Prospect of Homeownership for Millennials

From the National Association of REALTORS® 2/6/2014

Under QM regulations that took effect in January, one of the underwriting criteria for a loan to be originated as a Qualified Mortgage is that the borrower must meet a monthly debt to income ratio (DTI) of no more than 43 percent [2]. The monthly debt payments include recurrent debt obligations such as student loans, auto loans, revolving debts, and any existing mortgages not paid off before getting a loan [3].

The chart below shows NAR Research’s calculations of the debt to personal income ratio for student debt, auto, and credit card debt with mortgage debt (red ) and without (blue) across age groups based on household debt and income data in 2012 [4]. Using income data for persons with at least an Associate degree, all age groups will meet the 43% DTI except for the “21 to less than 30 year old” group. For this age group, the monthly student, auto and credit card debt payments are about 30 percent of income. Now, with mortgage payments for a starter price home of $149,425 in 2012 at 10% down payment and a 30-year fixed term [5], the debt to income ratio (red) increases to 61 percent.

The implication for millennials is that a home purchase may be pushed back and borrowing ability is adversely affected. Assuming that this group’s income grows at 5% per year, they will meet the 43% DTI in seven years. With an average student debt of $21,402, their current borrowing ability declines by the same amount [6].

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What does this mean for Buyers?

REALTORS® may need to provide some insight to first-time homebuyers and options for addressing this issue.

1. Working with the buyer to get an overall financial picture of what can be done.

2. Looking for alternatives may be necessary—rentals, rent to buy, assuming a mortgage, exploring financial options.

Contact me for details.  I'm happy to talk with you one on one to come up with the best strategy to help you or someone you know become a first time homebuyer. - Liz Sandwick