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The Challenges Millennials Face

7 November 2014 No Comment

canstockphoto7017202Today, a little more than one third of people between the ages of 18 and 30 years, called millennials, live with their parents. There is good reason for this. Student loan debt, unemployment and underemployment make it almost impossible for these people to pay rent and live independently. If they can’t even pay for a low-rent apartment, how will they get a mortgage and own a home? With the increase in housing prices, even the 60 percent who don’t live at home find it difficult to qualify for a home loan.

Why is it hard for millennials to get mortgages?

The number one reason millennials are not financially able to buy a home is because of the huge amount of debt they have in student loans. If they went to expensive schools and got advanced degrees, they may have from $80,000 to $200,000 of debt to repay.

It’s difficult for anyone to get a home loan with a low credit score. Students often miss payments on their student loans, which damages their credit rating. This means, if they can qualify for a mortgage, they will most probably have to pay a higher interest rate than someone with a good credit rating. To improve credit scores, the consumer must show that he or she can make regular payments on debt for an extended period of time or completely repay some debt. The graduates who are living with their parents have a limited ability to build up their credit scores.

If students still have a large amount of debt on their student loans, the mortgage lender will consider this when analyzing the borrower’s ability to repay another loan. If they don’t have a high-paying job, they won’t be able to keep up high mortgage payments. The lender may also require a large down payment, which would be impossible for a millennial living at home.

Are There Any Solutions?

The first thing millennials need to do is to get a copy of their credit rating and find several ways to improve it. They should check if all the items on the rating are correct. There could be inaccuracies that are lowering the rating. The credit reporting companies are required by U.S. law to give one free copy every year to consumers if they ask for it. Mortgage lenders are usually looking for a rating of 700 or higher. If you know your rating, you’ll know where you stand in relation to getting a mortgage, and you can take steps to raise your rating.

You should also know your debt-to-income ratio (DTI). This is a comparison of your gross monthly income and your debt obligations. It should be lower than 36 percent, but will vary if you have a saving’s account or can make a big down payment on a house. Most lenders are looking for a DTI under 43 percent. You could buy a cheaper house, increase your income or pay down your debt to get a better DTI.

Income is another important factor. Lenders want to know how long you have worked and if you are likely to keep your job.

Many states and cities offer assistance programs to help eligible residents with a first or second mortgage. You can look into a Federal Housing Administration (FHA) loan that will allow you to put as little as 3.5 percent down, which is much less than the usual 20 percent. However, you’ll need to pay mortgage insurance and will have a higher interest rate.

If you are getting a substantial amount of money from your parents or other source, you need to carefully calculate the cost of a mortgage and the cost of your student debt to decide if it’s more advantageous to use it to buy a house or pay down your debt. With a little effort in the right direction, it will be possible for millennials to buy a first home and get on the way to financial independence.

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