In our current economy it is no secret that many Millennials and Gen-Zers are feeling discouraged about the current housing market. With high interest rates and housing costs, the task of buying a home is a daunting one. High rental costs make it difficult for renters to put money aside for a down payment; add in closing costs and the expenses become astronomical. It is an unfortunate but common mind-set younger generations have, automatically disqualifying themselves before even starting the process. It's a conversation I myself continue to have with friends, family, and colleagues. It is also the situation I found my clients in a year ago.
Two weeks ago we closed on their first home.
Rewind to March 2024. A friend of mine in Loveland reached out to me expressing the desire to buy a home. Step one? I had him talk to my lender to get pre-qualified. This involves submitting pay stubs, W2s, and bank statements to know what purchase you can afford. Unfortunately at this point in time, his and his partner's credit scores were too low to qualify, but that didn't discourage us. With the help of our lender, we came up with a plan and enrolled them in a guided credit repair program to help them prioritize debts and increase their credit scores. By Summer of 2025, their credit scores were up to 580 and we were able to get them pre-qualified. A common misconception first-time home buyers have is that they need to have a perfect credit score to qualify for a mortgage, but the reality is FHA loans and other programs allow credit scores as low as 580 and even lower with larger down payments.
Early adulthood often comes with financial challenges that make it difficult to save for a down payment, however. Expenses like student loan payments, wedding costs, or buying a car are just a few examples. These life events can discourage buyers from getting pre-qualified because they do not believe they can qualify if they have debt, but this is a false assumption. Lenders look at debt-to-income ratio (DTI), not just loan balances. Many buyers qualify even with student loans. Like many other Millennials, these buyers had numerous debts (some even delinquent) but were still able to get pre-qualified and even pay off some of their student loans at closing with a credit.
There is a commonly used 20% rule when calculating an "appropriate" down payment, which would tell you that in order to afford a $500,000 home, you would need at least $100,000 for a down payment, a startling, intimidating number for most Americans. According to a survey published by Forbes in October of this year, the average savings for Americans under 35 is $5,400. For Americans 35 to 44, the average only goes up to $7,500. The idea that you need a 20% down payment is another common misconception, however. While not required, putting down 20% on a conventional loan allows you to avoid paying for Private Mortgage Insurance (PMI). PMI is an extra monthly expense that protects the lender, not you, and is typically required when your equity is below 20%. The reality is many loan programs require as little as 3% down and some even allow zero down for eligible buyers. In this scenario, my buyers had zero money for a down payment but were able to utilize a VA loan which allows veterans to finance 100% of the home's value. Although this can create additional VA funding fees, there are options to assume the fee as part of the loan or pay it off with a credit. In this specific scenario, the buyers assumed the VA funding fees into their mortgage which only added an additional $63 per month. If you do not qualify for a VA loan, there are other loan and down payment assistance programs that will allow you to put little to nothing down on a home. Talking with a lender is the best option to create a tailored solution that fits your goals.
Although we were able to find a loan program that allowed for no money down, we still had to consider closing costs. Closing costs are the fees and expenses you pay at the end of a real estate transaction when the home officially becomes yours. They cover all the services needed to process, verify, and finalize the loan and property transfer. In most cases, closing costs range from 2% to 5% of the home's total value (for example, on a $500,000 home, closing costs could be about $10,000 to $25,000 ). Because we factored in this expense at the beginning of the process, we knew we would be negotiating for a seller concession in our offer. As a result, we secured $10,000 in seller credits to put toward closing costs and a 1:0 buy-down.
A 1:0 buy-down is a type of temporary interest rate buy-down that lowers the borrower’s interest rate by 1% for the first year of the loan. After that first year, the rate returns to the full, permanent rate for the remainder of the loan term. You might hear this and think it is only beneficial for the first year of the loan, however, there is the opportunity to refinance after the first year at a lower rate. This provides buyers the opportunity to have an affordable monthly payment the first year of their loan while simultaneously improving their credit scores. With on-time mortgage payments, their credit scores will rise, making refinancing easier and potentially saving them thousands over the life of the loan. We decided to utilize a 1:0 buy-down after my buyers received their Closing Disclosure and had concerns over the monthly payments. As a result, we were able to reduce their monthly mortgage payments by $355.
At the end of this process, we were able to close on their dream home with zero money down, little to no closing costs, and an affordable monthly payment. Not only were my clients able to achieve a personal goal of becoming homeowners, but we set them up for future financial success. By making on-time monthly mortgage payments, their credit scores will improve significantly leading to a domino effect: not only will their interest rate improve, but their other insurance rates and premiums will go down as a result. Mortgage payments help credit scores more than other types of payments because they are a large long-term installment loan that significantly boosts your payment history (35% of your score) and credit mix (10% of your score).
I love sharing this story because my buyers faced nearly every obstacle a first-time homebuyer could encounter and yet they still closed on their dream home. Many young buyers are in similar situations and feel embarrassment or shame that prevents them from even taking the first step toward homeownership. There are a multitude of resources for homebuyers to make it more affordable and achievable, and your lender and I will understand and use every resource to get the best results possible that aligns with your goals. That’s why I believe we need to remove the stigma around lower credit scores and give Millennials and Gen Zers the grace to build their future wealth.
Were you thinking about buying a home but feeling discouraged? Let’s have a talk and explore your options—it may not be as far away as you think.
~Claire