Trends Motivating Millennial Homebuyers in 2019
After years of hand wringing over whether millennials would opt against homeownership, more millennials are now entering the housing market. The homeownership rate for Americans under the age of 35 increased 1.2 percentage points in 2018, rising from 35.3% in the first quarter to 36.5% in the fourth quarter, according to data from the U.S. Census Bureau.
Mortgage interest rates have dropped significantly, making it more affordable to buy a home. The average 30-year fixed-rate mortgage has fallen by nearly 80 basis points since January, according to Freddie Mac’s Primary Mortgage Market Survey. Additionally, data from the Federal Housing Finance Agency show home price growth has slowed down.
Millennials make up the largest share of homebuyers. Adults aged 21 to 38 account for 37% of all homebuyers, according to the 2019 Homebuyers and Sellers Generational Trends Report from the National Association of Realtors. The report also found that older millennials (ages 29-38) have the largest buyer share of married couples at 69%.
In this article, we look at what’s motivating them when they’re pursuing homeownership.
- Millennials are making smaller down payments
- They prefer conventional mortgages
- They’re leaning toward move-in ready homes
- They’re gravitating everywhere but South
- How to prepare for homeownership in 2019
Millennials are making smaller down payments
While they’re not putting down the bare minimum, millennials are making smaller down payments than previous generations. The average down payment that millennials make on their home purchases is 11%, according to data from mortgage software firm Ellie Mae’s Millennial Tracker, which analyzed home loan applications for homebuyers born between 1980 and 1999. This compares with an average down payment of 20% for all homebuyers, according to Ellie Mae’s latest Origination Insight Report.
Pava Leyrer, chief operating officer at Northern Mortgage Services in Grandville, Mich., said that she’s seeing a down payment of about 10% on average from millennial buyers — for conventional loans, at least.
“On the government side … no one is going over the minimum,” Leyrer said.
She said borrowers with USDA loans are opting for 0% down payments, and those with FHA loans are sticking to the 3.5% down payment requirement. The same is true for Fannie Mae HomeReady and Freddie Mac Home Possible conventional loans, which both have a down payment requirement of 3%.
“If there’s any way that they can go minimum on those programs a lot of people are, unless they’ve got a gift or for some reason (have) been able to save or can figure it out,” Leyrer said.
The lower average down payment from millennial buyers could be attributed to a few things. For one, mounting student loan debt might not afford them the capacity to put down a larger amount. Another reason might be the fact that it can take years to save the 20% down payment needed to avoid mortgage insurance. Rather than wait several years, millennials are jumping into the housing market sooner and shouldering the extra costs that come with a smaller down payment.
While they aren’t making as large of a down payment, millennial homebuyers still show that they care about affordability. The average back-end debt-to-income ratio for millennials matches the overall average: 38%, Ellie Mae found. The back-end DTI ratio is the percentage of income used to pay all monthly debt obligations, including the mortgage payment. This data indicates that millennial buyers are not stretching their budgets too thin in pursuit of homeownership.
Mortgage lenders arguably care slightly more about your debt-to-income ratio than they do about your credit scores. That’s because your DTI ratio demonstrates your ability to comfortably afford your mortgage, in addition to your other monthly payments.
They prefer conventional mortgages
Just over two-thirds — 67% — of the loans closed on behalf of millennial homebuyers from January to May 2019 were conventional mortgages, according to Ellie Mae’s Millennial Tracker. Another 29% were FHA loans, 1% were VA loans and the remaining 2% were unspecified.
While conventional loans have a higher barrier to entry than FHA loans, they do generally offer lower rates and cancellable mortgage insurance, which can serve as a selling point for many homebuyers. This feature is something that isn’t included in most FHA loans.
Once a conventional mortgage borrower reaches an 80% LTV ratio, they can request that their lender cancel their private mortgage insurance. On the other hand, FHA borrowers must pay their mortgage insurance premiums for the life of their loan, unless they put down at least 10% toward their home purchase — which would allow them to cancel mortgage insurance after 11 years — or refinance into a conventional loan after building at least 20% equity.
They’re leaning toward move-in ready homes
Leyrer said she has noticed that millennial buyers are becoming less interested in starter homes these days. Some are buying condos while others are looking at homes that don’t require a ton of work.
“They don’t want the maintenance; they want it all taken care of for them, for the most part, for now,” she said.
This trend contrasts with a recent LendingTree survey showing that nearly 88% of millennials would consider purchasing a would consider purchasing a fixer-upper home.
Still, some young adults are taking advantage of renovation loans, Leyrer said, with the intention of having the improvements completed around the time that they move in.
“They’re doing the reno loans that can be done within six months, even if they live there but they’ve got contractors and people hired and it gets done instead of (the buyers) doing any work,” she said, adding that she sees very little interest in DIY renovations.
They’re gravitating everywhere but South
The top three most popular metropolitan areas for millennial homebuyers are Salt Lake City, Minneapolis and Pittsburgh, according to a LendingTree study published in December. Purchase mortgage requests from millennials in all three metros was close to 50% for the better part of 2018.
Rounding out the top 10 cities are:
- Buffalo, N.Y.
- St. Louis
- Kansas City, Mo.
- Columbus, Ohio
- Rochester, N.Y.
How to prepare for homeownership in 2019
Since 2019 seems to be shaping up as a good year for millennial homebuyers, it’s important for people interested in entering the housing market to position themselves to get the best available deal. Review the following tips to prepare for homeownership this year.
Be mindful of your student loan debt
It’s possible to buy a home with student loan debt, but what can stand between you and a mortgage approval is how your outstanding student loan balance affects your DTI ratio. In most cases, you’ll want to keep your DTI ratio at or below 43%. Remember that your ratio factors in all debts, including your estimated monthly mortgage payment. Should your student loan debt push your ratio higher than that 43% threshold, you may have a harder time qualifying.
There are programs available that allow a DTI ratio slightly higher than 43%, but you’ll need to compensate for that heavier debt load by having a credit score above 700 or contributing a larger down payment.
Determine which mortgage type is right for you
There is an array of mortgage types to choose from, including products from private lenders and those backed by the federal government. If you’re planning to make a smaller down payment and have less-than-stellar credit, you might consider an FHA loan. This loan type is backed by the Federal Housing Administration and allows for a down payment as low as 3.5% and a 580 credit score. It’s possible to qualify for an FHA loan with a 500 credit score, but you’ll need to put down at least 10%.
Both government-sponsored enterprises, Fannie Mae and Freddie Mac, have conventional mortgage products that require just a 3% down payment. Generally speaking, you’ll need at least a 620 credit score to qualify for a conventional loan.
Get a mortgage preapproval
Once you’ve done the work to improve your credit profile and scores by maintaining on-time payments, reducing your existing debt load and removing any credit reporting errors, it’s time to get preapproved for a mortgage.
A mortgage preapproval gives you an estimate of the loan amount and mortgage interest rate you might qualify for with a specific lender, based on a review of your financial information including bank statements, credit reports, credit scores and pay stubs. Having a preapproval gives you an idea of what price range to stay in during your home search and also allows home sellers to take you more seriously as a buyer.
A major component of getting the best deal on your mortgage is shopping around. Compare mortgage quotes from at least two or three lenders and pay attention to the loan origination fees, title insurance fees and other closing costs.
Shopping around can also mean snagging a better mortgage rate. LendingTree’s latest Mortgage Rate Competition Index found a median spread of 1.04 percentage points between the lowest and highest rates offered by marketplace lenders. The spread amount represents an interest savings of nearly $50,000 on a $300,000 mortgage.