Down payment issues lead millennials to seek FHA mortgages
The Federal Housing Administration program insured three-quarters of the mortgages obtained by millennial homebuyers as most had trouble saving up for a 20% down payment, according to a study by online financial marketplace LendEDU.
The average down payment was just 16%, according to the survey of 1,000 people between the ages of 23 and 38. Of the millennials surveyed, 58% were homeowners, with 83% of that group obtaining a mortgage to purchase their property.
The most recent Census Bureau data put the overall homeownership rate at 64.1% at the end of the second quarter.
"With the oldest millennials currently being 38 years old, it appears that this generation is on a solid pace to reach, or even eclipse, homeownership rates set by previous generations when it eventually falls into the over 45 age grouping," LendEDU research analyst Mike Brown said in a blog accompanying the results. "One can logically assume that millennial incomes will grow with age, which should result in an increased homeownership rate above the 70.1% that currently exists for those between the ages of 45 and 54."
Nearly three-quarters of the respondents got their mortgage from a traditional bank, while just 22% went to a nonbank lender; 5% did not respond.
But only 30% of the respondents turned to their parents or guardians to help them finance their down payment. "If you are actively seeking out assistance from a parent to contribute towards your down payment, which may be the case for quite a few millennials judging by the 16% average down payment, than you are probably not ready to become a homeowner in the first place," Brown said.
Of the 25% that did not take out an FHA-insured mortgage, a significant minority, 45%, responded that they had never heard of the program.
"Even more millennial homebuyers would have likely seized the opportunity to utilize an FHA-insured loan if only they had known about it," Brown commented. "On the flip side, it is good to see that millennials, many of whom are just a few years removed from college and earning starting salaries or a bit more, are seizing the opportunity that comes with FHA loans. It is a program meant for consumers that otherwise couldn't afford to become homeowners since the low down payment on an FHA-insured mortgage makes owning a home possible."
Meanwhile, 52% of the respondents said they needed private mortgage insurance for their loan. "While it is great that so many millennials are already homeowners, it is not great that so many are also paying for PMI as a result of less-than-optimal down payments," said Brown.
A 39% plurality of those surveyed were secure in their ability to keep making their monthly payments, but 33% were concerned over limited savings, 18% had too much credit card debt and 10% were worried about job security. "Having so many millennials being concerned about fulfilling monthly mortgage payments is worrisome," Brown stated. "As it has been alluded by other data points from this survey, like the average millennial down payment on a mortgage, it seems that a good proportion of this generation is taking the plunge into homeownership without really being ready to meet the demands."
While 41% of the respondents said they did not delay any life goals because they needed to take out a mortgage to purchase a house, 17% said they put off marriage, 16% postponed having children and 15% did not make a job change.