The vast majority of millennials think owning a home is an important part of the American Dream, on par with Americans of every age. Millennials, however, are facing some of the strongest headwinds ever. Home prices are climbing well above the rate of income growth and millennials more than any older generation are burdened by student debt.
If high home prices and student debt weren’t enough obstacles, many of them have a general misunderstanding of the mortgage and homebuying process. A study of 1,000 U.S. adults by Widmeyer Communications on behalf of NeighborWorks America showed wide variation in how much renters think they need to save for a down payment on a home. While local affordability certainly comes into play, a lack of understanding about the mortgage process and purchasing real estate are key obstacles renters must overcome to successfully become first-time homeowners.
The Truth About Down Payment
The first place to start is with misconceptions about down payment. There is widespread confusion about the minimum down payment required to get a mortgage, but millennials are even further off the mark.
In the same national survey, on average, Americans incorrectly think that a minimum down payment to get into a home is 17 percent, and millennials estimated the minimum at 21 percent. The truth is there are dozens of lender and government-backed mortgage programs across the U.S. that require as little as 3 percent down. The impact of this information gap is considerable. For example, a millennial who thinks she needs to save $40,000 in order to buy a typical starter house or condo selling for $200,000 actually needs $6,000 for the down payment.
The Truth About Down Payment Assistance
It’s difficult to save money these days, even enough for a 3 percent down payment. But there are resources out there for homebuyers to tap into that can bridge the down payment savings gap. But here, too, a majority of millennials are operating without full information.
The NeighborWorks America survey found that fewer than four out of 10 (38 percent) millennials are aware of the existence of down payment assistance programs for middle-income homebuyers in their community. That’s better than the 27 percent on average nationally who believe such programs are out there, but still way off from the reality. According to Downpayment Resource, an Atlanta-based company that tracks and helps consumers find programs, there are more than 2,400 down payment programs in the U.S.
Some of these programs have income restrictions or professional restrictions – for example, a recipient has to be a teacher or local government employee – but many are open to the majority of homebuyers.
The Truth About Weak or Bad Credit
The No. 2 obstacle cited by millennials for not buying a home is bad credit (behind lack of down payment), but just over half (56 percent) of all consumers have received a copy of their credit report and score in the past year. The rest of consumers have little idea of their credit profile.
Moreover, even if a millennial has less than perfect credit there are mortgage products available that can help him buy a home. These products have FICO credit score hurdles as low as 600, although most set the bar at 620 or higher.
Working with a U.S. Department of Housing and Urban Development-approved housing counselor to identify down payment assistance programs and mortgage products that are open to borrowers with a ding on their credit is a first step to truly knowing if weak or bad credit will prevent a millennial from buying a home.
The Truth About Help With Student Debt
Millennials with their eyes on homeownership are living with an incredible amount of student debt. There is more than $1.3 trillion in student debt outstanding nationwide, and while a portion of that is not held by millennials, the bulk is and it is weighing on them. Half of millennials worry about their student debt all or most of the time.
However, there is help available with understanding how student debt affects homeownership. Housing counselors across the country are available to help consumers better manage their student debt with the goal of homeownership in mind. From help determining whether or not loan consolidation is the best strategy, minimum payment options or choosing a loan forbearance program, housing counselors are there to help millennials make the best choice. But only 30 percent of millennials who have student loan debt are aware of nonprofit housing counseling organizations that can help with student debt, according to the survey.
As Agent Mulder often said on "The X-Files," “The truth is out there,” and a housing counselor is the best partner to help a millennial homebuyers find it and secure their piece of the American Dream.