Millennials Put Hold on American Dream

Millennials-those born after 1980 through the mid/late 1990s-are not buying homes at the rate previous generations have. To determine why, Bank of America Merrill Lynch conducted a survey of 1000 adults ages 20-34 across various U.S. cities. This is what the company found:

Millennials want to own their own home, but lack the financial resources to do so. 73% of survey respondents report that owning a home is either very important (56%) or important (17%) to them, indicating that Millennials maintain the strong desire to own their own homes consistent with the classic perception of the American Dream. However, Millennials have been negatively affected by cyclical economic factors including high unemployment, lack of wage growth, and lack of credit. 

The study suggests that Millennials may have a distorted image of interest rates as a result of growing up during a time when interest rates were artificially low, hovering around 3-5%. Looking back in time presents a different picture: since 1971, the median 30-year fixed mortgage rate has been 7.98%. Employment for those ages 25-34 is 75.6%, which is more than the low of 73.4 but still behind the pre-recession level of 83%.  Wage growth has been slow, with the real median income for those under 35 falling 16% from $42,000 in 2007 to $35,000 in 2013. Tight credit remains another issue. The average qualifying FICO score as of July 2014 (690 and 760 for an FHA mortgage and conventional mortgage, respectively), is nearly 13 points greater than the average score back to 2000. 

Student loan debt is also hindering first-time homebuyers. One quarter of survey respondents cite that student debt has prohibited them from purchasing a home to date. The median education debt for those under 35 was $17,200 in 2013. It is not a surprise, then, that the survey revealed that Millennials who have student loans are 55% more likely to currently rent than own a home.

Nineteen percent of Millennials are living with their parents. This consists of 31% for those ages 20-24, 16% ages 25-29, and 10% ages 30-34. Many Millennials are living in an apartment (38%) while others have their own home (31%). Not surprising, higher income earners are much more likely to be living in their own home. 12% of respondents making less than $25,000 own their own home, while 60% of those making $75,000-$100,000 own their own home. 

Millennials are delaying household formation, including getting married and having children. Annual household formations of married couples lave dropped 61% for those under 25, 41% for those 25-29, and 18% for those 30-34 since 1982. Mellennials are having fewer kids, and they are having them later in life. Birthrates for women ages 20-29 are decreasing while birthrates for women ages 30-39 are increasing.

As the economy continues to recover and Millennials increase their earnings, they are expected to enter the housing market in greater numbers. Half of those surveyed plan to buy a home within the next five years. The American Dream is not lost: it is merely on hold. 

Pre-Qualify for a Loan

House hunting is exciting, but the idea of financing a home is not. Meet with a mortgage officer to pre-qualify for a home loan. A pre-qualification, AKA prequal, illustrates a borrower's ability to get a loan. It's easier to obtain than a pre-approval because someone can get a pre-qualifcation online or over the phone; however, it is not as in depth as a pre-approval, which requires paperwork to back up your claims. Ideally, homebuyers should 1) get pre-qualified, 2) get pre-approved, 3) shop for a home based on their pre-approval, and 3) apply for the home loan. If your pre-qualification application isn't accepted the first time around, follow these three steps to improve your situation:

• Increase your credit score. You can improve your credit score in a number of ways. Order a copy of your credit history from TransUnion, Equifax, or Experian. Dispute any errors you come across--they will be removed within 30 days. Paying down your debt also helps, as debt accounts for 30% of your FICO credit score. Finally, pay your bills on time to slowly but steadily increase your score. 

• Don't change jobs. Lenders like to see that you've been with the same employer for at least two years, because this gives them confidence that you are stable and able to repay your mortgage. 

• Build income and financial assets. The simplest ways to afford the home you want are to get a pay raise and search for a lower priced home. Perhaps less obvious, you can find a co-borrower with good credit, hoping that your combined incomes will make the loan feasible. Build your assets by keeping a contingency fund--money reserved for emergencies with unexpected cash outflows. The fund should equal two or three months of your mortgage payments, and you must be able to prove (with bank statements) that this money has been in your account for at least 60 days prior to pre-qualification. 

Want to see if you will be approved before you visit a lender? Visit Bankrate.com's free online loan pre-qualification calculator. If you prefer to do the math yourself, the first step is the same--get your credit score. lenders prefer credit scores of 680+. Next, you should calculate the front-end ratio and the back-end ratio.

• Front-end ratio: proposed monthly mortgage payment / gross monthly income before taxes. This tells you how much of your monthly income goes toward mortgage payments and is not recommended to exceed 28%.
• Back-end ratio: total monthly debt obligations / gross monthly income. This tells you how much of your monthly income goes toward paying debts and is not recommended to exceed 36%. Note: debt obligations include credit cards, student loans, car loans, etc.

Finally, ensure that you have enough money for a down payment. As with contingency money, lenders like to see down payment funds in your bank account for a least 60 days. They also like for people to have their own money saved for a down payment--not the money of their friends or family.

As of July 2014, the average 30-year fixed rate mortgage was 4.13%