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How Millennials Are Buying Houses With Less Than 20% Down

Dec. 15, 2020
Finding the Right Mortgage, Homeownership, Mortgages
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By Ori Zohar

Learn more about Ori on NerdWallet’s Ask an Advisor

If you pay attention to what’s written and said about people in their 20s and early 30s — the “millennial” generation — you’ll find two common themes:

1) We are an optimistic, self-entitled generation with unrealistic expectations about our own abilities and success paths.

2) We are going to have an exceptionally difficult time getting into the housing market because of mountains of student debt and other factors that make it nearly impossible to manage a down payment without help from our hovering helicopter parents.

When it comes to the housing market, though, that first millennial theme — optimism — could be enough to overcome the financial challenges.

The National Association of Realtors recently noted that millennials’ inherent optimism (and willingness to buy fixer-uppers — we do like to have things exactly as we like them) are two underpinnings of what may be a surprising statistic to many: Millennials represent the largest share of homebuyers, at 32%, and make up 68% of first-time homebuyers.

This may come as a surprise to those folks writing articles about how we’ll never buy homes. How can it be that so many millennials — a generation that is moving back in with mom and dad and has historic amounts of student debt — are managing to enter the housing market, even overcoming the mortgage rules of thumb of a 740 credit score, 43% debt-to-income ratio and a 20% down payment? (More on Down payment strategies for first-time home buyers)

Here are the main ways to get into a home without a perfect trifecta of credit score, DTI ratio and down payment:

  • FHA loans.
  • Conventional loan programs.
  • VA loans.
  • Down payment assistance programs.

Let’s dig a little deeper into these programs:

FHA loans

What is an FHA loan?

FHA stands for the Federal Housing Administration, and its loans help borrowers who don’t qualify for other loan types. Through FHA, the U.S. government provides the lender with borrower-paid mortgage guarantee insurance. This means the borrower has to pay for mortgage insurance for the life of the loan. As a result, lenders are willing to approve borrowers that don’t meet the higher standards for conventional loans.

Why would I want an FHA Loan?

The primary reason people choose an FHA loan is simple: FHA loans allow you to put as little as 3.5% down when buying a house. FHA loans also offer relaxed credit and debt-to-income requirements compared with conventional loans. This is a prime way millennials are getting into the housing market — 37% of homebuyers below the age of 36 used an FHA loan in March through May of this year, according to mortgage tracker EllieMae.

What are the downsides of an FHA loan?

The biggest downside can be the cost — government-provided mortgage insurance is usually 1.75% of the loan amount when paid upfront, and 1.30% to 1.35% if paid monthly. If you are getting an FHA loan (or really, any loan), ask to see the total monthly payment you’ll be expected to pay.

How do I get rid of mortgage insurance on an FHA loan?

An FHA loan carries mortgage insurance for the life of the loan. The only way to remove it is to refinance to a conventional loan when your home equity has increased to a point that you have an 80% loan-to-value ratio; remember that if you make a 5% down payment on your home, for example, your initial LTV ratio would be 95%. Note that if you refinance to a conventional loan and include the refinance fees into the loan amount, that will affect the LTV.

>> MORE: What is mortgage insurance?

Conventional loan programs

What is a conventional loan?

This is basically a “normal” loan. It’s neither insured nor guaranteed by the federal government, and it meets guidelines set by Fannie Mae and Freddie Mac.

How do I qualify for a conventional loan?

In general, there’s a limit of $548,250 in 2021 for single-family homes. In some high-cost counties, the limit is higher.

These loans require that a borrower have a minimum FICO score to qualify. Lenders will have their own minimums beyond the Fannie and Freddie guidelines, but a 620 credit score is often a starting point. A score over 740 will most likely get you the best rates.

There are various loan programs, and the minimum down on a conventional loan can be as little as 3%: the so-called “Conventional 97” is backed by Fannie/Freddie, so rates are low.

What are the downsides of a conventional loan?

The downside of a conventional loan is that if you use one to buy a house with less than 20% down — meaning your loan-to-value ratio is higher than 80% — you have to purchase private mortgage insurance, a monthly expense of up to 1.5% of the loan amount.

Make no mistake, putting 20% down is a good idea if you can do it. It’s how you avoid mortgage insurance. But paying PMI for a time might be acceptable if it means actually getting into the housing market and building equity.

» MORE: Calculate your debt-to-income ratio or monthly mortgage payment

How do I get rid of PMI?

Unlike an FHA loan — which carries mortgage insurance for the life of the loan — the mortgage insurance on a conventional loan will fall off as soon as the LTV reaches 80% because of the Homeowners Protection Act.

What this means is that, if your home is appreciating steadily, you’ll be in good position to see your mortgage insurance disappear. Another way to get rid of PMI is to keep track of the comps for recently sold homes in your neighborhood. If you feel that your home is undervalued, you can always order a new appraisal to determine whether your home equity is such that you can ditch the PMI.

You can also refinance your loan, if rates have dropped, which can both save you money and redefine your LTV.

VA loans

What is a VA Loan?

The U.S. Department of Veterans Affairs backs loans as a benefit for active-duty military personnel, veterans and some spouses/widow(er)s. VA loans come with great terms for those who qualify.

VA loans can be either fixed rate or adjustable rate mortgages. This type of loan can only be used for your primary residence, and you can only have one VA loan at a time.

Why would I want a VA Loan?

VA loans have 0% down requirement and do not require mortgage insurance. And while credit scores matter in order to qualify for the program, minimum requirements are usually sufficient to qualify for a good rate. About 1% of millennial homebuyers use VA loans to buy a home.

How do I qualify for a VA Loan?

You qualify for a VA loan if you are a veteran, active duty personnel in any branch of the U.S. Armed Forces, or a spouse/widow(er) of one.

Down payment assistance programs

What are Down Payment Assistance Programs?

Down payment assistance programs, sometimes called DAPs, are designed to be secondary loans or gifts that can help you meet minimum down payment requirements or to help make your mortgage loan more affordable. They’re often restricted to first-time homebuyers.

Where can I find a DAP?

State and local housing authorities typically offer DAPs, and they are funded through a variety of sources, including bond programs. Some programs are offered to specific qualified applicants, teachers for example, or for particular geographic areas.

Because many mortgage brokers aren’t familiar with DAPs or where to find them, it’s a good idea to do your research and ask around.

How do DAPs work?

Details on DAPs vary — some don’t have to be repaid until the house is sold or your mortgage is paid off. Others feature deferred interest, accrued interest, loan forgiveness or simple interest models.

Do I qualify for a DAP?

While DAPs are aimed at low- or moderate-income homebuyers, don’t assume you’re out of the running if you have a higher salary, especially if you live in expensive areas, because income limits vary. Eligibility measurements can include assets, debts, credit scores, property type and property location, though it’s important to remember they may be different from those used to qualify you for your mortgage.

Despite the high barrier to entry for homebuyers, often-stereotyped millennials are using these and other programs to get a foot in the homeownership door — no matter what the conventional wisdom says.

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Ori Zohar is the co-founder of Sindeo, a company that connects consumers with mortgages. Sindeo is a NerdWallet business partner.