Saddled by student debt and confounded by skyrocketing rents and home prices in the nation’s largest cities, young people today are struggling to become homebuyers. If that weren’t enough, the millennial generation that came of age in the Great Recession has been so wary of debt that some of them lack sufficient credit histories to make them good lending candidates.
An April 2016 survey published by credit agency TransUnion found that more than 40 percent of millennials (defined as ages of 18-34) lack sufficient credit to buy a home. Lenders define sufficient credit as, at minimum, a credit score in the low-to-mid 600s.
Among the under-35 crowd, “There’s a delay in establishing credit,” said Kathy Cummings, a homeownership solutions and education executive at Bank of America. “They may have a student loan, maybe one credit card, but that’s not enough” to get a mortgage using traditional means of credit.
The average credit score for millennials is 625, according to Experian, a credit agency. That compares to 650 for members of Generation X and 709 for baby boomers. “Looking at the trend in borrowing by age, millennials seem to be delaying their big adult decisions – whether to buy homes or cars with a loan or use credit cards – by about five years,” said Amy Crews Cutts, chief economist for Equifax, the credit agency, in an email. “They are doing the same things as their historical peers, just later.”
Millennials’ credit landscape different
This generation is different, Cutts said. Where Gen-Xers were deluged with credit card offers as college students, millennials found a different credit landscape. The federal CARD Act of 2009 limits young students’ ability to get a credit card in their own names if they don’t have the income to pay back his debt, Cutts said. Instead, many millennials got into the habit of paying with debit cards, and continued do so after leaving school.
|Millennials’ top concerns about the homebuying process|
|Having a low credit score|
|Not being able to fund a down payment|
|Not qualifying for a low interest rate on a mortgage|
Source: TransUnion survey conducted in March 2016 of 1,843 U.S. adults
This is also a generation that watched parents and older friends lose their savings, their jobs and their homes in the Great Recession. “Their reluctance to take on large debt outside of student loans (which are more like an investment in future earnings) is shaped by the realization that you can lose money in real estate and that jobs can be hard to find and hard to keep – thus, they’ve kept their borrowing down,” Cutts said.
Rocke Andrews, president of the National Association of Mortgage Brokers, sees this trend in his own son, who checks his online banking to see how much money he has to spend. “Many young people use their debit cards for everything,” said Andrews, who is based in Tucson, Arizona. That’s a problem when it comes time to apply for a mortgage, he said. “A lot of them don’t have a lot of variable credit, and a lot of them don’t have enough savings.”
So what’s a credit-challenged millennial to do? First, don’t panic. It’s still possible to borrow money for a house. This is particularly true of buyers who suffer not so much from bad credit, as lack of it. “That is something that can be easily remedied,” Andrews said. He recommends such prospective buyers open up a new credit card account, charge gas on it once a month, and pay it off completely. “That’ll shoot the score up by 40-60 points by the end of a few months,” he said.
Even if your score is low, if it’s above 640 (or even 620 for some lenders), you can still find someone to lend you money for a mortgage if other elements of your financial life are in order, said Erin Lantz, vice president of mortgages for Zillow.com.
Bank of America, for example, found that some younger buyers who lived in cities with good public transit lacked not only credit cards, but car loans as well. And yet, their finances were stable and they’d saved enough money for a down payment.
Many young people use their debit cards for everything. A lot of them don’t have a lot of variable credit, and a lot of them don’t have enough savings.
|\u2014 Rocke Andrews |
National Association of Mortgage Brokers
Now “we have what we call nontraditional credit,” Cummings said. To build a client’s credit file, Cummings said, the bank will accept utility bills, rent bills and cellphone bills as evidence of financial readiness to assume a mortgage.
Student loan debt is not an automatic disqualifier. “That does not hinder you at all in getting a mortgage,” she said. But lenders will look at whether an applicant is making her debt payments on time, and whether she has enough income left to pay the mortgage and living expenses after making her student loan payments.
Overall, “the last two years of your financial history is really important,” Lantz said. Lenders will look, for instance, for a history of steady, even sustained, employment.
Jamie Yan and her husband, Hugh Lau, discovered this the hard way when they first went looking for a home in the Los Angeles area. They had a credit score “in the high 700s,” Yan said, and had managed to save enough to put 20 percent down on a mortgage – no small feat in a place where starter homes can range from $750,000 on up. But although Jamie had a long history working in her field of advertising, at the time they applied for their first mortgage, her husband had only been back at work two months after taking off a year to stay home with the children. For that reason alone, they were advised by lenders to wait until Lau had been back at work for a full 12 months before trying to get a house loan, Yan said. Once the year had passed, they reapplied, were approved, and were set to move into their first house at the end of June.
Untraditional credit alternatives
As the Yans discovered, a credit score is only one part of the mortgage puzzle. “It’s about the components of credit,” said Michael Tannenbaum, vice president of mortgage for SoFi, an online financing company and a newer entrant to the mortgage lending business. “Lenders will look at credit file fitness.”
For SoFi, that might include credit scores, a consistent employment record and a history of paying off debt, be it credit card, auto or student loan. The San Francisco-based lender, Tannenbaum said, will also take into consideration how much money a buyer can put toward a down payment, and how much free cash the potential borrower would have each month after paying the mortgage and other debts, factoring in as well the cost of living in that particular city. SoFi – unusual in a tight financing market for not requiring private mortgage insurance for borrowers with less than 20 percent down – calls that “confirming the ability to repay,” Tannenbaum said.
Still, many millennials find saving up even a small percentage of a down payment to be a daunting challenge. Some are just getting their financial footing after the impact of the Great Recession. Others live in pricey coastal cities where high rents make saving money a challenge. A too-small down payment combined with low credit scores is often the equivalent of mortgage poison, lenders say. But some fortunate millennials have another option they can tap: their families.
A full two-thirds of millennials expect some type of help from their parents when buying a home, whether that’s money toward a down payment or even assistance moving in, according to the 2016 Bank of America Homebuyer Insights Report.
Mike Pfefferman, a loan officer in Westlake Village, California, finds that in practice among his own clients.
“I’m seeing a lot of assistance,” he said. “You’ve got these parents who’ve been paying for college, and schooling after college, and now housing.”
Some parents supplement monthly expenses. Others give all or part of a down payment, or assist with closing costs, he said. “They’re [helping out] their kids for an extended period of time,” he said.