August 25th, 2016 7:32 AM by Jackie A. Graves, President
If you pay attention to what’s
written and said about people in their 20s and early 30s — the
“millennial” generation — you’ll find two common themes:
are an optimistic, self-entitled generation with unrealistic expectations about
our own abilities and success paths.
are going to have an exceptionally difficult time getting
into the housing market because of mountains of student
debt and other factors that make it nearly impossible to manage a down payment
without help from our hovering helicopter parents.
comes to the housing market, though, that first millennial theme — optimism —
could be enough to overcome the financial challenges.
National Association of Realtors recently noted that millennials’ inherent
optimism (and willingness to buy fixer-uppers — we do like to have things
exactly as we like them) are two underpinnings of what may be a surprising
statistic to many: Millennials represent the largest share of homebuyers, at
32%, and make up 68% of first-time homebuyers.
may come as a surprise to those folks writing articles about how we’ll never
buy homes. How can it be that so many millennials — a generation that is moving
back in with mom and dad and has historic amounts of student debt — are
managing to enter the housing market, even overcoming the mortgage rules of
thumb of a 740 credit score, 43% debt-to-income ratio and a 20% down payment?
are the main ways to get into a home without a perfect trifecta of credit
score, DTI ratio and down payment:
dig a little deeper into these programs:
stands for the Federal
Housing Administration, and its loans help borrowers who don’t
qualify for other loan types. Through FHA, the U.S. government provides the
lender with borrower-paid mortgage guarantee insurance. This means the borrower
has to pay for mortgage insurance for the life of the loan. As a result,
lenders are willing to approve borrowers that don’t meet the higher standards
for conventional loans.
primary reason people choose an FHA loan is simple: FHA loans allow you to put
as little as 3.5% down when buying a house. FHA loans also offer relaxed credit
and debt-to-income requirements compared with conventional loans. This is
a prime way millennials are getting into the housing market — 37% of homebuyers
below the age of 36 used
an FHA loan in
March through May of this year, according to mortgage tracker EllieMae.
biggest downside can be the cost — government-provided mortgage insurance is
usually 1.75% of the loan amount when paid upfront, and
1.30% to 1.35% if paid monthly. If you are getting an FHA loan (or
really, any loan), ask to see the total monthly payment you’ll be expected to
loan carries mortgage insurance for the life of the loan. The only way to
remove it is to refinance to a conventional loan when your home
equity has increased to a point that you have an 80% loan-to-value ratio;
remember that if you make a 5% down payment on your home, for example, your
initial LTV ratio would be 95%. Note that if you refinance to a conventional loan and include the
refinance fees into the loan amount, that will affect the LTV.
basically a “normal” loan. It’s neither insured nor guaranteed by the federal
government, and it meets guidelines set by Fannie Mae and Freddie Mac.
general, there’s a limit of $417,000 for single-family homes. In some high-cost
counties, like in the San Francisco Bay Area, the limit is $625,000.
loans require that a borrower have a minimum FICO score to qualify. Lenders
will have their own minimums beyond the Fannie and Freddie guidelines, but a 620
credit score is often a starting point. A score over 740 will most likely get
you the best rates.
are various loan programs, and the minimum down on a conventional loan can be as little as 3%: the so-called
“Conventional 97” is backed by Fannie/Freddie, so rates are low.
downside of a conventional loan is that if you use one to buy a house with less
than 20% down — meaning your loan-to-value ratio is higher than 80% — you have
to purchase private mortgage insurance, a monthly expense of up to 1.5% of the
mistake, putting 20% down is a good idea if you can do it. It’s how you avoid
mortgage insurance. But paying PMI for a time might be acceptable if it
means actually getting into the housing market and building equity.
an FHA loan — which carries mortgage insurance for the life of the loan — the
mortgage insurance on a conventional loan will fall off as soon as the LTV
reaches 80% because of the Homeowners Protection Act.
this means is that, if your home is appreciating steadily, you’ll be in good
position to see your mortgage insurance disappear. Another way to get rid of
PMI is to keep track of the comps for recently sold homes in your neighborhood.
If you feel that your home is undervalued, you can always order a new appraisal
to determine whether your home equity is such that you can ditch the PMI.
also refinance your loan, if rates have dropped, which can both save you money
and redefine your LTV.
The U.S. Department of Veterans Affairs backs
loans as a benefit for active-duty military personnel, veterans and some
spouses/widow(er)s. VA loans come with great terms for those who qualify.
loans can be either fixed rate or adjustable rate mortgages. This type of loan
can only be used for your primary residence, and you can only have one VA loan
at a time.
loans have 0% down requirement and do not require mortgage insurance. And while
credit scores matter in order to qualify for the program, minimum requirements
are usually sufficient to qualify for a good rate. About 1% of millennial
homebuyers use VA loans to buy a home.
qualify for a VA loan if you are a veteran, active duty personnel in any branch
of the U.S. Armed Forces, or a spouse/widow(er) of one.
payment assistance programs, sometimes called DAPs, are designed to be
secondary loans or gifts that can help you meet minimum down payment
requirements or to help make your mortgage loan more affordable. They’re often
restricted to first-time homebuyers.
and local housing authorities typically offer DAPs, and they are funded through
a variety of sources, including bond programs. Some programs are offered to
specific qualified applicants, teachers for example, or for particular
many mortgage brokers aren’t familiar with DAPs or where to find them, it’s a
good idea to do your research and ask around.
on DAPs vary — some don’t have to be repaid until the house is sold or your
mortgage is paid off. Others feature deferred interest, accrued interest, loan
forgiveness or simple interest models.
DAPs are aimed at low- or moderate-income homebuyers, don’t assume you’re out
of the running if you have a higher salary, especially if you live in expensive
areas, because income limits vary. Eligibility measurements can include
assets, debts, credit scores, property type and property location, though it’s
important to remember they may be different from those used to qualify you
for your mortgage.
the high barrier to entry for homebuyers, often-stereotyped millennials are
using these and other programs to get a foot in the homeownership door — no
matter what the conventional wisdom says.
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