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Millennials Have a Credit Problem

American-Dream-two

Low credit scores and high student debt are two major obstacles millennials face when applying for a mortgage, but this hopeful generation still dreams of homeownership . . . and some are achieving that dream. 

By Chad Jampedro

For all the mileage the housing industry gained in the last year, millennials’ financial woes continue to have many young folks tossing their homebuying dreams into the backseat.

It’s an exasperating case of Catch-22: With more job prospects on the horizon, increasing wages, and historically low-interest rates carrying into the new year, homeownership should be more attainable than ever. But faced with more than $1.2 trillion in student loans, high living costs, and even higher rental rates, many millennials are barely living paycheck-to-paycheck. Putting away enough money for a down payment scarcely fits into the equation.

And there’s one other roadblock keeping this group on the fringes of the housing market: millennials have a credit problem.

Millennials have the lowest average credit score of any generation at 625, with nearly one-third with credit scores sinking below 579, according to NerdWallet, a personal finance website. That’s even lower than the FHA Loan program, which generally requires a down payment of just 3.5 percent with a credit score of at least 640.

Millennials may be struggling with credit, but they are not alone in the rue. The average U.S. credit score is just 687, well under the 740 score mortgage lenders recommend to consumers looking to take advantage of the lowest interest rates.

The average FICO score for approved loans slid to 723 in September 2015—a number not seen since August 2011.

NerdWallet reports the average U.S. household holds more than $129,579 in debt, with roughly $15,355 of that on credit cards. Assuming an average of 18 percent, credit card debt costs consumers an average of $2,630 a year—a nice chunk of change if only wannabe buyers could put it toward saving for a down payment.

The rise of credit management programs may be making that possible. As Americans increasingly turn to apps such as Mint.com, CreditKarma, SmartCredit, and other proprietary credit management programs, to monitor their credit, mortgage lenders may see more applicants—and many are finding ways to get in on the action.

Rose-colored Glasses

To get behind the credit management movement, it’s important to understand the current credit climate.

For millennials, the lack of credit is as psychological as it is financial, says Sean McQuay, credit expert at NerdWallet. Many millennials mistakenly believe if they pay all their bills on time, they are financially in the clear. Others simply withdraw from checking their bank balances and credit reports in fear. In fact, nearly one-third of this group hasn’t even bothered to apply for a credit card, says McQuay.

“Millennials have been profoundly affected by the financial crisis,” he explains. “So, the horror story became that credit cards led to bankruptcy. We’ve grown up with Uber, so [the attitude is] ‘I don’t need to buy a car.’ ‘I’m renting, so I don’t need to buy a house.’ And ‘Since, I’m not buying a house, I don’t need to build credit.’ They don’t have a history with credit.”

Without sufficient credit, the opportunity to secure a mortgage remains perpetually out of reach, a fact that has thousands of disenchanted would-be buyers opting out of homeownership, altogether.

Last year’s housing gains were largely driven by older, repeat buyers. In fact, the National Association of Realtors reported that the share of first-time buyers dropped to an all-time low at just 32 percent, its lowest point in nearly three decades. That being said, millennials still make up the largest share of first-time buyers.

Considering that nearly 76 percent of millennials rank homeownership as “extremely or very important,” according to a TD Bank Renter Survey, and nearly 86 percent of people consider homeownership vital to the American Dream, the credit problem presents an obvious rift.

To increase the number of first-time homebuyers, Americans must first remove their rose-colored glasses when it comes to their credit.

“Consumers vastly underestimate or underreport how much debt they have,” says NerdWallet in its 2015 American Household Credit Card Debt Study. “In fact, as of 2013, actual lender-reported credit card debt was 155 percent greater than borrower-reported balances.”

American consumers struggle to keep track of their credit card balances. Roughly 20 percent of people with a credit card say they have been surprised at least some of the time by the bill that comes in the mail.

“In most cases, people were more embarrassed by their credit, than getting dumped,” adds McQuay.

Unlocking the  ‘Black Box’  

In the past, checking one’s credit score was severely limited—and usually came with a cost. But with the changes stemming from the Credit Card Accountability

Responsibility & Disclosure Act of 2009, free versions emerged to compete with the fees charged by the three major credit bureaus (TransUnion, Experian, and Equifax). Today, more than 40 percent of consumers check their credit scores for free, according to Bankrate, though just 46 percent of Americans have checked their credit score within the past year.

“Historically, credit has been a very confusing black box,” says McQuay. “I think consumers in general are more interested in being on top of their credit.”

The top credit management apps, such as Mint.com and CreditKarma, not only offer their users credit management tools, but also shed a light on spending habits, provide bill reminders, and help users work toward their savings goals. And with more people accessing information via smartphones and tablets, they make perfect sense for the on-the-go millennial.

In mortgage lending, many firms are turning to credit management programs to keep potential buyers in the pipeline. In addition to providing financial education—through blogs, brochures, first-time homebuyer seminars and the like, lenders have the opportunity to offer credit management services to applicants who may not yet be qualified for a mortgage. The move not only serves to encourage potential homebuyers who may otherwise feel dejected, but also conserves the customer base that lenders work so hard to attract for future transactions.

One of these proprietary services is Homebuyer’s Club powered by iQualifier, from Credit Plus, Inc. The program, which can be privately branded, provides enrollees with analytic tools to monitor credit and set an action plan. The service’s “Lender Portal” allows lenders to create reports that set and monitor participants’ target scores, giving lenders the leverage to customize marketing messages when a target is reached.

The company claims that roughly 20 percent of rejected applicants return to the lender following enrollment.
Despite the prospect of more first-time homebuyers in the market, McQuay says it is important for lenders to stress that when it comes to credit, slow and steady wins the rate. Although people may be able to check their credit more frequently, it takes time to pay off debt, save for a down payment, and raise a credit score.

“I think the lenders are in a spot where they could really help,” says McQuay. “I think they want to help [consumers] get back to a state where they can buy a home. This is a much healthier approach."

About Author: Chad Jampedro

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Chad Jampedro is the president of GSF Mortgage Corp. With more than 20 years in business, GSF Mortgage Corp. has embraced the next generation of homeowners with its GoGSF brand, continuing its dedication to flexible and transparent lending. With more than 50 locations across the country, GSF Mortgage is continuing to grow and is always “Lending in Your Favor.” Reach Jampedro at [email protected]
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