When young renters were asked about their primary reason for renting, their top response was that they are making themselves financially ready to own. Combined with the answers “renting is a more affordable option” and “cannot obtain a mortgage,” 57% of those in the Fannie Mae survey cited financial reasons for not buying a home. Post-college millennials living with their parents also reported not having enough income as their No. 1 reason for staying at home.
Asked what they believed were the biggest obstacles to getting a mortgage, millennial renters gave these answers, in order:
- Insufficient credit score or history
- Affording the down payment or closing costs
- Insufficient income for monthly payments
- Too much existing debt
For many millennials, the data NerdWallet analyzed reveal that these reasons may be more perception than reality.
Stricter credit standards are impeding millennial homebuyers, a majority of whom don’t meet the median credit score of 750 for loans backed by Fannie Mae, one of the biggest buyers of U.S. home loans from lenders. A third of millennials don’t meet the industry standard minimum credit requirement of 620. From 2011 to 2013, when home purchases were falling across the entire credit score spectrum, homes bought by those in the lower range of scores, from 660 to 720, dropped at four times the rate of homes bought by people with scores above that range.
Credit standards — while still historically tight — have been easing in recent years. Mortgage processor Ellie Mae saw FICO scores steadily decrease through 2015, and data from Zillow suggest that credit scores for first-time homebuyers have been declining from a high in 2010. Some loans, such as those backed by the Federal Housing Administration, a government agency that insures home loans, closed at lower scores than standard loans, with an average FICO score of 688.
While younger renters cited a down payment and closing costs as the second-most-common reason for not buying, they may not know how much money is required. In a 2015 survey by Fannie Mae, 42% of those ages 18-34 said they didn’t know what lenders expect of them, and 73% were unaware of lower down-payment options that range from 3% to 5% of the home’s purchase price, as compared with the commonly cited lender preference of 20%.
Many lenders underwrite loans with down payments as low as 0% to 6%, the most popular option for first-time homebuyers and those with lower credit ratings. RealtyTrac estimates that about 30% of all homebuyers put down 3% or less on the cost of the home.
For questions on qualifying, reach out to Jeff Haag at CMG Financial. He will answer your questions.