There’s been a lot of discussion about whether young adults will be a generation of renters or homeowners.
While Millennials have delayed homebuying, there’s new evidence to suggest they still aspire to be homeowners. Eight out of 10 non-homeowners said they desire to own a home, according to the National Association of Realtors. In fact, about a third of home sales are to young adults, the trade association found.
Along with getting jobs and having families, a Bank of America study found that “FOMO,” fear of missing out, may also be motivating Millennials to buy as they see their friends purchasing homes.
Although many Millennials want to buy, these young buyers face several unique challenges. Many of them have large student debt burdens that may affect their ability to qualify for a mortgage. Additionally, ever-increasing home prices and competition from other buyers is making it even more difficult for these young adults to become homeowners.
Fortunately, there are several loan products that can help Millennials navigate these current challenges.
Fannie Mae HomeReady Loan
For many years, FHA loans, which the Federal Housing Administration insures, were the default loan for buyers who had small down payments or poor credit.
While these mortgages still have advantages, they may not be the most competitive when it comes to having a seller accept your offer. Because the government requires a special appraisal and repairs, they are not particularly appealing to sellers.
That’s where the new HomeReady loan is helpful. This is a conventional loan from mortgage investor Fannie Mae. This means no FHA hassles even with a low down payment. This is likely to make your offer to buy more appealing than if you used FHA financing.
A HomeReady mortgage requires a minimum down payment of 3 percent, compared to 3.5 percent for FHA. Plus, you can use a gift or a grant for your down payment. Co-borrowers, such as parents, aren’t required to live in the house.
When your down payment is less than 20 percent, you will purchase insurance to compensate the lender if you are unable to make your payments. Unlike an FHA loan, you may be eligible to cancel this insurance once your home equity exceeds 20 percent.
This product is designed for low- and moderate-income buyers so your income cannot exceed the maximum amount allowed in an area. You are also required to take a homebuyer education course.
Fannie Mae Student Loan Solutions
In response to the increase in student loan debt, Fannie Mae rolled out three programs to help would-be buyers.
The first allows homeowners to pay down student debt with a cash-out mortgage refinance. Fannie Mae has reduced the costs to do this, which should help parents who are helping pay off their kids’ student debt.
The second change allows lenders to exclude non-mortgage debt paid by others. That means it won’t be counted against the buyer in mortgage calculations. This will improve debt-to-income ratios for those who are getting some help each month from parents or someone else.
Finally, if you are participating in a reduced payment plan on your student loan, Fannie Mae allows lenders to use those loan payments. This allows for a more favorable debt-to-income calculation, which will allow more people to qualify for mortgages.
“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution,” said Jonathan Lawless, Fannie Mae vice president of customer solutions, in announcing the changes. “These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”
These are just a few of the options that cater to the unique needs of today’s first-time buyers. To learn more about local real estate and mortgages, contact your Realtor and mortgage lender. A directory of Northern Wasatch Realtors is available at NWAOR.com.
Brenda Nelson is president of the Northern Wasatch Association of Realtors.