Last June, millennials weren’t so crazy about FHA loans. This was confirmed by Ellie Mae’s Millennial Tracker that showed conventional loans taking up 67% of mortgage loans that closed during the month, compared with FHA loans’ 32% share.
And millennials want to buy a home, after all. This was apparent in 9 out of 10 loans taken by the 18-37 age group to purchase a home, with the remaining one used to refinance an existing mortgage.
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Millennials Prefer Conventional Mortgages
In the tracker, 63% of the total loans that closed during the period were conventional loans averaging $205,066. FHA loans covered almost half of conventional loans’ market share, averaging $173,381 in mortgage amounts.
Per Joe Tyrrell, Ellie Mae’s executive vice president of corporate strategy, FHA and conventional loans are millennials’ usual bets for a mortgage but the group’s preference to the government-backed mortgages has been eroding for months now.
“Conventional loans are rising, from 60 percent in March to June’s 63 percent, indicating that, at least at the moment, Millennials are slightly more able to afford a house without government guarantees. Alternatively, this also demonstrates a potential opportunity for greater borrower education on FHA and other loan options available,” Mr. Tyrrell pointed out.
What Buying a Home Among Millennials Means
In June, the millennial generation predominantly took out purchase loans that represented 90% of total closed loans. The remaining 10% was for refinance mortgages. It was interesting to note that FHA refinance loans closed faster in June, 10 days fewer than May’s 55 days.
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This generation of homebuyers continued to concentrate their purchases in the Midwest, home to affordable real estate markets where they took out the following average loan amounts:
- Muscatine, Iowa – $143,988
- Watertown, South Dakota – $138,492
- Frankfort, Indiana – $125,069
- Oshkosh-Neenah, Wisconsin – $150,751
- Quincy, Illinois/Missouri – $107,589
Despite the above constituting as top markets for millennials purchasing homes, some of them took out mortgages for properties located in expensive metros. The most expensive markets with their corresponding loan amounts taken on average are:
- San Jose-Sunnyvale-Santa Clara, California – $598,606
- San Francisco-Oakland-Hayward, California – $543,851
- Los Angeles-Long Beach-Anaheim, California – $436,967
- Boston-Cambridge-Newton, Massachusetts/New Hampshire – $364,767
- Washington, D.C.-Arlington-Alexandria, Washington – $342,722
Conventional or FHA Loans
If the FHA loan share in June were to be broken down, it was made up of 96% purchase loans and 4% refinances. Compared this with the share of conventional financing where 87% went to purchases and 12% were for refinances.
For purposes of its tracker, Ellie Mae defines millennials as those born in 1980 to 1999. This generation has been the subject of study and speculation over their buying vs renting choices, mortgages included.
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FHA loans, for instance, have been popular because of their low down payments, low credit score requirements, and low income standards at competitive rates. They are made so that low and mid-sized income borrowers can afford to buy a home and pay for their monthly mortgage dues.
On the other hand, qualifying for conventional loans and getting approval via Desktop Underwriter®, as updated by Fannie Mae, has been made easier. Beginning July 29, Fannie Mae has pretty much relaxed its guidelines when it comes to conventional financing. For one, it now accepts debt-to-income ratios of up to 50%, allows for higher loan-to-value ratios for adjustable-rate mortgages, and makes it easier for self-employed borrowers to present documentation of less than two years.
These big underwriting changes on conventional loans could make homeowners out of more consumers, including those aged 18 to 37, in the coming months. But FHA loans need not fret because these trends tend to track in cycles if we were to quote Mr. Tyrrell.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.