Parents, grandparents and young adults know the problem only too well: Heavy student-debt loads, persistent employment troubles stemming from the recession, plus newly toughened mortgage underwriting standards are all standing in the way of potential first-time home buyers in their 20s and 30s. There are effective techniques that family members, friends, even employers can use to bridge the generational gap by offering a helping hand — without hurting their own finances in the process.
First, some sobering numbers:
*Census Bureau data on homeownership by age: Americans who were 30 to 34 in 2012 had the lowest homeownership rate of any similarly aged group in recent decades. Americans born between 1948 and 1957 had a 57.1% ownership rate by the time they were 30 to 34. This is despite record low mortgage rates and bumper crops of bargain-priced foreclosures and short sales.
*Debt to income ratios are mortgage application killers for would-be first-timers. Adoption of a new federal 43% maximum debt-to-income ratio for “qualified mortgages” is poorly timed for young buyers. Large student debts, which average $21,402 but sometimes balloon into six figures, may not allow buyers to meet the 43% standard for years. Many buyers are able to consolidate multiple student loans into one requiring a smaller monthly payment.
*Typically young buyers are already paying out large amounts on credit cards, auto loans and their student debt, about 30% of monthly income for those ages 21 to 30 as of 2012, according to a report from research of the National Association of Realtors. Factoring in the monthly cost of a typical mortgage for an entry-level purchase, the debt-to-income ratio as of 2012 for these individuals exceeded 60%. Even with a 5% increase in income per year, they will not be able to qualify under the 43% debt-to-income test until 2019. Consumer research consistently finds that the majority of Americans in their 20s and 30s would like to own a home, once they’re able to put together the financial pieces to make it feasible.
So what are some of the solutions available to help bridge the gap? Growing numbers of relatives are stepping in with gift money to help defray the down payment and closing costs, 27% of first-time buyers last year had gift funds to close the purchase of a home. Down payment gifts do not address the debt-to-income ratio problem, but for young buyers who can get close to the 43% mark for conventional loans or slightly higher at the more flexible FHA or VA, they can be extremely important.
Rules on gifts vary among funding sources, but there are some shared basics: There needs to be a formal gift letter that spells out the purpose of the gift and the specific transaction for which it is to be used; the source of the funds and the capacity of the gift giver to provide the money need to be documented.
For down-payment help outside the family tree, check out www.downpaymentresource.com.
With a little professional assistance, family members are providing either second mortgages or first mortgages that are custom-designed to deal with whatever financial hurdles, including paying off student loans to reduce debt-to-income ratios. Properly structured, these loans provide annual returns to family members well in excess of money-market funds or bank deposits, and open the door to homeownership for their kin. National Family Mortgage, www.nationalfamilymortgage.com, has offered assistance for intra family transactions.
Eileen Schamber is the president of the Lodi Association of Realtors and can be reached at firstname.lastname@example.org