Since the market crash, many prospective first-time home buyers have been fighting an uphill battle on their path to homeownership. Certainly it isn't for lack of trying. While millennials might be the largest group of first-time buyers, according to the NAR, they face a whole slew of daunting challenges before they can sign on the dotted line.
And here's the kicker: Some of these hiccups are mostly out of their control. Bummer.
Here are some of those factors that could be barring millennials from homeownership. (They have our sincere sympathy, alas.)
1. College costs more than they bargained for
Student loans are this generation’s beast of burden. The national average for 2016 graduates remains around $37,172, up 6% from last year.
“Student loan debt raises the debt-to-income ratio of borrowers, making it hard to qualify for the amount of a loan they'd need,” explains Robert Farrington, founder of TheCollegeInvestor.com. In 2015, Federal Housing Administration loans, which once ignored deferred student debt, started factoring it into applicants' DTI.
So what can millennials do if they're saddled with college debt? Farrington says their key focus should be on getting those monthly payments into a manageable position. One tactic is refinancing their federal loans into a private loan, “which could offer lower interest rates and more flexible payment options,” he says. Another option: Paying more each month to reduce their debt at a faster rate.
Understand that refinancing can be a double-edged sword when it comes to federal student loans. Income-driven repayment plans offered by the government will vanish once the federal loan is refinanced with a private loan company. So millennials should go into it with their eyes wide open. It makes sense to refinance if they can afford their standard repayment plan and don't qualify for debt forgiveness they might be privy to if they work in a service or teaching job.
2. Someone else screwed up their credit
Generally, you can control your credit with patience and a good understanding of how to get a decent credit score. But if someone hijacks your identity, the thief can wreak havoc on your dreams of homeownership. Even a family member.
"I had a client whose parents took out the accounts in his name when he was a child, and didn’t ever pay them," recalls Rebecca Bell, a broker with Alpha Mortgage Corporation, in Wilmington, NC. "It knocked this prospective buyer’s score below 500. It was impossible for anyone to lend to him and took him years to fix.”
In this case, the client should have been checking his score periodically. Bell recommends putting a fraud alert on the reports from all three credit bureaus. This flags your account for extra protection, so if something odd happens, the bureau will call to confirm it with you before trashing your score.
3. The rent is too damn high
It’s no secret that rent in metro areas is skyrocketing. And higher rent means less money for everything else.
“In California, what we're seeing is that renters are devoting increasingly more of their paychecks to cover their rising rents, which means they have less money to save for a down payment,” says Kevin Stein, associate director at the California Reinvestment Coalition, an organization that advocates for low-income communities.
Being stuck in a classic renter's limbo is frustrating. If millennials are set on owning, the best thing they can do is create a budget and start saving what they can. It might mean sacrificing some comfort—like their own apartment or a short commute—to get cheaper rent and secure a property in the future.
4. Their competition has bags of cash
In some areas, the people millennials are up against don’t have 20% down; they have 100% down. All-cash offers from investors can be tough to beat. The "pecking order" of preferred home buyers, according to a real estate agent in the San Francisco Bay Area, is:
Less than 20% down
On the bright side, cash offers don’t always rule the roost. There are plenty of sellers who are willing to entertain offers from all buyers, not just the ones with a big wad of cash.