Why millennials can’t, or won’t, get a mortgage

BY REAL ESTATE WEEKLY CHRISTIAN BRAZIL BAUTISTA •   JUNE 17, 2016

Millennial homebuyers, most of whom entered adulthood as the housing market collapsed due to misconduct from lenders, continue to face a variety of obstacles to obtaining credit.

The barriers persist in spite of the swelling size of the millennial homebuying market.

According to the National Association of Realtors’ Home Buyers and Sellers Generational Trends Survey from March, millennials are the largest group of homebuyers in the United States, accounting for 35 percent of all buyers in the country in 2015.

This marked the third straight year that the millennial homebuying population grew.

With the increase, the millennial stake in the housing market is now equal to the shares of Gen X (25 percent) and Silent Generation (nine percent) homebuyers combined.

Melissa Cohn, a mortgage broker from FM Home Loans, attributed the difficulties of getting loans for millennials to various factors, including regulation, the subprime crisis, student loans and a general lack of funds.

Out of the list of blockages to credit, she considers stricter requirements imposed by the financial reform law known as Dodd-Frank to be the most unwieldy. “I think that, unfortunately, all generations have it worse today when it comes to applying for mortgages just because of the stricter regulations we’ve had put in place with Dodd-Frank,” Cohn said.

“We used to have no income verification loans for self-employed people. We don’t have that anymore. In that way, the bar is higher. Banks pay more attention to people’s credit scores than they used to.”

Alan Rosembaum, the CEO and founder of residential mortgage bank Guardhill Financial, agreed that regulations are stricter. However, he claims that this is offset by a wealth of choices for potential borrowers.

“I would say it is more difficult because… guidelines are more strict,” he said. “(But) I would say (they have it) better than their grandparents because there are so many opportunities out there.”

While a lot of external factors continue to prevent millennials from getting credit, there are also some behavioral factors that are in play.

“When I was young and of millennial age, we would buy a property that we would think we would be in for the rest of our lives. I think millennials are a much more mobile generation,” Cohn said.

“At the price of real estate today, you can’t afford to buy something that you’re going to live in for the rest of your life. They buy what they need for today with the thought that, when they get married and have children, they will sell and move on.”

NAR chief economist Lawrence Yun said young people are finding it too difficult to afford urban homes of the same quality as those they would find in the suburbs.

“Even if an urban setting is where they’d like to buy their first home, the need for more space at an affordable price is for the most part pushing their search further out,” said Yun, noting that the survey revealed that 51 percent of millennial homebuyers recently purchased a home in the suburbs.

According to Rosenbaum, millennials are also hesitant to take on debt because the subprime crisis provided a wealth of cautionary tales.

“I think they’ve read a lot of negative press about how difficult it is to get mortgages and how many consumers were taken advantage of during the credit crisis. And people are scared. They’re scared of the unknown. They’re not sure what’s out there.

“They hear about the banks that are too big to fail. They hear about the mortgage brokers. They hear about this and that and they don’t know what to do. So they run,” he said.

Phil Caggiano, a mortgage sales manager for M&T Bank, disputed Rosenbaum’s comments, saying that many millennials were too young to grasp what was happening during the financial crisis.

“I really don’t think so because a lot of them, when the subprime crisis was occurring, they were still young and they didn’t understand it. But I think they’ve seen their family members and parents struggling. I don’t think that attitude was created by the crisis, I think it’s more what they’ve seen through their parents,” he said.

Nonetheless, millennials seem to be more cautious when it comes to taking on debt.

According to the NAR survey, while millennials have the most student loan debt, their generation doesn’t have the biggest student loan balances. The median amount of student loan debt among millennials was at $25,000, which is lower than that of Gen X ($28,000) and younger boomers ($29,100).

In spite of having less debt, millennials remain at a disadvantage because they entered the job market at a bad time.

“Unfortunately, some of them were graduating from school in 2008 and 2010 when the economy was slow. It took them longer to get jobs and longer to begin to save,” Cohn said.

“(What) we have with millennials is that oftentimes they don’t have enough money to make some liquidity requirements and need to go to the bank with mom and dad. And they may not have sufficient credit. Because what I’ve seen with a lot of millennials is that they maybe have this one credit card and it counts for everything.”

Nonetheless, Caggiano said that the barrier to buying homes for millennials continue to shrink because of smaller downpayment requirements.

“As far as the cost, some of the programs that I’ve arranged come with as little as three percent down,” he said.

Rosenbaum, meanwhile, provides a caveat for such deals. “They come with higher prices and higher fees,” he said.

“They do help you if you have a lower credit score. You have a lower downpayment, but it costs more.”

The NAR agrees that rising rents, plus an abundance of low- and no-down payment mortgage loans, is making homeownership look more attractive.

The Association points out that mortgage lenders have reduced their minimum FICO scores required to get approved; lenders are now less stringent with respect to loan-to-value restrictions; and, the piggyback loan has re-emerged as a popular home-buying option.

Fannie Mae and Freddie Mac have also re-introduce a program known as the Conventional 97, which is a three percent downpayment loan for borrowers with above-average credit. The lenders also created a brand-new three downpayment product known as the HomeReady loan.

“Both are exceptional vehicles for getting into homeownership,” the NAR said.

FHA loans require downpayments of 3.5 percent and its credit score minimum is in the 500s. The FHA also lowered its mortgage insurance premium (MIP) structure in 2015 which makes FHA loans more affordable. FHA loans account for close to 25% of home loans made today.

According to a report from real estate listing website Zillow, a three percent plan comes with a trade-off.

For a $300,000 home purchase, the mortgage would cost $467 more per month but will require $51,000 less down payment.

The study claims that closing costs are one of the primary considerations for millennial homebuyers because they haven’t been in the workforce long enough to have large savings at their disposal.

Economic factors also remain an adversary for millennial homebuyers. The MacArthur Foundation’s 2015 “How Housing Matters” survey revealed that 20 percent of Americans have been forced to hold a second job or find other ways to increase their income, 17 percent have stopped saving for retirement, and 14 percent made ends meet by borrowing on their credit cards.

When it came to millennials, MacArthur found that 67 percent are being forced to sacrifice in order to pay for housing. While most still see homeownership as an excellent long-term investment and want to own one day, 80 percent reported that it is hard for them to find anything they can afford to buy.

The interest in homeownership remains in spite of regressing wages. According to a recent report from New York City Comptroller Scott Stringer, millennials earn 20 percent less than the previous generation and are more likely to feel the effects of the global financial crisis for years to come.