In a NutshellSome millennials might hesitate before committing to buying a home — the cost of a mortgage, tighter lending standards and personal finance issues may all factor in.
While homeownership was once a common milestone in the lives of young adults, research shows that millennials are moving away from buying homes.
A 2019 survey by Fannie Mae found that 55% of millennials and Generation Z believe that homeownership is “out of reach financially.” Several factors, including the rising cost of housing and preexisting debt (often from student loans), present barriers to homeownership for these generations — and new obstacles continue to emerge.
- High cost of housing
- Carrying high levels of debt
- Tighter lending standards
- They may not need the space
High cost of housing
According to the National Association of REALTORS®, the median existing home price was $329,100 in March 2021. Only a few months later that price rose to $350,300, which NAR said was an all-time high.
Home prices have generally increased at a steady pace since 1963, according to data from the Federal Reserve Bank of St. Louis. Though inflation contributes to the rising cost of a home, it’s not the sole factor. Other factors that are contributing significantly to rising home prices include …
- Housing shortages
- Low interest rates
- Rising prices for building materials
The housing affordability index, published monthly by the National Association of REALTORS, features data that reveal whether a typical family has sufficient income to qualify for a mortgage loan on a typical home based on aggregated national and regional data on home prices and income. This index could help you get a sense of whether your income could support a mortgage.
Carrying high levels of debt
According to the 2020 Better Money Habits® Millennial Report from Bank of America, nearly three-quarters of millennials are saving for life milestones and future goals — with some putting money away for a house. But the same report found that more than three-quarters of millennials are weighed down by debt. And carrying too much debt could make it difficult to save enough to put a down payment on a house.
Other factors, including credit scores, can play a key role in determining whether you’ll be able to get a mortgage.
Lenders use credit scores as a factor to determine your eligibility for a loan — and potentially even your interest rate. In general, the higher your credit scores, the lower your potential interest rate. While it’s sometimes possible to get a home loan with bad credit, these loans could come with high interest rates or may require a larger down payment.
Tighter lending standards
Though mortgage rates are currently low, lending standards have tightened considerably since the 2007-09 recession. The Mortgage Bankers Association reported in July that mortgage credit availability decreased in June 2021. The Mortgage Credit Availability Index, a report from the Mortgage Bankers Association that analyzes data from Ellie Mae’s AllRegs® Market Clarity® business information tool, fell by 8.5% in June, indicating tightening lending standards.
To apply for a mortgage you may need to present the following documents and information:
- Tax return
- Proof of income
- Bank statements and other assets
- Credit history
- Down payment gift letters
Getting preapproved can help you understand how much a lender may be willing to lend to you — but keep in mind that preapproval is not a guarantee of approval, and loan terms may change after you complete a formal loan application.
Getting preapproved with a few lenders will allow you to compare offers and identify the loan that best meets your needs. If you apply for preapproval and aren’t preapproved, ask the lender why so you can take the necessary steps to try to qualify in the future.
They may not need the space
Millennials are getting married at lower rates than previous generations, and the median age at first marriage has edged up gradually in recent decades. Millennials who have completed more formal education are less likely to live with a family of their own (spouse and children), and millennials have more formal education than previous generations overall. Because of this, millennials may have less need for additional living space.
With high housing costs and stricter lending standards, you may want to do some prep work before you begin shopping for a home and mortgage. Check your credit reports to make sure they don’t contain any errors that are negatively affecting your credit scores. If they do, you can take steps to try to get the errors fixed. Determine how much house you can afford, and research different types of mortgages, including FHA loans or USDA loans, that may make home ownership more accessible to you.
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