From Twitter to TikTok to the pages of the New York Times, you'll find memes, debates, and think pieces on intergenerational differences everywhere. People love to use generational categories such as zoomers, millennials, Gen X, and baby boomers to understand social and economic behaviors.
Like the generations before and after, millennials have received their fair share of criticism in the media. Many popular narratives and stereotypes have formed around millennials. For example, that they are the "avocado toast generation" or the "participation trophy generation."
One of the most prevailing narratives that persists today is the financial insecurity surrounding millennials, i.e., the inability to buy houses and the idea that millennials will have to wait much longer to retire than their parents. This article will take a closer look at these narratives and decipher fact from fiction and sensational stories.
Characterizing Gen Y
Generational cohorts such as the millennials are grouped by birth year. Gen Y, or millennials, were born between 1981 and 1996 and are now 25-40 years old.
The group includes about 73 million people in the U.S. In fact, the group comprises a quarter of the U.S. population and is now the largest demographic group, explains LexingtonLaw.
The term "millennial" is attributed to Neil Howe and William Strauss, who developed the word in 1989 and co-authored the book, Millennials Rising: The Next Great Generation in 2000.
Millennials have been the subject of many studies over the past few decades, and the surveys tend to describe them as mysterious or enigmatic. But one thing that's very clear is how emerging technology has continuously shaped this generation.
For example, a report by Barkley found that millennials are 2.5 times more likely to be early adopters of technology compared to older generations.
Over half of millennials reported they either are one of the first to purchase new technology or are among the first to try a new hi-tech device or app. In contrast, non-millennials reported waiting much longer before adopting new technology.
Several studies have examined millennials' financial habits in the past decade, especially the group's tendency to postpone homeownership.
What Does the Data Say About Millennial Homeownership?
The Mid 2010s
The Urban Institute discovered that millennials' homeownership rate was 37 percent in 2015, eight percentage points below the homeownership rate for the two previous generations—Gen X and baby boomers—at similar ages, 25-34.
The study found a few main reasons for the delay in purchasing homes. The first barrier was significant college debt. Studies also show that millennials also wait longer to get married than previous generations, which often delays homeownership. According to the Urban Institute, marriage boosts the chances of homeownership by 18 percentage points.
The Upward Trend in Millennial Homeownership
Just four years ago, millennial homeownership was at an all-time low. But trends have shifted in recent years.
A 2020 study by Bank of America shows that 75 percent of millennials with established savings are saving for retirement, more than half are building an emergency fund, and one-third are saving to buy a home.
The same year, millennials comprised the largest percentage of U.S. homebuyers. According to a 2020 survey conducted by the National Association of Realtors (NAR), the cohort of buyers ages 30 to 39 purchased 37 percent of homes—the largest share of home buyers.
Older millennials (defined as 30-39 years old) were behind 25 percent of U.S. home purchases in 2020, compared to the 13 percent bought by younger millennials (ages 22-29). Within this group of millennial homebuyers, 52 percent of older millennials and 86 percent of younger millennials were first-time home buyers.
What allowed for this rise in Gen Y purchasing power? According to the Wall Street Journal, low interest rates combined with reduced monthly payments facilitated homeownership for the millennial demographic.
Breaking Free From the Media Myth
Millennial spending habits have long been an obsession of mainstream media. It's hard to say when or why the stereotype started, but millennials have a reputation as "avocado toast-consuming, latte-drinking, yoga mat-toting 20-somethings who live in their parents' basement," as CNBC described the trope.
There is a grain of truth in this over-embellished stereotype. According to Charles Schwab, 60 percent of millennials polled said they would purchase a $4 cup of coffee, compared to 29 percent of baby boomers.
Millennials also spend more on dining out than generations before. A characteristic of millennial shopping habits is a willingness to spend more on popular consumer goods or unique experiences.
However, these "luxurious" spending habits don't keep millennials from buying homes—they just save for homeownership differently than previous generations.
In a 2019 survey conducted by Redfin, 72 percent of millennial homebuyers said they saved for their home down payments with money straight from their paychecks. This allows millennials to become homeowners despite student debt.
According to Redfin, "The combination of strong wages and the housing market stalling late last year means that more buyers are able to save for their down payment using their primary income alone."
A Practical Guide for Millennial House Hunters
Millennials have purchasing power. This age group now comprises the largest generational cohort of the U.S. workforce. With the youngest millennials turning 25 in 2021 and the oldest turning 40, it's prime time for hopeful millennials to become first-time homeowners.
Assessing Your Financial Health
The first step to millennial homeownership is knowing when you're ready to make the move. You can't take this decision lightly and shouldn't base this decision on feelings or social circumstances alone.
Ideally, you should run a tight analysis of key personal finance metrics before entertaining the idea too seriously. For example, you should review where you stand in the following areas:
A credit score (often called a FICO score, referring to a widely-used credit score brand) represents a house buyer's creditworthiness. For example, this score considers whether you pay your bills on time or if you overextend your credit limits.
When applying for a Federal Housing Authority (FHA) loan, applicants must have a minimum FICO score of 580 to qualify for a low down payment of 3.5 percent of the total loan. If the applicant's credit score is less than 580, they have to put down a 10 percent payment to obtain an FHA loan. As of 2020, millennials had an average credit score of 679.
All homebuyers, not just those applying for an FHA loan, need to establish a strategy. Should you buy a house with your current credit score and commit to a higher down payment, or work on raising your credit score, so you qualify for a lower down payment in the future?
According to industry experts, most private lenders require a credit score of 640 or higher.
Debt-to-income Ratio (DTI)
Your debt-to-income ratio represents your monthly debt payments divided by your gross monthly income.
Gross monthly income is the money you earn before taxes and other deductions. Lenders use this number to assess your ability to pay your loan's principal payments, monthly interest, and other various charges attached to your mortgage.
According to the Consumer Financial Protection Bureau (CFPB), borrowers with a debt-to-income ratio higher than 43 percent may have difficulties meeting the monthly loan payments. Lenders generally look for a DTI ratio below 36 percent.
Accounting for Additional Expenses
Even if the combined interest and principal payments for a mortgage are about the same amount as your current rent, homeownership includes many other expenses. Be sure to account for these costs when assessing your preparedness to buy a house.
Additional homeownership expenses often include property taxes, insurance, homeowner’s association fees, city assessments, water, sewer, garbage, and other utilities and repairs that come up such as roof repairs and replacing a hot water heater.
Applying for a Mortgage
If you assess your financial situation and find you’re in a good position to pursue homeownership, your next step is to research your mortgage options and start the application process. First, you’ll want to understand the fundamental differences between the most common home loan types.
"Conventional mortgages" and "conventional loans" refer to home loans not directly provided or guaranteed by government entities. Conventional mortgages typically come from private lenders or two government-sponsored enterprises, Fannie Mae and Freddie Mac.
Borrowers must fill out an official mortgage application and provide required documents along with their credit history and current credit score. The interest rates on conventional loans are usually higher than those of FHA loans and other government-backed mortgages.
Fixed-rate mortgages and adjustable-rate mortgages are two of the most common conventional loan types:
A fixed-rate mortgage charges a predetermined interest rate that does not change during the life of the loan— usually 15, 20, and 30 years.
A 30-year fixed-rate mortgage generally provides the lowest monthly payments. However, the borrower will pay more over the loan’s life than with shorter-term loans because, in the last decade of the loan, the payments will primarily be interest payments.
If you choose a shorter-term mortgage, you will pay higher monthly payments so you can repay the principal more quickly. Also, shorter-term mortgages usually have lower interest rates, enabling you to pay more principal with each mortgage payment.
Interest rates for an adjustable-rate mortgage (ARM) can fluctuate during the loan’s life.
The initial interest rate for an ARM mortgage is established at a lower rate than on a comparable fixed-rate loan, but the rate can climb over time.
An ARMs’ interest rate will remain at the initial interest rate for an agreed-upon period. Then, the interest rate may increase at a pre-arranged regularity, typically from one month to 10 years.
ARMs are attractive to borrowers who desire a lower initial rate and monthly payment or do not think they will own the house for the mortgage’s complete term, according to Freddie Mac.
Since 1934, the Federal Housing Administration (FHA) has operated under the U.S. Department of Housing and Urban Development.
The FHA loan program makes homeownership more accessible by insuring loans so lenders can offer better deals. This makes FHA loans popular among first-time homebuyers.
As previously discussed, a 580 or higher FICO score qualifies you for a down payment as low as 3.5 percent. You can see the full list of FHA loan eligibility here. The FHA website also offers many educational resources regarding the application process and personal finance management in general.
The U.S. Department of Agriculture (USDA) guarantees loans from qualified lenders to help eligible urban and suburban homebuyers. Because the USDA guarantees these loans, lenders can offer $0 down mortgages with 100 percent financing.
Moreover, the USDA guarantee enables lenders to follow more lenient eligibility criteria. USDA loans allow low and moderate-income individuals and families to buy a home of their own with minimal out-of-pocket expenses.
If you're interested in applying for a USDA loan, you can use the USDA loan calculator to determine your eligibility.
The United States Department of Veterans Affairs (VA) administers a loan program more commonly known as the VA loan program. The program—including a direct loan and three VA-backed loan options—help qualified borrowers purchase, build, or improve homes.
Who is eligible for a VA loan? Eligibility requirements for VA loans are a bit more complicated than those set for FHA and USDA loans.
According to the VA website, "Your length of service or service commitment, duty status and character of service determine your eligibility for specific home loan benefits." You can read the full list of eligibility requirements here.
The phrase "specific home loan benefits" refers to the different VA loan offerings, including Purchase Loans, Cash-Out Refinancing, Interest Rate Reduction Refinance Loans (IRRRL), the Native American Direct Loan (NADL) Program, and Adapted Housing Grants.
Deciding on a Down Payment
Aside from USDA loans and VA loans under certain circumstances, all home loans require a down payment. Depending on the type of loan you choose, your credit score, and DTI, you may have some flexibility with how much you put down.
The CFPB provides a guide for assessing what down payment amount you can afford. The bureau recommends collecting your savings and investment statements to calculate your total available funds.
First, you must decide the amount you want to dedicate to other savings goals, such as moving costs and renovations for your new home. Then, you have to subtract your emergency fund—ideally about three to six months' salary.
The sum is what you can safely designate for the downpayment and closing costs combined. Typically, the mortgage equals 20 percent of the house's sale price and closing costs equal about 2 to 5 percent of the home purchase price, according to the CFPB. To get a better idea of how your down payment and mortgage payments will break down, you can use What’s My Payment’s mortgage calculator.
Many industry experts agree that a 20 percent down payment improves your odds of approval for a loan at a favorable interest rate. However, the 20 percent down payment benchmark isn't a hard and fast rule—you have other options.
The origin of the 20 percent down standard dates back to 1956, according to Dan Green, writing in the Mortgage Reports. However, the rationale behind this standard is outdated given the advent of Private Mortgage Insurance (PMI).
If you can't or decide not to put down a 20 percent down payment, you can still become a homeowner. One option is to apply for an FHA loan, as previously discussed.
On the conventional mortgage side, you can apply for the Fannie Mae low down payment mortgage option called HomeReady. HomeReady Mortgage down payments can be as low as 3 percent.
Millennials Come of Age
Millennials have a reputation for financial limitations. However, the tides are continuously shifting.
Research from The Center for Retirement Research at Boston College found that millennials no longer trail previous generational cohorts in financial metrics such as earnings and employer-sponsored retirement savings plans at the same point in their lives.
As previously mentioned, more and more millennials have become homeowners in the past couple of years, giving them the largest generational share of the housing market.
Overall, millennials now have much more buying power than once believed and can achieve milestones like homeownership sooner than the mainstream narrative suggests.