Is 2017 the year Millennials finally become homebuyers? Perhaps, but they’ll likely need a little help to close the deal.
Many parents want to help their Millennial generation children become homeowners – especially those still living at home. The question to answer? What is the best thing to do to help Millennials become homebuyers?
A series of studies from Fannie Mae, the secondary mortgage market leader, shows that parental financial assistance can make a big difference when it comes to buying a first home, but other factors can be a big boost as well. Here’s what all homeowners should know about the next generation of homebuyers and the financial help that will get them into the market.
How parental assistance helps first-time homebuyers
According to Fannie Mae’s March 2016 report, The Role of Parental Financial Assistance in the Transition to Homeownership by Young Adults, parents’ own status as homeowners, as well as their financial standing overall, can make a big difference as to whether their child is able to buy a home.
The report states that adult children are more likely to become homeowners if their parents are homeowners and, from a net worth point of view, fall into the upper quartiles of wealth ownership.
No surprise there, as wealthy, home-owning parents are naturally in a better position to help their children achieve these sorts of goals. But the report also states that for parents not in this position, a one-time transfer of assets to their children can achieve similar results.
According to the report, adult children who received at least $5,000 from their parents in the past two years, whether it was a gift or a loan, saw “a proportional increase in the probability of home buying of 13.1 percent.”
Giving or lending your children cash toward a down payment or repayment of student loans will help them more easily qualify for a home. Be aware that mortgage lenders will want to see a gift letter or loan document to help them understand what the repayment requirements are (if the cash is a loan rather than a gift).
The true value of an education for new homebuyers
According to a second Fannie Mae report, Education and the Intergenerational Transmission of Homeownership, published in September 2016, attaining a higher level of education also improves the likelihood your Millennial children will become homeowners.
The report states that the positive effect of higher education on homeownership varies somewhat between racial groups, even when controlling for household wealth and other resources. Those from white households, for example, see similar increases in homeownership whether they’ve attained a bachelor’s degree (7.6 percent) or have only received a high school diploma (7 percent). In comparison, those from black households see a 9.7 percent increase in homeownership with a bachelor’s degree but only a 1.2 percent increase with a high school diploma.
Overall, the report states that when other resources are controlled for, people across all groups with a bachelor’s degree saw a 5.4 percent increase in homeownership. The report acknowledges that college graduates typically have increased purchasing power, which may contribute to this finding.
For parents with Millennial children, the conclusions are obvious: financial assistance and a college degree can help your child become a homeowner, but helping them make a plan for their first home purchase is just as important.
If your Millennial child did earn a college degree, there’s a strong chance they’re making student loan payments. The monthly mortgage payment they’ll soon be responsible for has to be affordable once the student loan payments are factored in. Getting student loans paid down, or even paid off, will help your Millennial child more easily qualify for a mortgage.
If college debt isn’t an issue, but auto loans, personal debt or credit card debt is, you can give them a one-time transfer of funds to help pay down some of these older debts, which will make the monthly mortgage payment more affordable in the eyes of the lender.
Buying a first home is exciting, and scary. While financial assistance is extremely helpful in getting your child to the closing table, your support and knowledge can still make a difference even if you don’t have a dollar to spare.
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