Credit unions could find an untapped market for millennials looking to buy homes.
Millennials as a group have entered the phase of their lives where historically people start settling down, buying homes and starting families. But currently the vast majority of millennials don’t own a house, creating opportunities for lenders to help this demographic with this important purchase.
To be sure, there are risks in making mortgages to millennials. Many millennials need to improve their credit history and scores in order to qualify for credit. That’s where CUs have an opportunity to step in and help.
“We’re seeing that small changes in financial behaviors such as building a history of on-time payments and improved credit practices can help lenders shift from viewing millennials as high-risk to low-risk relatively quickly,” said Michele Raneri, vice president of analytics and business development at Experian. “Knowing where you stand from a credit perspective is critical to improving or maintaining your financial well-being.”
Underserved market
The Pew Research Center defines a millennial as anyone born between 1981 and 1996. That means they now range in age from 22 to 37. Roughly 56 million millennials are currently working or looking for work, making them the largest portion of the total labor pool, according to Pew.
But only about 15 percent of millennials currently have a mortgage, according to a recent study by Experian. The overall homeownership rate was roughly 64 percent in the second quarter, according to the Census Bureau.
In the fourth quarter of 2017, millennials accounted for just 23 percent of newly originated mortgage dollars, the Experian study noted. On average, millennial homebuyers are 31 years old with an income of $64,000.
That means there are potentially millions of borrowers that credit unions and other lenders could help with a mortgage. Yean-Ai Long, vice president of marketing at Merrimack Valley Credit Union in Lawrence, Mass., said that her credit union and other financial institutions should reach out to millennials because of their large numbers and dominance in the workforce.
“One out of four of our member base is a millennial,” Long said. “They represent the future growth of our credit union. Plus, many of them are the second or third generation of our original members. We want them to succeed and build their lives in our community.”
But so far millennials have been reluctant to take on the debt necessary to buy a home. Millennials may be more cautious about borrowing after watching their parents lose their homes during the Great Recession, said Rod Griffin, director of consumer education and awareness at Experian.
“They might be culturally cautious to make such a large expenditure as a home,” he said. “Others might simply be postponing buying a home as they seek to become more established in their jobs and relationships.”
Michael Farren, vice president of lending at the $617 million-asset Merrimack Valley Credit Union, said that millennials with significant student loan debt may put off buying a house.
“For millennials with high student debt, homeownership is not a priority,” Farren said. “They either don’t have the down payment or cannot afford the monthly mortgage payment.”
Still, Farren has seen more millennials looking to buy a home. In the last 18 months, 16% of new mortgages were made to millennials at his credit union, versus 9 percent in the prior 18-month period, Farren said.
Scott Toler, president and CEO of Credit Union Mortgage Association in Fairfax, Va., said that more millennials buying houses, but that they tend to wait until their early 30s, in part because some are marrying and having children later. When these millennials do buy a house, it is usually something at the upper end of the market, rather than a starter home, he added.
Credit woes
Despite the attractiveness of working with millennials, CUs still need to be aware of potential issues around creditworthiness. About 61 percent of millennials without a mortgage have a VantageScore of near prime or lower, according to the Experian study. VantageScore is a credit score system that was developed by Experian, TransUnion and Equifax.
Younger millennials, from 22 to 28 to years old, have an average VantageScore of 652, while older millennials, age 29 to 35, have an average score of 665, according to Experian. The average VantageScore was 675 last year while a score of at least 700 is generally considered good.
That means those borrowers will have to take steps to improve their credit scores before looking to buy a house, Raneri said.
Jack Baker, director of CDCU Mortgage Center at National Federation of Community Development Credit Unions, said that lenders are hesitant to make mortgages to millennials ever since the crash of 2008. As a result, they are catering primarily to borrowers with higher credit scores.
But there are steps that CUs can take to help millennials become ready to get a mortgage. Community development credit unions can help these “potential borrowers shape their financial futures and realize the wealth and financial security they can attain through homeownership” with credit and pre-purchase counseling, Baker said.
Merrimack Valley encourages millennials to get their free annual credit report and learn what lenders look for in qualifications for a mortgage, Long said. It also offers a credit builder loan for borrowers with no or bad credit and free credit counseling through a partnership with GreenPath Financial Wellness.
Merrimack Valley’s also offers CashIQ, a new financial education trivia challenge designed to help millennials improve their financial literacy in an “interactive and fun way,” Long said.
“We put a lot of effort into educating our members through free seminars on money management and credit scores and partnering with local schools and colleges on financial education,” she said.
