As crazy as it may sound, millennials are now approaching the age when many Americans start to think about buying their very first home. In 2016, data from the National Association of Realtors showed that millennials make up 34 percent of the U.S. housing market, down from 35 percent in the previous year. Still, they have claimed the largest share of homebuyers in the United States market since 2013.
According to a survey done by Apartment List in May 2017, 80 percent of millennials hope to buy a home. That statistic begs the question, what are the best mortgage options on the market for millennials who are looking to buy a home?
If you’re a millennial looking to buy a home in the next few years, you might be feeling overwhelmed by the mortgage options – or lack thereof – that seem to fit your financial situation and needs. Luckily, we’ve done a lot of the work for you when it comes to the best loans available to you.
Continue reading to get a crash course in the best mortgages for millennials.
FHA Loans for young couples
For millennials who want to get in a home fast without putting down a huge down payment, FHA loans are a practical and useful choice. These are government-insured loans require just a 3.5 percent down payment. Beyond that, even the money required for that down payment is allowed to be gifted from a relative or the home seller.
This means that if you’re looking to buy a home for $300K, you would only need to come up with about $10K to complete a down payment. Additionally, potential home buyers do not need to have great credit to afford moving in. In fact, borrowers need to only have a credit score of 580 or higher.
One major downside of FHA loans is that whenever you put less than 20 percent down on a home, you will be required to a buy mortgage insurance. That will be tacked on to your monthly payments you are making on your mortgage and will increase those monthly payments. For FHA Loans, this charge is known as the Mortgage Insurance Premium or MIP. It is also known as a PMI with other loans.
Conventional Mortgages for Millennials
While FHA loans offer clear advantages for millennial home buyers, conventional loans offers very substantial positives as well. Thanks to mortgage guidelines provided by Fannie Mae and Freddie Mac, conventional mortgages are now available with only 3 percent down payments as well. On top of that, the mortgage insures (PMI) is much cheaper than that of FHA loans as long as you have a good credit score.
Conventional loans definitely benefit potential home buyers who enjoy higher credit scores. In fact, according to a recent study by WalletHub, consumers who put down payments less than 20 percent on the purchase of a home can save as much as $8,000 in just five years if they opt for a conventional loan rather than an FHA loan. The higher the credit score and down payment, the more the potential savings will be.
One option for millennials who are interested in avoiding mortgage insurance altogether is to pursue what is known as a piggyback loan.
While they did lose favor amongst potential buyers following the housing crash of 2018, piggyback loans – or also called 80/10/10 loans – are back to being quite popular, especially for first-time homeowners. How they work is pretty simple, basically you make a 10 percent down payment, you get a first loan to cover 80 percent of the home’s value, and then a second loan to cover the remaining 10 percent. The second loan basically acts as a home equity loan and is called a piggyback loan because you close on the loan at the exact same time that you make the purchase.
It’s important to know that they do come with some drawbacks First off, they are most expensive than the previous two options because of the 10 percent down payment. Additionally, you will need to make sure that you have the funds required to close on two loans, not just one. Finally, the second loan has a variable rate, so if mortgage rates rise, you can expect your piggyback loan to rise as well.
Lenders offering piggyback loans typically reserve this kind of mortgage for customers with good-to-great credit. They are especially popular for those who are looking to buy in high-cost areas and require jumbo loans.
First-Time Homebuyer Programs for Millennials
This is a tried and true option that is meant to help get younger adults into the housing market. There are is a large number of homebuyer assistance programs offered in every state across the U.S. While they do vary from state-to-state, they share some fairly general characteristics.
These programs work to get millennials into the housing market by offering free grants for down payments, help with closings costs, and loans with interest rates well below the rates typically found in the mortgage market.
To qualify for these kinds of programs you have to be a first-time homebuyer, or someone who has not owned a home in over three years. You will also be required to attend a homebuyer education course.
While this is a great way to get started, do not think that opting for a program such as this is going to make buying a home that much cheaper. You have to remember to consider expenses that as bills, repairs, insurance, and more.
After all, the first payments you make on your home will be far from the last.
Final Thoughts on home loans for millenials looking to borrow
Now that you have a general idea of the mortgages that are available to millennials, it is time for you to evaluate your financial situation, your credit score, and what kind of home you are looking to buy in what kind of market. This will help you along your journey of finding the right mortgage, the right home, and beginning your life as a millennial homeowner.