I recently sat down with a lender I work closely with and we discussed a common trend we are seeing: millennials are struggling to make the leap into homeownership. As a millennial myself, I'm well-aware of the concerns many younger people have about investing their money in property. Fortunately, I'm also educated about the opportunities that are available to millennial home-buyers. Here's a great article that discusses the issue of how myths about student debt are deterring young individuals from buying property, and how home ownership is absolutely still within reach for college-educated millennials!
Millennial Homeownership Dreams “Can” Come True!
There’s a new generation of homebuyers ready to put down roots in our communities. Born between 1982-2000, the Millennials are our nation’s largest living generation, surpassing the Boomers by a half million (and growing).
Ranging in age from 17 to 35, “mortgage-ready” Millennials (25-35) are thinking about their first home while the “near-ready” (17-24) are entering the credit market with their first credit card.
Student Debt Myth
Over $1 trillion and growing, student loan debt is said to be one of the main reason Millennials don’t think they can afford a home. In reality, student loan debt makes up only four to seven percent of most Millennial’s monthly gross income, research suggests.
“The impact of student loan debt is not as high as other factors like home prices or income,” said Cynthia Waldron, Quantitative Director of Affordable Lending Analytics and Research at Freddie Mac. In fact, a recent study conducted by Freddie Mac and Experian, showed “that a large pool of Millennials, including many with student loans, are ready for a mortgage.” In particular, 75% of Millennials, ages 30-34, are mortgage-ready.
Freddie Mac Uses IBR Plan
To better accommodate actual student loan repayments, Freddie Mac confirmed that it will use the IBR payment to calculate Debt to Income ratios. Guidelines are subject to change.
Available since 2009, the Income Based Repayment (IBR) plan is a federal student loan repayment program that allows a borrower to limit the amount they must repay each month based on income and family size. Debt repayment under the IBR Plan is generally 10% of discretionary income for a new borrower accepted into the plan. In some cases, a borrowers payments could be deferred. Lenders then fall back to Freddie Mac forbearance guidelines and use 1% of the outstanding student loan debt unless a borrower provides documentation verifying payments are less than 1%.
“There are many misconceptions about mortgage criteria among mortgage-ready individuals,” said Waldron. “They think [they] need 20% down and a really high credit score,” she adds.
“Many Millennials don’t know how to use credit as a tool. They may think not having a credit card is a good thing. What they may not realize is they could increase their credit score by using and paying off a credit card.”
“Through education,” Waldron concludes, “local lenders can help consumers in their communities recognize their mortgage readiness, student loan debt notwithstanding.”