We all know that in recent years the housing market has been pretty soft. Folks haven't had much extra income to throw around at new homes, some folks lost the homes they had, and a whole generation of new buyers has been very slow about dipping their toes into the real estate market and buying. This generation is known as the Millenials. The Millenials are the Americans born between 1980 and 1995- - those who have come of age in the past few years. The story is that many, not being able to find a job when they graduated, went home and have been living in Mom's basement for the past five or ten years.
The good news is that the job market is improving. Most of the Millenials that I know have found jobs. So the move out of the basement has begun. In a typical year up to 46% of home buyers are first time home buyers- - right in the Millenial sweet spot. But for the past several years the percentage of first time buyers has been low - -around 32-33%.
But if the calls I have been receiving over the past couple of weeks are an indicator, that ship is beginning to right itself. And the moment couldn't have come at a better time. Interest rates will no doubt increase as we round the first of the year and head towards spring. As the economy begins to pick up stream the Federal Reserve Bank has been kicking out the props that had been holding up the economy such as the treasury bond and mortgage bond buying programs that were keeping interest rates lower. Obviously if interest rates go up it will affect buying power. So it would not be out of the question to see a bit of a housing boomlette this winter, made up of people who want to get into the game while the rates are still low.
Let's try this on for size: your lease is up in a couple of months and your landlord just announced that the rent was going up once again, so now, it seems might be a good time to buy a home. You have a decent job a couple of grand in the bank, now's the time right?
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Not so fast - - you have left out a big piece of the equation - - credit. In my conversations with Millenials I am finding out that many, in fact most, haven't established much credit; often none. While no credit isn't bad, it also won't help with obtaining mortgage financing. Let's think about that for a minute. If you have no credit, there is no track record of how you pay your bills. (The cell phone family plan account isn't enough and unfortunately, after all the spasms and pain lending has just gone through, Mom vouching for your good character isn't enough either.) A mortgage on a home is a fair chunk of change. Lenders want to have some kind of a record that you are good at paying back what you owe.
If you are thinking about buying your first home you need to be thinking about having enough credit for a long enough period of time to compute a credit score. If you have student loans, that's great - -you may have all the credit lines you need when they go into repayment. However, this is important to remember: student loans are federal debt. If you get behind or default on federal debt you won't be able to get a home mortgage. If you were fortunate enough to get through school without student loans and have no credit you will need to establish some. That is easier said than done - - it is sort of like job experience : You need experience to get a job, but you can't get experience unless you have a job. So you need credit to get a mortgage, but you can't get credit unless you already have some. Capische?
There are solutions for that (you knew there would be, right?) and they involve a bit of cash up front and or help from mom and dad. Your rent, electric or other utility payments don't report on your credit report unless you are skipping them. Then they show up as collections-which isn't good. So while they hurt you if you don't pay them they don't do much for credit if you do. What you need is at least two consumer credit lines on your credit report. A consumer credit line consists of vehicle payments, credit cards, installment loans or bank loans.
If you have a goose egg on credit, it is because you have no consumer credit. The first suggestion I would make is to ask a parent if they might allow you to be added to the card as an "owner" of a couple of credit cards that they already are using. Please note, I said owner. Any child can piggy back onto a parent's credit card as an authorized user. That just means the child can use the card, but that isn't the same as owning the card and having a responsibility to pay the debt. If you are successfully added you do get the benefit of the payback history of your parent. If your parent doesn't like that idea or the card company still won't approve you, you can try applying for a credit card for one or two to places that you shop or buy gas. Use them to buy what you would buy anyway.. If you get the card, great. Using it sparingly, maybe once a month, wait for the bill, pay it off. Rinse, lather, repeat. It takes about six months or so to get three good scores which is what you need. If you are declined for your first set of applications, which would not be unusual you may have to consider obtaining a secure card or two. In that case you apply for credit, pay a fee, normally five or seven hundred dollars which is kept in reserve by the creditor and you are given a small balance that you use just as I have indicated above. Whatever type of card you get it is important not to run up a high balance. Credit card lenders are like any other lender in that they make money off of interest so running a balance is not discouraged. Where that begins to hurt you is when your balance is approaching your credit limit. So keep all credit balances to one third of your limit and you will have maximum impact on credit.
There is a second group of people who may be getting their second wind about now as well. The foreclosure crisis hit people between the ages of 40-55 more than any other age group. Time does its thing, and for those that lost their homes between 2008-2011, enough time has elapsed that most of those sheriff's deeds for foreclosure sales will have been long enough ago for these people to get back into the housing market. Remember-the time frame is three years from the date that the sheriff's deed transferred the home out of your name is the date that you are eligible for an FHA, VA or USDA loan. It is highly advisable that you have re-established credit since that time.
Remember, owning a home is the fastest way to net worth. You have to pay to live somewhere. Now may be the time to buy.
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