The Millennial’s Guide to Getting a Mortgage

First-time buyers are a huge part of today’s real estate marketplace, and that means we’re largely talking about Millennials. This is a group of more than 70 million people born between 1981 and 1996, individuals now entering their prime home-buying years.

According to the National Association of Realtors (NAR), Millennials have a median age of 36 years. That’s also the same age as the typical first-time buyer, meaning Millennials and first-time buyers are often the same individuals. 

So how do Millennials become homeowners given the tough market we’ve had during the past few years? NAR estimates that in 2023 first-timers represented 32% of all real estate buyers, or more than a million home sales. Here’s how it’s done.

How’s Your Credit Score?

Free weekly credit reports are available from the three major credit reporting agencies – Equifax, Experian, and TransUnion – at AnnualCreditReport.com. Good credit reports lead to high credit scores, so check your reports for mistakes and out-of-date items.

If you see a problem, contact the credit reporting agency immediately. The goal is to get incorrect items off the report before applying for a mortgage. 

You don’t need a perfect 850 credit score to get financing. A score of 780 or above will likely get you the lender’s best rates. 

There are steps you can take to improve a low score. Start a budget and watch where your money goes. Make more than minimum payments on credit card bills.

Consider paying off a debt that has a small remaining balance. Bulk up savings so you have cash for emergencies. Avoid needless late fees and other costs by always paying bills in full and on time. 

What Can You Afford?

There’s no doubt that home prices have risen significantly during the past few years. CoreLogic, as one example, reported that as of September 2023, home prices were up 4.7% when compared with a year earlier, “the 141st straight month of annual appreciation.”

The basic problem is that – on average – wages have not kept up with costs.

As Redfin explained in late 2023, “The typical 2023 homebuyer needed to earn an annual income of at least $109,868 if they wanted to spend no more than 30% of their earnings on monthly housing payments for the median-priced home. That’s a record high – up 8.5% from 2022 – and is $31,226 more than the typical household makes in a year.”

It’s true that many households have been priced out of the market because of rising prices, but it’s also true that many households are doing well. For instance, recent contract settlements between unions and UPS, auto manufacturers, and movie and TV studios have greatly favored labor. 

What is your debt-to-income (DTI) ratio? 

Lenders will compare your monthly income with debt payments to ensure you can repay the loan. In general, if your DTI is 41% or below most lenders will be elated.

To check your DTI, look at your gross monthly income before deducting taxes. Then add up your required monthly payments for student debt, car loans, credit cards, and similar expenses.

Combine those monthly costs with what you will pay for mortgage principal and interest, property taxes, property insurance, and – if any – HOA fees. For example, if your household income is $9,000 a month, and you have debt payments of $3,600 a month (40%) your DTI will work with many – if not most – loan programs.

What if your debts are more than 41%? Way more? Lenders often allow higher DTI ratios if you have an off-setting factor such as large reserves.

In fiscal 2023, a period that ended in September, the average DTI ratio for borrowers with FHA-insured purchase mortgages was 45.10%. Many FHA loans – more than 30% – had DTIs of 50% or more. 

How much down can you pay? 

While 20% is a widely-quoted down payment standard, the reality is that most buyers put down far less. In 2023, for example, NAR reported that “The typical down payment for first-time buyers was 8%, which is the highest share since 1997.”

Many programs require less upfront. The VA and USDA loan programs allow financing for qualified borrowers with 0% down, the FHA is at 3.5% for most borrowers, and the HomeReady (Fannie Mae) and Home Possible (Freddie Mac) programs require just 3% upfront. 

Can You Get Down Payment Help? 

According to NAR, about a quarter of all first-time buyers get financial help from family or friends. Redfin estimates that “38% of recent homebuyers under age 30 used either a cash gift from a family member or an inheritance in order to afford their down payment.”

Loan programs typically require money from the borrower and only the borrower – but there are exceptions. Both down payment assistance programs (DPAs) and gifts are often allowed.

The Urban Institute estimates that “there are 14.5 million renting households who are potential first-time homebuyers who might benefit from assistance.” There are large numbers of these programs and many offer down payment help, money to offset closing costs (an expense that’s seen by lenders as separate from a down payment), and funds to reduce interest rates.

If you look for DPA programs be sure to understand what is offered and how a sale might be effected. 

Lenders generally welcome gifts from friends and family, and such help is fairly common. NAR estimates that about a quarter (23%) of first-time buyers receive financial assistance, while Redfin reported in August 2023 that “38% of recent homebuyers under age 30 used either a cash gift from a family member or an inheritance in order to afford their down payment.”

Cash gifts can be substantial. Under IRS rules, individuals in 2024 can give as much as $18,000 to someone else tax-free.

For example, think of the Bank of Mom and Dad. One parent might give $18,000 to an adult child and $18,000 to the child’s spouse. A second parent might do the same, meaning that together they can transfer $72,000. They can give another round of gifts a year later. 

Lenders will ask donors for a gift letter, a short statement saying the money is really a gift and that no repayment, interest, or other consideration is expected in return.

Seller Contributions

With little inventory and lots of demand, home prices have rapidly increased during the past few years. Sellers in most markets could readily ignore buyer demands and in many cases get full-price offers, if not more because bidding wars were common.

The market began to change toward the end of 2023. The extreme supply-and-demand imbalance softened, at least in some areas. Of 221 metro areas, NAR found that prices in the third quarter rose in 182 and fell in 38. 

The era of take-it-or-leave-it sale offers has weakened in many areas, and that means buyers have some chance to negotiate. Contingencies such as home inspections satisfactory to the buyer and minimum appraisal values are back. 

There are, of course, other potential concessions that buyers might seek, including so-called seller contributions. While owners cannot pay anything toward a down payment, they can provide money for such things as closing costs, repairs, and buying down the mortgage rate.

Many loan programs specifically allow seller contributions but with limits, including loans that will be sold to Fannie Mae and Fannie Mae (9%), FHA-backed financing (6%), and VA financing (4%). 

Can Millennials really get such big discounts as the limits allow? Probably not, but any seller contribution represents that much less cash the buyer must bring to closing and might be easier to get than other concessions. If a local market turns down, if homes are on the market longer and longer, seller concessions might be possible.