There are even a select number of lenders that enable you to use Airbnb income in your loan application but that applies to refinances more than home purchase loans.
Your Credit Score Matters
Studies show that millennials are eschewing traditional forms of credit and have few credit cards than other generations but it important to emphasize that your credit report and score are very important inputs to the mortgage process. In most cases your credit score determines if you qualify for a mortgage and directly affects your mortgage rate. Applicants with lower credit scores pay a higher rate while applicants with higher scores pay a lower interest rate. Many loan programs also require borrowers to meet a minimum credit score requirement, which can range from 580 to 620, depending on the program.
These points reinforce why you should closely examine your credit report and score well in advance of applying for a mortgage. You may discover a negative item on your credit report that you were previously unaware of or your score may be lower than you thought. We highly recommend that you resolve any credit report issues prior to applying for a loan as can take months to address an issue and see your score increase. The good news is there are multiple apps like Credit Sesame and Credit Karma that enable you to monitor your credit report and score free of charge.
Understand the Credit Score Required for a Mortgage
We should also point out that several mortgage programs are allowing borrowers with limited or no credit histories to use non-traditional credit information to qualify for a mortgage. For example, instead of using a credit report, the lender submits a non-traditional credit profile using the borrower's rental payment history plus payments for monthly recurring bills such as utilities or a cell phone. Using a non-traditional profile requires extra effort on the part of lenders, may extend the mortgage process timeline and result in the borrower paying a higher mortgage rate.
You Can Get a Mortgage on Your Phone (or Computer)
It's widely accepted that millennials spend a lot of time on their cell phones, but how is this relevant to getting a mortgage? More lenders are offering mobile and online applications and providing functionality that enables you to upload your personal and financial documents. For example, some lenders provide apps that enable you to take a picture of your W-2s and pay stubs and you may also be able to submit larger documents such as tax returns and bank statements electronically.
The use of technology helps accelerate the mortgage process and addresses the document overload that overwhelms so many borrowers. While the vast majority of loan closings still require borrowers to physically review and sign their loan documents, we are starting to see a handful of lenders offer a fully online or mobile mortgage process. The widespread adoption of an online or mobile mortgage process may be a ways out but millennials' obsession with cell phone should help them get a mortgage in the long run.
Use the FREEandCLEAR Lender Directory to find lenders that offer online mortgage applications.
Don’t Be Influenced By Social Media
Recent reports have indicated that social media is increasingly driving millennials to buy homes. People see their friends post pictures of the home they just bought on Instagram, Snapchat and Facebook and feel compelled to buy their own home. While social media can have a positive impact, it is important that you buy a home because it is the right decision for you based on your specific situation and financial goals. Buying a home before you are financially ready can have significant adverse consequences, especially if you end up with a mortgage or home you cannot afford.
When you are evaluating if you should buy a home make sure to consider all of the expenses involved including your mortgage payment, property tax, homeowners insurance and other applicable housing costs. You should choose a loan amount that reflects your risk appetite and a monthly payment that fits within your financial budget. While social media posts may help you realize it is the right time to buy a home, you want to make sure you can afford it.
Use our Mortgage Qualification Calculator to determine how much mortgage you can afford based on your individual circumstances
Online Shopping is Good
Millennials do the majority of their shopping online, which is a awesome when you are looking for a mortgage. Websites like FREEandCLEAR and others enable you to quickly and easily compare mortgage rates and closing costs for multiple lenders. Simply put, comparing multiple lenders is the best way to save money on your mortgage because it enables you to find the loan with the best terms. A recent study by mortgage industry giant Freddie Mac found that borrowers that receive at least one additional mortgage quote save an average of $1,500 on their loan and borrowers that compared five quotes saved an average of $3,000.
Comparing multiple mortgage quotes is so important because of the dollar amounts involved. Lower your interest rate by only 0.125% can save you thousands of dollars in interest expense over the course of your mortgage. Millennials use the Internet to find the best deal on cars, airline tickets and even jewelry and the same approach can produce significant benefits when you get a mortgage. So even if Amazon offers mortgages one day -- which is rumored to be in the works -- remember to shop around to find the lender and mortgage that are right for you.
The table below compares mortgage rates and fees for leading lenders in your area. We recommend that you contact multiple lenders to find the best loan terms. Shopping for your mortgage is the best way to save money on your loan
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Sources
Simmons, Patrick. Myers, Dowell. "The Awakening of Millennial Homeownership Demand." Perspectives. Fannie Mae, November 29 2017. Web.