It’s no secret that the millennial generation of home buyers, especially first-time homebuyers, is facing big financial roadblocks compared to previous generations. One of the characteristics of millennials you need to understand is they have unfavorable debt-to-income ratios. Many of them have bad credit scores as well. This will affect interest rates they may qualify for and whether or not the potential borrower can be approved for a home loan.
What is a Credit Report? The credit report is the basis upon which potential borrowers are assessed. Credit reporting agencies collect information about a person’s credit history: auto loans, student loans, mortgages, credit cards, judgments, etc. They maintain this credit history for years, but the last 2 years (24 months) is the timeframe of most importance.
Why are credit scores so important? Credit scores affect consumers in a number of ways. Landlords, employers and creditors frequently look at scores for their current and potential customers. Favorable credit scores could mean the difference between being offered desirable rental housing, a job or a loan. A buyer’s credit score can be crucial to determine which properties the buyer can afford. Credit scores can affect the loan amount, interest rates, required down payments and whether or not a potential buyer can be approved for a conventional mortgage.
How can millennials improve their credit scores? In order to help millennials buy homes, it might take some work to find a mortgage solution that meets their needs. The combination of high debt, low income and, in many cases, bad credit creates challenges for the average millennial.
Some basic advice that applies to most potential buyers is: 1) Pay down credit card debt, pay off the highest interest debts first. 2) Save as much down payment as possible, after paying down debt. Paying down debt not only improves a debt-to-income ratio, but also relieves some of the burden of the expenses first-time homebuyers may not expect. Another benefit is that mortgages usually have lower interest rates than credit cards. The interest payments are tax-deductible for mortgages, but not for credit card interest payments.
Other hurdles facing today’s young homebuyers? In addition to low credit scores, other home-buying hurdles facing the millennial generation include Student loan debt, inability to save for an adequate down payment, or fear of the real estate market. Financial roadblocks are the biggest challenge facing young home buyers today, this is why mortgage pre-approval is key with the millennial generation.
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