The administration earlier this month cut the premium that borrowers with a Federal Housing Administration loan must pay for mortgage insurance to 0.85% from 1.35%. The half a percentage point reduction will reduce the cost of the average FHA loan by about $1,000 per year.
Meanwhile, Fannie Mae and Freddie Mac last month dropped the minimum down payment to 3% from 5% on some of its mortgages. FHA requires a 3.5% down payment.
Those who might criticize these policies should consider how these changes come as homeownership has fallen to the lowest level in 20 years, at about 65%. The figure for those under 35 dropped to the lowest level in 30 years, at 36%, highlighting how millennials have been absent from the housing recovery. Saving up the customary 20% down payment has been a major barrier for millennials, defined as those born between 1981 and 2000. Many entered the job market just after the 9/11 attacks, and have endured the Great Recession and a collapse in home prices.
Millennials are also faced with low wage growth, rising rents and an average of $30,000 in student loans. Thus a typical millennial needs 12.5 years to save up a 20% down payment, given the current personal savings rate of 5.6%, according to real estate research firm RealtyTrac. And that’s with zero home-price appreciation. This population clearly did not cause the housing crisis, but they certainly are suffering disproportionately from it.
But the new low down-payment requirements can put homeownership in reach. Imagine a $200,000 starter home; it would require only $6,000 down. That makes it comparable to a rental that might require a first and last month rent payments, as well as a security deposit. That can easily add up to $6,000 — without the tax savings from the mortgage-interest deduction. As rents have risen in some metropolitan areas, an opportunity to buy a small home in the suburbs could be a welcome reprieve for many millennials.
There are even grant programs, such as CHFA in Colorado, that can allow home buyers to purchase a home with as low as a $1,000 down payment. Programs like these vary by state, creating a confusing patchwork for millennials to navigate. Critics of the mortgage changes abound, of course, as home buyers who put 20% down are less apt to default. Some in Congress even want tougher lending standards.
New regulations, however, should stop the problems that led to the subprime mortgage crisis. For instance, there are now rules that mandate that incomes on loan applications must be independently verified. Predatory-lending practices should also be prevented by the recent adoption of ability-to-repay standards. We just aren’t going to see the same kind of mess we saw before. It’s much more difficult to qualify for a mortgage since the new regulations have been in place.
Millennials, currently about 17% of all U.S. households, make up the largest demographic group ever to enter the nation’s housing market. More than half plan to purchase a residence in the not-too-distant future, according to 2014 data from Zillow. This survey data was published before some of the latest moves to clear some hurdles for first-time home buyers, who need to demonstrate that they are, in fact, creditworthy.
Perhaps this will be the year this generation will leave their expensive rentals, or their parents’ basements, and move into their own homes and live the American Dream.
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By: Damian Maldonado is CEO and co-founder of national mortgage lender American Financing.