Millennials are currently the largest demographic of home buyers in today’s marketplace, having recently replaced the Baby Boomer generation as the most populous. A recent report from the National Association of Realtors highlights some of the characteristics and some particularly interesting differences between today’s home buyers and those of previous generations. One of these differences is the how Millennials are using gift money for down payments. This trend tells us a lot about the current housing market, not only how prices have changed but also about the challenges that this generation faces.
Student Loan Debt Delays Home Buying
Recent data shows 31 is now the median age of a first-time home buyer. 34% of home purchases were made by first timers, which is down from 37%. This tells us that Millennials are waiting longer to buy a home compared to previous statistics. Why is that?
One eye-popping statistic is the amount of student debt Millennials have when first entering the workforce. College tuition and fees have increased over the years to the point where borrowing for college is almost a necessity. The average amount of student loan debt today is $27,000. Fresh out of college, this group is facing a debt exceeding the average down payment for a starter home. With that new debt, buying a house and getting a mortgage might be on the back burner for a while. As it relates to employment, millennials prefer to rent at first. They need and want the flexibility of moving to another part of town or taking a new job in another city. Once they get settled in, they can then begin to consider buying.
Saving for Down Payments
Yet way before even thinking about searching for a home much less buying one, buyers need to know some basics about how much they can afford and how much money they will need for a down payment. Down payment requirements differ based upon the type of loan program and other factors but with a short conversation with a mortgage loan officer, they can get a good idea on how much money they’ll need and how much house they can afford. So how can millennials save up for the necessary funds to become homeowners?
Some individuals like to “mega-save” which means lowering expenses as much as possible and putting the rest into a savings account. Others like to set a certain percentage of their gross monthly income as a route for saving. Depending upon the amount needed for a down payment, it can take a few months to save up enough funds or much longer. But one area that can be a good source of funds to close comes in the form of a financial gift. Money for a down payment can’t be borrowed from someone else but it can come in the form of a gift.
Gifts Funds for Down Payments
Gift funds must come from an approved source. Financial gifts can come primarily from family members such as parents, grandparents and other relatives. When someone applies for a mortgage, two of the questions asked are: How much money do you have available and where did it come from? You might answer that it comes from your savings account and from a financial gift from family members, for instance. But when receiving a gift, it needs to be properly documented.
This documentation includes a paper trail of the funds going into your bank account from the donors. You’ll also need a signed and dated “gift letter” that states the amount of the gift and that the funds are not expected to be paid back. Remember, borrowing—that is, with the intent to pay them back—from friends and family is not allowed for down payment funds. You can ask your loan officer for a copy of an acceptable gift letter to make it official, and then lender will accept.
Closing Costs and Lender Grants
Finally, don’t forget about closing costs. Your loan officer can provide you with a Loan Estimate which will itemize potential fees. Paying for these fees follows the same guidelines as down payment sources if you are using your own funds, but Homesite Mortgage can also help you with these costs by providing a lender grant to qualifying customers.. As the term implies, the grant funds are not repayable or a loan. Don’t confuse these grant funds with some down payment assistance (DPA) programs offered by the government in certain states. Those DPA funds are usually repayable and NOT grants. Ask your mortgage banker at Homesite Mortgage for more details.