Is Bad Credit Keeping Young Americans From Buying Homes?
We've noted before that young adults are just as likely to live "at home" as own a home — even though they seem to be shopping around. Could low credit scores be holding them back?
That's the theory put forth by a recent TransUnion survey, which found that while nearly one-third of those aged 18-34 said they hope to purchase a home in the next 12 months, 43% of that group are saddled with a subprime credit score.
"Credit scores are a crucial component of the home-buying process, impacting everything from the size of a mortgage payment to the interest rate on a home loan," said Ken Chaplin, senior vice president for TransUnion. "People with subprime credit may face financial barriers to homeownership, making it difficult for their dream home to become a reality."
There seems little argument that credit scores for young adults are low. TransUnion found that one-third of adults up to age 34 have VantageScores between 300 and 600, or what it defines as subprime. Earlier, Experian said that the average VantageScore for that crowd is 625, compared with a national average of 667.
FICO data also show that credit scores are lower among young adults than other age groups, though FICO does not categorize scores as prime or subprime — it leaves that task to lenders. Still, this chart shows that the largest group of 18-29 year olds have FICO scores below 699, meaning they wouldn't be able to obtain a bank's best rate to borrow money.
FICO's India McKinney said that 32% of FICO "scorable" consumers aged 18-34 have a score under 600 — and that doesn't include the 10% of the population that has no credit score. That group would have real trouble getting a mortgage.
"It makes intuitive sense why the younger generation has lower credit scores," FICO said in a post about the topic. "More younger consumers have a missed payment on file, and on average, the missed payment occurred more recently than for older consumers." They also have shorter credit histories, naturally.
But are they really longing for their own homes? Earlier this year, we reported one sign that millennials are at least window shopping. LendingTree said the 34-and-under crowd made up nearly half the mortgage requests that flowed through its site during the prior 12 months for cities like Boston, Pittsburgh, and Washington, D.C.
Low credit scores worry the house-shopping set, TransUnion found — 47% said so — but they are even more worried about building up their bank accounts for a down payment. Nearly 60% said getting a down payment was their primary concern.
Are Low Credit Scores Really a Big Deal?
But not everyone agrees that low credit scores, or large down payments, for that matter, are blocking young people from the housing market. Housing expert and loan officer Logan Mohtashami said he sees banks give low-score, low-down-payment buyers loans all the time.
"Low FICO score loans have been present this entire cycle," he said. Buyers with scores as low as 620 can qualify, he said. And loans with down payments as low as 3.5% are available, too.
When asked how many would-be buyers he's seen completely shut of getting a mortgage, he answered simply, "zero."
On the other hand, adults with low scores are probably struggling with finances, so they probably aren't even looking.
"(It) means your cash flow is bad and you don't have much in liquid assets. Which means you aren't taking on the biggest debt and debt payment in your life (right) now," Mohtashami said.
So it's possible that low-score young adults are keeping themselves out of the mortgage pool. But what else might be keeping them out? An interesting theory was suggested in a Bank of America research paper and survey published earlier this year. It found that first-time buyers aren't interested in purchasing a starter home and trading up later. Rather, many are content to wait until they are ready to purchase their dream, long-term home.
"First-time homebuyers are prioritizing their long-term residential needs. They're willing to save more and pay down debt to buy the home they want … 75% of first-time buyers would prefer to bypass the starter home and purchase a place that will meet their future needs," the survey found.
If that's accurate, it's a sensible strategy. Trading up worked for prior generations, but the Great Recession showed that it's far from a guaranteed strategy. Buying a home because you love the home and can afford the payments is a great idea. Buying a home so it will build equity so you can do what you really want later can be a risky strategy that might end badly, as many buyers from last decade learned the hard way.
If you're in the market to buy a home, it's a good idea to check your credit before you apply, since a good credit score will help you qualify for better terms and rates. You can see where you currently stand by viewing your two credit scores, updated each month, for free on Credit.com.
If your credit is looking lackluster, you can try to improve your score by disputing errors on your credit report, paying down high credit card balances and limiting new credit inquiries.
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