And FHA loans could be helping them buy homes
Many young people are hesitant about buying homes, but those that are jumping on board are doing it with better credit and relying more on Federal Housing Administration (FHA) loans.
For the third straight month, millennial credit scores have increased, according to mortgage automation company Ellie Mae. From April through June, average FICO scores of millennial home loan borrowers have gone up a point every month, with June’s average score at 723.
“Economic uncertainty may be contributing to a general tightening of credit, which could explain why we are seeing a slight uptick in the average FICO scores for closed loans to millennials,” says Joe Tyrrell, executive VP of corporate strategy at Ellie Mae.
FHA vs. conventional
Americans know it’s a great time to buy a home, but other financial struggles are a big factor in why some millennials are holding back on buying. According to the Ellie May study, 23 percent of loans from all borrowers were through the FHA. However, when broken down by generation, millennials were taking out FHA loans at a much higher rate.
“For the third month in a row, FHA loans made up 37 percent of closed loans among millennial homebuyers,” the study says. “Conventional loans represented 60 percent of total closed loans in June.”
FHA mortgage loans are government-insured and typically have a lower interest rate than a conventional loan, which isn’t backed by the government. Borrowers can take out an FHA loan that only require a 3.5 percent down payment for a home. Recommended down payment in other programs can be as much as 20 percent — a huge difference and one that millennial homebuyers are taking note of.
All the single ladies
Last year, Bloomberg predicted that a surge in female homebuyers would happen this year, and they were so right. Ellie Mae’s Millennial Tracker shows that so far this year, 40 percent of homebuyers were female. In 2015 it was 15 percent.
It’s more likely women will take an FHA loan over a conventional loan, as 42 percent of the loan types women took out so far in 2016 were FHA. On the other hand, men had FHA loans 35 percent of the time.
But it’s men that are getting the better deals. Even slightly better FICO scores (men are averaging 725 so far this year, compared to 723 for women) are giving men a higher average loan amount ($193,382 for men, compared to $180,482 for women) and a lower interest rate (3.25 percent for males and 3.29 percent for females).
Where are the millennials moving to?
According to Ellie Mae’s tracker, young people are heading to Iowa! Four out of the top 15 metro areas where millennials are moving to are in the Hawkeye State: Waterloo-Cedar Falls; Iowa City; Des Moines; and Cedar Rapids. Indiana is also a hot spot, as three metro areas crack the top 10: Terre-Haute, Lafayette, and Fort Wayne.
No major metropolitan area made the list, and that’s probably because millennials just like living in the city. It’s cheaper to live out west, but better job offers are keeping many from going, and housing affordability in bigger metro areas is high. Unfortunately, high rent is keeping many people out of affordable apartments as lower-end places are skyrocketing in price.