Millennial buyers (those born 1981-1997) have quickly entered the housing market and they are rapidly becoming the largest and fastest-growing demographic. A 2020 Realtor.com forecast gave the estimation that 51% of the housing market will be comprised of millennials, outnumbering both Generation X and Baby Boomers combined. This will be especially prevalent in Texas markets where millennials make up on average, 25% of the population.
However, the biggest roadblock for millennials when considering a home purchase is the qualifying process for a mortgage loan. Student loan debt and the rising home prices in Texas markets can make buying a home appear to be a near-impossible feat. It can be intimidating for younger first-time buyers to consider qualifying for a mortgage.
There are options for those that want to buy but feel that they can’t afford a down payment for a property on their own. For some millennials, they don’t need to look much farther than home for help to get into the Texas housing market.
Gift Funds From Mom and Dad
A borrower can use gift funds if they need more cash for a down payment. Gift funds can come from a close relative or family member and are an excellent option to get the cash you need to cover the home-buying costs you can’t afford on your own.
There are some requirements when it comes to using monetary gifts for your down payment. FHA down payments can be made up of 100% gift funds, but the donor will be required to demonstrate their “donor’s ability” with bank statements Conventional down payments can be 100% gift funds if the down payment is 20% or more. If the conventional down payment is less than 20%, borrowers will need to provide a portion of the funds depending on the loan type. Assuming the donor sends the funds directly into escrow at closing (as opposed to into the borrower’s personal account beforehand), gift funds do not need to be “sourced” on a conventional loan.
It is a requirement that the money being used is truly a gift. The donor must sign a letter stating that funds being gifted have no repayment requirements and are being used as a gift for the borrower’s home purchase. Please note: we as the lender do not report gift funds to the IRS.
If it seems taboo to ask a close relative for funds to help you get your first home, it’s not. The National Association of Realtors cited in their 2019 Home Buyer and Seller Generational Trends that over a quarter (28%) of millennial buyers used a gift from a friend or relative for their down payment.
Cosigning the Loan
Younger borrowers can also have their parents cosign their loan applications to improve their qualifications for a mortgage loan. There are two different types of mortgage cosigners: occupant and non-occupant.
An occupant cosigner is someone who will physically live in the home that is being purchased.
A non-occupant cosigner is someone who will sign the loan, but they will not actually live at the property.
It is important to note that cosigners become partially responsible if the primary borrower defaults on the loan or becomes unable to make repayments.
How Millennial Buyers Can Work Towards Qualification
If you are a young borrower and are looking to get into the Texas housing market sooner rather than later, there are a few things you can do right now to set yourself up for success.
1. Lower your debt to income ratio (DTI).
Your debt-to-income ratio is determined based on your total monthly income compared to your total current and proposed monthly debt payments (such as student loans). The best way to lower your DTI is to make consistent payments towards your debt.
2. Work on your credit.
We often see young borrowers with no established credit. Our advice is always to establish at least three or four accounts as soon as possible. We cover ways to do this in one of our past blogs.
- Secured Cards: Credit card providers like Capital One and Wells Fargo will offer “Secured cards.” These are credit cards with credit limits that are matched by cash deposits from the cardholder. They often start with as little as $200 credit limits.
- Department Store Credit Cards: These issuers also tend to be more flexible.
3. Save for a down payment.
Plan for when you’d like to buy a home and build a budget around that timeline. Making a budget and planning early will set you up for success later when you are able to start house hunting.
As always, we are happy to discuss any questions millennials, or others may have about the Texas housing market. You can reach JVM here, by phone at (855) 855-4491, or by email at jvmteam@jvmlending.com.
