Millennials overwhelmingly identify owning a home as a goal, but many misunderstand what it takes to get a mortgage, according to a new report from Bank of America.
Seventy-two percent of 23- to 40-years-olds surveyed listed homeownership as a top priority. Renters’ reservations about making the switch are often steeped in misinformation about who qualifies for a mortgage and the cost of buying, according to the 2018 Fall Homebuyer Insight Report.
The biggest problem is people are self-selecting out of homeownership because they have preconceived notions about the requirements, says Kathy Cummings, senior vice president of Bank of America’s homeownership solutions and affordable housing programs.
Top renter misconceptions identified in the report include:
- Almost half of millennial renters (49 percent) incorrectly believe buyers must put 20 percent down to purchase a home.
- Forty-three percent wrongly stated that buyers must pay private mortgage insurance if they failed to put 20 percent down.
- Nearly one in four falsely believed they need to have a “perfect” credit score to be considered for a mortgage, according to the report.
Facts and myths about homebuying
Slightly less than half of non-cash buyers (49 percent) put down payments of 20 percent or more in August 2018. Even fewer first-time buyers (27 percent) paid a fifth of or more of their purchase price upfront, according to the National Association of Realtors.
In some cases it might be financially savvy not to put 20 percent down, Cummings says.
“Rather than putting all the money you have in the bank down for the down payment, really make sure you have that savings cushion in case the hot water heater breaks because you no longer have a landlord to call,” she says.
Conventional mortgages can be obtained for as little as 3 percent down. And while putting down 20 percent generally helps buyers avoiding having to shell out cash every moth for private mortgage insurance, there are also other options like Federal Housing Administration (FHA) loans, lender-paid mortgage insurance and specialty loans and programs that don’t require PMI.
Higher credit scores help buyers snag lower interest rates and better deals, but homebuying isn’t reserved just for those with perfect credit. FHA loans can be obtained by people with scores of 580 or higher. People with scores upward of 620 can usually obtain a conventional home mortgage loan.
“It’s really about setting your financial priorities,” Cummings says. “If homeownership is a priority for you, then there is certainly a way to achieve that.”
How to overcome the barriers
Finances remain one of the top barriers to homeownership, according to the Bank of America report.
Forty-four percent of respondents felt they didn’t have enough money saved up for a down payment. And almost a fourth of renters (23 percent) said they couldn’t afford the home they want.
Saving up isn’t easy when housing takes a big bite out of millennials’ paychecks, Cummings says. Bank of America found that almost half (48 percent of renters) are devoting more than 30 percent of their income to rent.
In recent years, more millennials are living with mom and dad instead of starting their own homes, according to a recent analysis of federal data by the National Association of Home Builders. The rising cost of housing paired with delayed marriage, student debt, and choosing to live in high-cost cities create barriers for some younger adults looking to buy, according to an analysis by the Urban Institute.
“If you’re unsure of your financial situation or you know that you need to or would like to improve your credit, working with a (United States Department of Housing and Urban Development) is a great way to get you going in the right direction,” Cummings says.
HUD keeps a list of approved housing counseling agencies on its website. In addition to using those advisors, Cummings recommends prospective buyers study their area housing market’s real estate trends.
“Making sure you have a really clear understanding of what your must-have versus like-to-have list would be is going to be critical in trying to find that place you’re going to be happy in and that you’re going to be able to afford,” she says.