Millennials and Mortgages: Why FHA Loans Are So Popular
The topic of millennials and mortgages is a hot topic among those in the real estate industry. According to a recent study, 35% of millennial home buyers decided to use FHA mortgages as a means to financing their home purchases in January 2017. This is nearly 14 percent over FHA’s typical market share of 21 percent. This is a significant number considering that the Ellie Mae Millennial Tracker reported that 84 percent of all closed home loans came from millennial borrowers. This pairs with actual data from the Federal Housing Administration showing that 82 percent of all FHA insured mortgages have been to first-time home buyers.
To level set things, we’re defining millennials as people who were born between 1980 and 1999.
Millennials Are Choosing FHA Loans Over Other Popular Mortgage Options
As for why FHA loans have become so popular? This is an incredibly valid question given that Fannie Mae and Freddie Mac have been offering mortgages through programs requiring just a 3 percent down payment. While FHA loans come with a low, albeit slightly higher 3.5 percent requirement, they are also easier to qualify for. Millennials are savvy yet, with the rising cost of education, they tend to carry significant levels of student debt. Millennials also tend to be less established in their careers and therefore do not tend to be at the peak of their income potential. This has implications as things pertain to credit scores, debt-to-income ratios, and income cutoffs that may affect eligibility requirements with conventional loan programs.
Fannie Mae and Freddie Mac Have Stricter Credit Requirements Than FHA
Being as millennials, like most first-time homebuyers, are not at the pinnacle of their income potential, their credit scores may be generally good but debt such as student loans and credit cards may be holding them back. As a result, a majority of millennials may not be eligible for more conventional home loans that have low down payment requirements. This is a significant reason as to why millennials are opting for FHA loans. The FHA accepts much lower credit scores than Fannie Mae and Freddie Mac… In some cases, FHA will allow a buyer to have a FICO score that is below the 600 mark!
To put things in perspective, the average millennial first-time buyer that successfully closed a Fannie Mae or Freddie Mac home loan had a FICO score of 748. On the other hand, the average score among millennial FHA purchasers was 690.
According to many mortgage professionals, FHA will present the most options to a borrower that has a FICO score under 720 and needs a low down payment requirement.
Debt-to-Income Ratios Are More Strict With Fannie Mae and Freddie Mac
Younger borrowers are less financially stable. From credit card debt to student loans, millennials carry a higher DTI than they will hope to see at any other point in their lives. In view of that glorious 3 percent down payment requirement, Fannie Mae and Freddie Mac make that number seem so far away, typically requiring that a borrower not exceed a 45 percent DTI. Again, FHA makes for easier qualification and in some cases the debt-to-income ratio may even hit 56 percent given special compensating factors. This is especially important to millennials with undergraduate or graduate school debt because FHA will factor in monthly payments to student loans in its debt calculation.
Where Millennials Are Buying and Home Loan Amount Limitations
As for any buyer, millennials are restricted to FHA loan amounts that vary according to the location of the home. The main purpose of these loans is to assist the average American in buying a home. Therefore, there are variations in the maximum amount that may be borrowed based on the economics of the locality. Millennials that seek to avoid paying rent to a landlord must be within these restrictions in order to qualify for FHA loans and Texas seems to be one of the hottest markets. Specifically, the Texas cities of Odessa, Midland, and the Beaumont-Port Arthur area outside of Houston metro have presented significant buyer activity.
Millennials Can Handle FHA’s Basic Requirements…
While the housing market seems to be rising, a correction is anticipated over the next year however a strong job market is making a 3.5% down payment realistic for many young professionals. First-time homebuyers should know that this amount must come from your personal funds and kept in a personal bank account. Money kept in your treasure chest or under the couch will not be considered valid.
The basic FHA requirements that home buyers must meet are:
- Show that you have been employed with the same employer since the last 2 years;
- The total income for the last 2 years must be the constant or growing.
- FHA requires you to have a minimum credit score of 500 while any score below 620 is labeled as ‘subprime’; therefore, it is a good idea to apply for FHA loan if your credit score is equal to or above 620.
- Insolvency must at least be 2 years old with a good credit history from then on.
- Shut out must be at least 3 years old along with a satisfactory credit since then.
Documentation Requirements To Have Available:
Apart from the basic requirements, there are certain documentation conditions to be met:
- Photocopy of the paychecks transacted in the past 30 days,
- Photocopy of the W2 forms and 1099 forms since the last 2 years,
- If self employed, copy of tax income list in the past 2 years,
- Photocopy of all relevant bank declarations and investments made by you in the last 2 months,
- Submission of driving license, passport and military ID (if any) to establish your identification,
- If you are self-employed, a copy of your Profit & Loss statement.
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