When considering a mortgage loan application, banks could care less about how old you are, as long as they think you are likely to repay your loan. It's all about your debt, income and job stability. Unfortunately for millennials – Americans born in the last two decades of the 20th century -- on average, they are hurting in all three elements.
An April 2013 analysis by the New York Fed provided a startling statistic. In 2012, the average 30-year-old with student debt was less likely to have a mortgage than the 30-year-old that had never incurred student debt.
Historically, home ownership is higher among people who acquired student debt, because on average, college degrees translate to higher wages. However, 2012 produced a crossover point. There are three logical reasons for this:
- Amount of Debt – Spiraling college costs produced an average debt of $29,400 for 2012 graduates, even with minimal data from for-profit colleges. This might be tolerable except for a lack of…
- Employment – Millennials absorbed a major gut punch from the recession. They graduated with higher debt from rising college costs, into a job market that shrank by 6.6 percent from December 2007 to June 2009 (according to the Bureau of Labor Statistics). If they were fortunate enough to find a job at all, they were likely to be underemployed – often in jobs that did not require a college degree.
The New York Fed also uncovered a significant trend. By separating underemployment into good non-college jobs (for example, mechanics and dental hygienists) and lower-wage jobs (or example, retail cashiers and food service), they discovered that recent numbers of underemployed graduates have broken sharply toward lower-wage jobs. The percentage of recent graduates in part-time employment has also risen sharply. The gap between debt and initial working income is increasing.
This combination throws the Debt-to-Income ratio, or DTI, beyond acceptable risk limits even if millennials have a spotless repayment record. They may also be more susceptible to high-interest credit card bills to get by with lower-than-expected incomes.
With respect to home buying, the slightly lower-paid worker with a stable job and relatively little debt is advancing past the more-educated worker with higher debts and a corresponding higher likelihood of default.
- Mortgage Qualifications – With the new Qualified Mortgage rules and Ability to Repay scrutiny issued by the Consumer Finance Protection Bureau (CFPB), banks have been tightening down on the fundamental loan qualification markers and discouraging high-risk loans. The days of piggyback loans that allowed purchasing a home with virtually no down payment are over – and we wouldn't suggest millennials follow in that path in any case.
As a result, it will take this generation longer, on average, to acquire the necessary down payments for home purchases.
In short, until there is considerable job growth, the picture for millennials as homeowners looks bleak. They are starting out with higher debt, and by the time jobs and subsequent wages catch up to their needs, rising interest rates are likely to move the finish line further away just when it appeared to be within their reach.
The advice from the mortgage industry will be no different from advice from parents. Reduce existing debt as best you can, save for at least a partial down payment, set a realistic time and income goal, and scale back your homeownership plans accordingly. Your first home may not be anything like what you pictured, but you can at least build up equity for future upgrading – while enjoying the mortgage interest tax write-off -- instead of tossing money away through rent.
Eventually millennials will recover, but it's going to take some time.
Want to learn more about successful millennials and their habits? Download your free copy of the eBook, “The Millennial Next Door [Revealed]: How to be Financially Successful in Your 20's.”