It’s old news that the rate of homeownership among millennials pales in comparison to previous generations, but the reasons why are more complex than catchy headlines.
First off, millennials are the nation’s most diverse generation ever, comprising 22% of Americans (71.2 million), with 45% being minorities (2021 Freddie Mac study).
According to a 2018 Urban Institute study, millennial diversity and its link to homeownership have a symbiotic relationship with parental homeownership and wealth. Sadly, redlining, income inequality and other discriminatory policies that sidelined wealth accumulation and homeownership for the parents of millennial minorities parents in the past are hurting their children’s ability to buy a home today.
Further compounding the lack of homeownership rates among millennials is their age of credit. For millennials who come from families with a long credit history, their parents can add them to a credit card and that child inherits their parent’s credit age and likely their good credit score.
Transunion, Experian, and Equifax have tried to help people who don’t have this option to build credit by allowing bills like utilities to factor into age of credit, but it’s not enough. Millennials forced to build their credit age from scratch end up with the same result — a low credit score.
Millennials or anyone with a low credit score are then only left with one option to homeownership — government-sponsored loans. The most widely known are Federal Housing Administration (FHA) loans. Established in 1934 by Congress, FHA’s sole aim was turning the 90% of Americans who were renters into homeowners.
Since then, FHA has put more than 40 million families into a home, which also gives them access to the country’s largest wealth-building tool – homeownership. However, one could argue these loan programs have also perpetuated cycles of poverty since they come with exorbitant interest rates, higher than conventional mortgage insurance and inflated closing costs.
For example, I am working with a first-time homebuyer whose income is greater than $100,000, has been employed at the State of Colorado for 11 years, has zero debt, and has a credit score in the mid-600s. When he applied for a home loan, he was flagged as “high risk.” When I asked the lender why, she said, “I don’t know, it’s just an automated system.”
She then provided three government-sponsored options for a $564,000 purchase price. The following tables outline the cost for each loan program vs. a conventional loan:
Over the life of these 30-year government-sponsored loans my client would pay $137,880 on mortgage insurance alone. Meanwhile, the Metro DPA loan that provides a forgivable down payment of 4% after 3 years, also comes with an interest rate nearly one point higher than FHA and CHFA, adding $230 to his monthly mortgage payment.
Taken together, these loan programs are counterintuitive to helping our most financially vulnerable. It’s also likely one of the culprits to why Black homeownership remains lower than it was a decade ago.
Bottom line: we need changes to these programs and quickly, such as:
- Luxury taxes on homes over $5 million or more or all-cash transaction to fund penalty-free down payment assistance;
- Allow all retirement accounts, including Social Security, available for penalty-free down payments;
- Reward people for on-time payments with reductions in mortgage insurance and interest rates over five years and/or rebate part of the Upfront Mortgage Free Application for Federal Student Aid (FAFSA®)Insurance Premium in the form of one mortgage payment;
- Allow the open market to provide mortgage insurance to bring down mortgage insurance rates;
- Remove FHA’s minimum of 11 years of mortgage insurance and ban it for the life of the loan;
- Set max prime plus 1% interest rates for all government loans;
- Create transparency in banking so buyers who get labeled “high risk” know why;
- Enlist or create non-profits with the sole aim of helping people of color with repairing their credit;
- Give a one-time boost of 50-100+ points to an individual’s credit score based on income status, eligibility could be modeled after the Free Application for Federal Student Aid (FAFSA) for college tuition.
If we don’t act fast, many will be permanently priced out of the American dream of homeownership and lose access to our nation’s best wealth-building tool.
Rachel Chaparro is a Denver Real Estate Broker with Your Castle Real Estate. She can be reached at [email protected]