It’s no secret that when it comes to transitioning into homeownership, millennials have procrastinated compared to previous generations. They entered the job market during the recession and have opted to rent while paying down student loan debt and trying to grow their savings.
But this trend has slowly been turning around. With the oldest millennials turning 37 this year, more and more in this age group are looking to purchase their first home. Millennials rank as the generation most likely to purchase a home in 2017, making up 34 percent of the pool of home buyers, according to the National Association of REALTORS®’ 2017 Home Buyer and Seller Generational Trends report.
Your agents can capitalize on the wave of millennials entering the market, as long as they understand and recognize the needs of today’s first-time buyer. Here are some tips brokers can pass along to their team to help clients get financially prepared for their first home purchase.
How Credit Affects Lending Options
According to Nathan Miller, president of Rentec Direct, a software company for real estate investors, lending restrictions are extremely tight for first-time buyers. An A+ credit score is now 760 rather than 720, and in some cases, a buyer needs a score of at least 780 to get a lender’s best rate. While millennials may have passed a credit check to score a lease in a tight rental market, their credit score will now be more relevant than ever for securing a loan for a home purchase.
If a buyer has less than stellar credit, consider offering him or her these options to improve their score before speaking with a lender.
- Increase credit limits. Clients preparing to apply for a mortgage should make sure their credit card limits are increased as high as possible. Credit lines with major banks should equal between 25 percent and 35 percent of a person’s annual gross income. If a client is not at that level, suggest they call and ask for a credit increase.
- Use high-limit cards. Potential home buyers should actively use their high-limit cards so that a bank doesn’t shut them down. They should consider cycling through their credit cards, making smaller purchases, and paying off the balance on time each month. If a bank reduces a credit line or shuts down a card due to inactivity, that person’s credit score will take an immediate dive because their ratios of used credit to available credit (or debt to income) will go down.
- Pay down revolving lines. For clients who aren’t first-time home buyers and may have a home equity line of credit, Miller suggests paying it down quickly. Clients should get it below the 50 percent level so it’s not negatively impacting their credit score. Conventional loans don’t matter as much. For example, a 30-year conventional mortgage loan, regardless of the balance, will typically improve your credit score.
Down Payments for First-Time Buyers
As agents advise potential buyers on the purchase process, they should be sure to give them realistic numbers about down payment expectations. “Apparent confusion about down payment requirements may also be behind nonowners’ lagging confidence about buying,” according to NAR’s Aspiring Home Buyer Profile,
The median down payment for first-time buyers has been 6 percent for three straight years and 14 percent for repeat buyers in three of the past four years, according to NAR’s 2016 Profile of Home Buyers and Sellers. However, when asked about the amount of a down payment needed to purchase a home, 87 percent of nonowners indicated that a down payment of 10 percent or more is necessary. Agents should let their clients know the accurate amount that’s generally required, which should provide encouragement for them to take steps toward a home purchase.
Once first-time home buyers are armed with knowledge about how to improve their credit scores and have realistic expectations about the savings required for a down payment, they’ll feel more confident working with your agents to purchase their first home.