The increasingly strict regulations on first-time homeowners are squeezing a vital segment of buyers from the housing market. While big banks are often criticized for doing nothing to help these potential buyers into their first home, another type of lender is stepping up to help-Mom and Dad.
Millennials Feeling the Sharpest Pinch
Potential homeowners from 20-29 are feeling the most pain, with the lowest employment rate in the nation. Many in this age range are saddled with crippling student loan debt, which makes getting a mortgage loan even more difficult.
Unable to purchase a home of their own, many millenials are opting to remain renters, as rentals continue to grow in larger cities like New York. Even with federal and state programs directed towards helping first time homeowners find and qualify for a home, the combined burdens of student debt, part-time employment, and inexperience still make these programs out of reach for young home owners.
The changing face of the competition is further squeezing out young buyers as cash buyers are swooping in to buy the lower priced homes that younger buyers typically gravitate towards. As a result, the few Millenials who are are able to secure a loan are unable to win a bidding war on properties that in the past were most within their financial reach. Real estate professionals warned in a recent DC summit that without first time home owners active in the market, the industry overall will be unable to fully recover.
Mom and Dad to the Rescue
Unlike big banks, older relatives are willing to provide cash for Millenials without taking a critical eye towards student debt ratios and part- time employment. Helping a child find a home of their own comes with some self interest as many parents found their children forced to move back home after the economy collapsed, housing costs rose and unemployment skyrocketed.
The National Association or Realtors reports that 27% of successful first- time homeowners were able to purchase a home with the help of a relative, the highest number since the association began keeping records of the trend in 2009. While the economic outlook is bleak for Millenials, Baby Boomers are seeing a comparatively easier outlook as stock value and property cost continue to rise.
Economic experts warn that when giving a child cash for a home it must be clearly documented as a gift and not a loan. Many banks are starting to require that a “Gift letter” be included with a mortgage application. The Federal Housing Administration found that during the worst days of the recession, applications accompanied by gifts led to the highest rates of default.
Faced with historically high debt to income ratios, many potential first- time homeowners are looking for ways to get into the housing market. Tighter restrictions on lending have placed many banking and financial institutions out of reach for these younger buyers. Baby Boomers, buoyed by a comparatively better economic outlook, have stepped in to make the dream of home ownership a reality for their children.
