Mark Twain observed that if you don’t read the newspaper, you are not informed, and if you do, you are misinformed. He also noted that the report of his death was an exaggeration.
Both are fitting thoughts when we look at the state of anxiety about what has become of first-time homebuyers.
It’s difficult to a positive story about this market, where as every day it seems another headline is thrust in front of the public about the dire straits of this crucial homebuyer. And yet, perhaps, all is not as dismal as it may appear. Perhaps we as an industry could start doing a little less handwringing and start handing out some hope and help to today’s first-time homebuyers.
With that in mind I can count on my hand five ways we can help your members who want to buy that first home.
Getting down to the truth about down payments
A recent consumer survey showed that 74% of respondents believed they “know and understand the financial process of buying a home.” However, the survey also showed that nearly half — 44% — believed that a 20% down payment was required.
The point is, savings like that can be the difference between being able to afford a monthly mortgage payment and continuing to rent.
With a national personal savings rate average hovering around 5.4%, a family with a median income of $60,000 —which is greater than the national median average —would be able to save about $3,240 a year. That means it would take them more than 9 years to save for a 20% down payment on a $150,000 home.
Luckily, 20% is not required. The FHA requires just 3.5% down, and some conventional private mortgage insurers, such as MGIC, insure loans with even less down, requiring just 3% down for borrowers with credit scores as low as 620.
1. Conventional wisdom
Many are concerned about the current premium rates on FHA mortgages and the added monthly cost for many homebuyers. However many borrowers who financed their mortgage through FHA could have used conventional financing. And in many cases, these borrowers would have reduced their monthly cost by more than $100 per month — depending on loan amount, credit score and interest rate. The point is, savings like that can be the difference between being able to afford a monthly mortgage payment and continuing to rent.
2. Gift of affordability
The National Association of Realtors estimates that last year 26% of young buyers used a gift for part or all of their down payment. Both Fannie Mae and Freddie Mac offer programs that allow for homebuyers to use gifts for 100% of their down payment, as do many private mortgage insurers. MGIC, as an example, allows borrowers to use 100% gift funds toward the down payment with as little as 3% down and a credit score as low as 620.
3. Studying up on student loans
The media is quick to point out nationally student debt has increased dramatically. As of June 20, 2014, it was at a record $1.2 trillion. While it certainly will be a barrier for potential first-time homebuyers, constant negative stories are causing some to stay on the sidelines and not even try. When we look closer, we see that 60% of households aged 25 to 34 have no student debt; another 15% owe less than $10,000; and still another 13% owe less than $25,000 on student loans. The truth is, many people with student loan debts could buy a home today. And many do. The New York Fed Consumer Credit Panel showed that the percentage of borrowers aged 25 to 30 with a new mortgage was actually higher among those with current student loan debt than those who did not have student loan debt.
4. Membership has its privileges
The path to homeownership for many should start at their local credit union. Credit unions are perfectly poised to help today’s first-time homebuyers. Not only can they offer members and perspective members a lower monthly mortgage due to reduced MI premiums, but the member-centric approach fits well with the mind-set of this generation of first-time homebuyers.
5. The kids are alright
The good news is, despite what the media may sometimes have us believe, there is a huge opportunity among first-time homebuyers. The Demand Institute tells us that Millennials accounted for 13.3 million households in 2013. By 2018, that number is estimated to increase to 21.6 million. The institute also tells us 74% of Millennials plan to move in the next 5 years. Most Millennials would prefer to own rather than rent. Will you give them a hand?
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