According to Pew Research Center, members of the Millennial generation — also known as Generation Y — are 19-35 years old in 2016, which puts their birthdates between 1981-1997. When it comes to finding a place to live, some of the youngest millennials are probably more concerned with choosing to live in a good fraternity house or a nice sorority house, while many older millennials have been done with college for a while, and are ready to buy their first home.
Factors Affecting Millennial Home Buyers
After the financial crisis of the mid-2000’s, Millennials emerged as one of the groups hardest hit by the recession. Due to downsizing, some millennials lost lucrative jobs that helped them save for buying a home, and then found that replacing the income was an uphill battle in a dog-eat-dog job market, where stock brokers were accepting jobs as baristas just to get by.
Some millennials already had homes when the recession hit, but the relaxed income reporting standards for homebuyers that precipitated the burst of the housing bubble meant that even these millennials would be in for a financial challenge when the interest rate for the adjustable rate mortgages (ARMs) they received skyrocketed, when the lender adjusted the mortgage’s interest rate.
In such a tenuous housing market, ARM terms were highly favorable to banks, and they soon drove more than a few millennial homeowners into home foreclosures that, in the best care scenario, were commuted to “short sales”, when the bank-owned homes were offered for a discount, so banks could earn quick revenue to help offset missing interest revenue from mortgage payments.
Millennials Recovering From Recession
The situation above is a financial backdrop to where many Millennials at the older end of the generation are today. Many thirty-somethings have weathered the five-year waiting period after a foreclosure that’s required for the event to lose its stranglehold on credit rating. Their bad credit gradually improved, and, during their exodus from credit purgatory to brighter shores, many Millennials worked diligently to restore their earning power at the same time.
Now, many Millennials feel they are in a better position to make a second run at buying what is essentially their first home, but are they really well-positioned? And what about Millennials who lack a home buying history: Are they ready, too? What factors currently affect Millennial home buyers and their ability to afford the cost of long-term home ownership? Let’s take a look.
Whether you work for a living or spend your days on a yacht sipping umbrella drinks while you rake in big dividends from passive investments, the money you earn is a significant predictor of how much credit a home lender is willing to offer you in the form of home loan — as well as the interest rate for the loan — after considering the margin your monthly income against monthly outgo.
Thanks to the explosion in IT job growth since the recession and the many well-paying jobs the trend provides, it’s possible to start earning a decent salary by acquiring basic IT certifications. Jobs in other technical fields, such as mathematics and materials science, also look promising, as companies look to cutting-edge technology to create new products and services in hopes of restoring a recession-ravaged bottom line.
In some job sectors, particularly ones that ride the exponential increase of digital technology to create products and services once thought impossible, the availability of well-paying jobs favors Millennial home buyers. As mentioned above, the barrier to entry for these positions isn’t always high. An associate’s degree in a technical discipline or an IT certification can be enough to get a foot in the door, and impressive job creation in technological sectors helps pave the way for career advancement.
Student Loan Debt
Over the past few decades, the soaring price of college education has left college graduates with a degree that helps them find an entry-level job, but not one with enough earnings to cover the triple-digit and quadruple-digit checks that education loan lenders expect to start receiving after recent grads have had a few months to land their first “real job”, as it were.
Student loans can’t be dissolved through bankruptcy. Like legal fines, you have to pay them, unless you die. But the difference between educational debt and legal debts is that a student loan forgiveness program is in place to make it easier to satisfy education debts. If student debt is standing in the way of buying a home on the loan terms you need, check out the Public Service Loan Forgiveness (PSLF) Program from the U.S. Department of Education.
Affording a penthouse in Manhattan is more prohibitive than closing the deal on a house nestled in the small town charm of Hudson, New York. Like young Baby Boomers before them, many Millennials are interested in “starter homes” — residences that are “nice to live in for now” but will be upgraded in the future, after the homeowner’s credit improves from making regular mortgage payments and his or her net wealth increases from investments and savings.
Buying a starter home in an affordable town or a metropolis is a good way to start down the path of secure home ownership — and you don’t need to own the home outright to make your next move. You simply need to wait long enough for the financial stars to align in your favor via debt repayment and savings, and provide you with more flexibility for your next real estate move.
According to a recent report from InvestmentNews.com, “Over the next 30 years, an epic $30 trillion will be passed down from baby boomers to generation X to millennials [through inheritance]”. If nature runs its course, as the saying goes, members at the older end of the Millennial generation spectrum stand to receive their inheritances first.
With enough inherited wealth, you can buy the home of your dreams outright, but when and how inheritances will arrive — and in what amount — is highly unpredictable — and the chance of receiving a familial windfall precisely when you need it is the stuff of movies with Disneyland endings. Unless you’re in the position to receive your inheritance early through planned estate distribution, figuring inheritance into your home buying plans is a highly unreliable strategy.
Buying a Home Versus Renting
Many hopeful homeowners of all ages, including millennials, can find themselves stuck between a rock and a hard place when it comes to buying their homes. They may not be good candidates to receive favorable loan terms for the house they wish to buy, and renting a house generally costs more than renting an apartment of comparable location and size. However, renting a residence — whether it’s an apartment or single-family home, isn’t at cross-purposes with home ownership.
Because you usually pay an affordable monthly lease and invest no money to maintain the property, it can provide a situation that helps you save for homeownership, and gives you the flexibility you need to pay debt that drives up the interest rate of a home loan. It’s a financial waiting game that requires patience, but an affordable rental situation can help you eliminate the following debts, among others, that make it difficult to receive good home financing terms.
- Student loans
- Credit card debt
- Car loans
- Business loans
- Personal loans
The specter of debt isn’t the only obstacle that precludes Millennial home buyers from closing on a residence. Psychological barriers exist, too. For example, many Millennials watched their parents, older relatives, and older siblings as they were directly affected by the recession in respect to home buying.
Older millennials may remember how many people acquired houses using speculative lending practices that made homes increasingly expensive to own once the stratospheric interest rates kicked in after the ARM period expired. Some people were thrust in the position of only being able to pay the interest on the loan. Then, even the interest payments became too costly, and the home was short sold or slated for foreclosure.
The U.S. economy has improved in several respects compared to its dismal standing in 2006-2008 when the housing bubble burst like a balloon landing on a spike. But many Millennials still remember the economic difficulties from those times. After all, many of them were children living in the homes of Baby Boomer parents who struggled financially, and they saw up close the emotional toll that not enough monthly income could have on the family unit.
Our economy still isn’t the robust bull market that it was leading up to the recession, and the lessons of the painful financial memories are still visceral for Millennials today, making them feel as if they face an uncertain future. Add to this feeling that fact that social security is currently in danger of privatization, and you have a perfect storm of anxiety that can develop when Millennials look at their financial future through the lens of recent social and economic shifts.
The largely dystopian view of our current economy leads many millennials to explore unorthodox ways of securing home loans. Whether they’re receiving financing through online social lending networks that have more lenient criteria than banks or they’re pursuing seller financing, millennial buyers are changing the way that the market operates.
Flexibility of Seller Financing
Social lending organizations are a great option for millennials who are disenchanted with retail banks — and many Millennials are. According to a recent report from Scratch — an in-house division of Viacom that performs brand consultation — “Banks make up four of the brands that Millennials hate the most.”
Why do Millennials dislike banks so much? According to industry experts, it’s a combination of banks failing to offer the latest digital banking options and a dissatisfaction with the fees that banks change to help prop up their antiquated way of handling business in a back office environment, where manual processes have yet to be re-envisioned through digital automation.
Online lenders can forego traditional bank fees while sellers who finance home purchases can offer more flexibility on down payments and loan terms. Both options are ideal for Millennials who are in a financially precarious state for home loan qualification.
Optimal Time for Seller Financing
The opportunity for long-term revenue isn’t the only reason homeowners opt for seller financing. They also like the arrangement because it can speed up the sale, eliminate the need to pay realtor fees, and provide them with a mortgage note they can sell to mortgage note buyers for a lump sum payment at almost any time.
Moreover, searching for a good seller financing agreement is like shopping for an attractive home loan from a bank. Some sellers offer more agreeable terms than others — and the better the financial position of the buyer, the more leverage he or she has to negotiate a favorable seller financing contract.
Seller financers have the opportunity to inflate the home price and earn a higher than the fair market loan interest rate, but those conditions don’t mean much when the buyer can’t meet the obligations. Consequently, seller financers also value well-positioned buyers whose ability to make loan payments is well-established. After all, a stable history of loan payments on the mortgage note only makes it more attractive to mortgage note investors.
Preparing for Purchasing a Home
What can Millennials do if they want to purchase a home with the greatest economic advantage? Whether they decide to apply for a traditional bank or credit union loan or a more modern option such as seller financing, there are at least two fundamental steps millennials can do to improve their home ownership prospects.
- Take Stock of Their Credit
A good credit score always makes the home buying process easier, especially if you’re dealing with a traditional lender like a legacy bank. It may take a couple of years to repair your credit. But if you’re signing off on a 30-year mortgage, those few years of credit reparation can translate into tens of thousands of dollars saved in interest over the course of the loan.
However, if a Millennial home buyer’s credit score is too low for a traditional bank mortgage — and a residence must be purchased in the short-term to accommodate a new job location, a new addition to the family, or to leave an area quickly, a seller financing agreement, where you negotiate the best terms possible, may be the way to go, especially considering such serious things as your job, a growing family, and family safety.
- Have a Serious Savings Plan
Many Millennial home buyers are still youthfully idealistic about the future, but it’s imperative to have a grown-up attitude toward finances when you’re considering taking on something as financially life-changing as a mortgage. Most importantly, develop a serious savings plan that socks away money you can apply to the down payment to make loan payments smaller over the course of repayment. The more you put down, the less you pay.
Much has changed since parents of Millennials purchased their first homes. Back then, real estate was more affordable, working people generally had better debt to wealth ratios, job security was fundamental, and the rumblings of an economic abyss couldn’t be heard like thunder on the horizon. Yet, at the same time, options like social lending and seller financing weren’t alternative lending options that helped balance the ship for less than qualified homebuyers.
By repairing their credit, reducing their debt, and saving up as much money as possible for the down payment, Millennials, and other home buyers put themselves in an excellent position to decide the best home financing option for their present finances and future goals.
Who We Are
Amerinote Xchange is an investment company that acquires mortgage notes for our sizable portfolio. Since the success of the notes we purchase is naturally tied to the homeowner’s financial standing, we’re invested in promoting effective strategies for Millennials purchasing homes on terms that bode well for long-term homeownership.
For more information about our company and services, or to schedule a free consultation, please call us today at (800) 698-3650, or use the contact form on our website. We look forward to hearing from you and seeing what we can help you do to monetize your mortgage note into a lump sum payment or a partial lump sum payment by selling part of the note while still receiving monthly income from the mortgage. Learn more about selling real estate notes and contact us today!