millennial generation

Is Bad Credit Keeping the Millennial Generation from Buying Homes?

It’s no secret that the Millennial generation of home buyers, especially first time home buyers, are facing some pretty big financial roadblocks compared to previous generations. As an agent, one of the key characteristics of Millennials that you need to understand is that they have unfavorable debt to income ratios. Many of them also have bad credit scores. This can affect interest rates offered, possible extra points a mortgage borrower may have to pay, and whether or not the potential borrower can be approved for a home loan.

Enroll in our sister site’s course Millennials are Changing Real Estate: Are You Ready?

What is a credit report?

The credit report is the basis upon which potential borrowers are assessed. Credit reporting bureaus collect information about a person’s credit history: credit cards, auto loans, student loans, mortgages, judgments, and so on. They maintain this credit history for years, but the last two years (24 months) is the timeframe of the most importance.

Our sister site’s course, Millennials are Changing Real Estate: Are You Ready? takes a deep dive into credit reports and gives helpful tips on how to improve a credit score quickly.

Why are credit scores so important?

Credit scores affect consumers in a number of ways. Landlords, employers, and creditors frequently look at these scores for their current and potential customers. Having a favorable credit score could mean the difference between being offered desirable rental housing, a job, or a loan…or not.

For the real estate licensee, a buyer’s credit score can be crucial to determining 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 the Millennial generation improve their credit scores?

The combination of high debt, low income, and (in many cases) bad credit creates challenges for the average Millennial. It is a good idea to direct anyone with these credit issues to a qualified credit counselor. State government websites are good places to find reputable government and nonprofit agencies for this.

Some basic advice that applies to most potential buyers is:

  • Pay down credit card debt. Pay off the highest interest debts first.
  • Save as much down payment as possible (after paying down debt).
  • If family members wish to give their favorite Millennial a gift, perhaps it is best directed at paying off debt, rather than going towards a down payment.

Paying down debt not only improves a debt to income ratio, it 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 home buyers

In addition to low credit scores, other home buying hurdles facing Millennials include:

  • Student loan debt
  • Inability to save for an adequate down payment
  • Fear of the real estate market

Financial roadblocks are the biggest challenge facing young home buyers today. That’s why mortgage preapproval is key when working with the Millennial generation. Learn how to help your young clients overcome common home buying hurdles—including bad credit scores, fear of the market, and more—in our sister site’s course, Millennials are Changing Real Estate: Are You Ready?

Enroll in our sister site’s course Millennials are Changing Real Estate: Are You Ready?