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Will millennials ever be homeowners?
Student-loan debt and unemployment shackle many adults in their 20s and 30s, the traditional first-time homebuyers. These tips may help some qualify for loans.
By Marilyn Lewis of MSN Real Estate
The recent recession kicked the millennial generation — those in their 20s and early 30s — in the teeth. Some wonder if they'll ever be able to own a home. Experts worry, too, especially because the housing market depends on young, first-time buyers.
The downturn began just as many young adults were entering the workforce. Americans ages 20 to 24 suffered a 12.9% unemployment rate in May. That was actually an improvement from 14.6% last year.
A college education is supposed to give job seekers an advantage. But to get it, many took on loans that now prevent them from qualifying for a mortgage.
"Sobering" is how the Consumer Financial Protection Bureau describes the roughly $1 trillion that Americans owe on school loans, 67% of it owed by people under 40. Just over half of college graduates from 2006 through 2011 have full-time jobs, yet six in 10 have student loans with an average balance of $20,000.
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In another time, Amanda Bate would have been a typical first-time homebuyer. She has always wanted to own a home. Now that she's 26, with interest rates and home prices at or near record lows, the time seems right. She went shopping this spring near her workplace in Birmingham, Mich.
"The housing market was so low. I thought, 'I could possibly get a house,'" she says.
The house she loved was listed at $80,000. The mortgage payments would have been about $500 a month, cheaper than the $610 a month she'd paid when she rented an apartment.
But the mortgage broker dumped cold water on her dreams. Even working a full-time job, plus a part-time job on weekends, and even though her parents have been helping pay her student loans, buying a home was out of the question.
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For one thing, she'd need an $11,000 down payment. "I don't even have a savings account," she says.
But it's her student loans — $1,470 a month in payments on $123,000 in combined balances — that have made buying impossible. Bate earns just $30,000 as marketing director for a small media company.
She says she wishes someone had warned her. She now can't imagine when she can ever buy a home of her own. Meanwhile, she's living with her family, like one in five 25- to 34-year-olds, and "everything I have goes into those loans."
Some experts see the double curse of unemployment and student debt as an ominous sign, not only for millennials but also for the whole economy.
"Debt, coupled with double-digit unemployment, has hobbled millions of young adults who would have bought homes, married, had children and feathered their nests with all the middle-class goodies that keep our economy humming," demographer Cheryl Russell writes.
Tighter mortgage-lending requirements add to the trouble for young would-be homebuyers. The numbers paint a picture of a generation falling behind:
36.8% of people under 35 own homes, down from 43% in 2006.
61.4% of people ages 35 to 44 are homeowners, down from nearly 69% in 2006.
Just 9% of people ages 29 to 34 got mortgages in 2009 to 2011, compared with 17% a decade earlier, even before home prices inflated and mortgages became easy to get.
40% of those with student loans have put off making big purchases such as homes and cars.
But Paul Ashworth, an economist with economic-research firm Capital Economics, says he isn't convinced that student debt will prevent millennials from eventually owning homes. Despite recent widespread concern over student borrowing, sketchy data make it hard to know if the proportion of borrowing is worse than in the past, he says.
At roughly $1 trillion, student debt is greater than outstanding auto loans ($730 billion) or credit-card balances ($693 billion). But it's unclear if that's a change, Ashworth says. "My big thing is, is it any different than it used to be?" he says.
Also, on the upside, six-digit student-loan balances like Bate's are unusual. Just 3.1% of borrowers owe more than $100,000. Most borrowers, 72%, owe less than $25,000. That's still sizable, especially if your salary is $25,000 or $30,000, and 14.4% of borrowers have missed at least one payment, so many clearly find their loans hard to repay. But it's equivalent to buying a new car — a big purchase, but one many young people manage.
There's no question, though, that many young adults are struggling.
"These were people who were most likely to be buying a home with very little equity at the very top of the boom," Ashworth says. "They would also have been the people who got whacked the hardest when the market turned down because they wouldn't have had the time to build up equity." That makes them more prone to foreclosure and negative equity.
The desire to buy
With the starting gate crashing down on millennials' heads, you might expect them to be disenchanted with homeownership. But that's apparently not the case. Western Union, which polls consumers about payments and purchases, found in late March that 47% of people ages 21 to 33 plan to buy a home within five years; 11% even hoped to buy a second home.
Their plans may be unrealistic.
"Even though they're very optimistic about it, I think they're going to have a more difficult time achieving homeownership than perhaps they realize," says Missy Zakett, Western Union's vice president of enterprise banking sales.
One-third of those young adults have never even seen their credit scores, Zakett says. This is the age group most likely to spend on "almost everything," including groceries, gas and clothing, according to the survey.
Again, however, the news is not all bad. Of young adults Western Union polled, 39% had no debt at all. An additional 13% had only $1,000 to $5,000 in total debt.
What millennials should know
If you're a millennial looking to understand what your student debt will mean when you go for a home loan, consider that the mortgage you can get depends on what money you have left after paying your monthly bills.
Mortgage payments may not top 31% to 35% of your monthly adjusted gross income, says Dennis Johnson, a certified credit counselor with the nonprofit ClearPoint Credit Counseling Solutions in St. Louis. If your annual adjusted gross income is $60,000, you could qualify for a monthly mortgage payment of $1,550 to $1,750. ((Bing: Download a blank mortgage application)
In addition, all your debts — car loans, student loans, credit cards and mortgage payment— may not exceed 40% to 45% of your adjusted gross income. For example, if your mortgage payment is $1,500 a month, you've got $750 a month for all other debt.
If buying a home is your goal, Johnson advises starting with these three steps:
1. Cut debt. Reduce or eliminate all debt, including student loans. The debt allowed when you apply for a mortgage depends on what you earn and what you owe.
2. Pump up your credit score. Make every loan and credit card payment on time. Late payments hurt your credit score, making it harder and costlier to get a mortgage. You'll need a FICO score of at least 580 — but realistically, as high as 700 or 720 — to qualify for most mortgages. Read about the new stricter loan standards here.
3. Save a down payment. Once your debts are out of the way, start saving for a down payment. How much depends on the loan type you'll use and how much you're borrowing. Johnson says Federal Housing Administration loans require a down payment of about 3.5% of the purchase price. Some conventional loans may require 10% to 20% down.
Looking back, Bate says she wonders what she might have done differently. Her bachelor's degree in public relations, for instance, seemed a savvy choice back in college.
"We would ask the teacher what kind of salaries we should be expecting, preparing to enter the workforce," she says. "They said you can start anywhere from $40,000 to $70,000 a year. I was like, 'OK.'"
But she graduated in 2008, just as the economy tanked. She couldn't find work, not even an unpaid internship. Returning to school for a master's degree in political communications seemed a smart way to increase her marketability and defer repaying her loans.
She says she sees now that she could have used more help with planning. Her parents warned that debt would make it hard to buy a home. But she did not understand what that meant, she says.
Students typically have little experience with bills, mortgages and paychecks, and yet they're making financial decisions that will shape their lives. Johnson says he sees many young adults who can't buy homes because of student loans.
He urges parents and students — even high-schoolers — to meet with a certified credit counselor who's unaffiliated with schools or lenders. A call to the National Foundation for Credit Counseling will get you a referral to the nonprofit agency nearest to you.
If owning a home is your goal, even in the distant future, include it when planning how you'll balance your career hopes, salary expectations and school choices.
Out-of-control student debt, Johnson says, mostly is because of:
Out-of-state schools: In Bate's case, both her schools were outside her home state of Michigan. Many schools charge much higher tuition to out-of-state students. Solution: Students successful at containing college costs often live with family to avoid paying room and board.
Failing to consider future salary: Like many millennials, Bate was caught by surprise when the recession lowered entry-level salaries. Get a reality check by reaching out to professionals in your chosen field to learn what jobs really do pay. Researchers at Rutgers University say the median salary for a first job after college is $28,000. Solution: When adding debt, estimate your payments after graduation and how they'll affect your overall budget and other goals. In general, payments on a $20,000 student loan run $200 to $300 per month. If you'll be earning $100,000 or more after graduation, you could handle more debt than on $30,000 or $40,000 a year.
How to prepare while in school
Johnson has five more tips to help students eventually buy homes:
1. Choose a smaller student loan: Lenders may offer money for tuition, books, housing and food, but you don't have to take it all. Accept just enough for tuition and books, Johnson says. Live frugally and work to cover room and board.
2. Get a work-study job: Around 3,400 schools participate in the Federal Work-Study Program, which pays students to work part-time while enrolled in school.
3. Study part time: Afford college by attending part time while working. It takes longer, but you're less likely to be shackled to loans.
4. Live off-campus or at home: Consider boarding houses or sharing a cheap apartment, or choose a school where you can live with family. Campus life, while undeniably fun, is less attractive when you factor in the price of indentured servitude after graduation.
5. Lower your student-loan payments: You may be able to restructure or consolidate student loans and lower your monthly payments. Learn more using the Consumer Financial Protection Bureau's student-debt-repayment assistant.