Young Adults Going Jumbo

The improving economy has enabled more millennials—those born between 1980 and 1999—to qualify for mortgages. And in some markets, they’re seeking jumbo loans.

Low interest rates and loosening credit qualifications are, in part, fueling the change. Borrowers can now pay as little as 3% down for government-backed loans, and 10% or 15% down for jumbos, which are loans over $417,000 in most parts of the country and $625,500 in high-price areas.

Slightly more than one third (36%) of renters aged 18 to 34 said they expect to buy a home within the next year, according to a renters’ housing confidence survey released by real-estate website Zillow.com. Nearly two-thirds of young adults said they think that owning a home is necessary to live “the good life” and the “American dream.” The findings, released in September, were based on more than 10,000 interviews across 20 different metro areas.

Generally renters expressed plans to buy this year in metro areas where home values are lower, while they planned to wait at least five years in high-price areas, says Skylar Olsen, senior economist at Zillow. An exception was San Francisco, where the current median home price is $715,800—well into jumbo territory.

High rents in the Bay Area—the median is $3,088 a month—may be spurring millennials to buy, Ms. Olsen says.

The area’s booming technology sector is also enabling millennials to apply and qualify for jumbo mortgages, says Mathew Carson, a broker at San Francisco-based First Capital Group. Here, many young borrowers liquidate stock options to make down payments, he adds. “For them, money is easy, and their earning potential is very good.”

Millennial borrowers also shop for loans differently, prompting some lenders to expand online and mobile capacities. This first generation that grew up with computers and the Internet are digital natives and expect online lending, says Jason van den Brand, co-founder and CEO of Lenda, a San Francisco-based online-only lender. Lenda currently underwrites refinance loans only; using its website, potential borrowers can complete the application online—without a loan officer acting as a middleman. The company plans to expand to loans for home purchases within a year.

At age 34, a millennial himself, Mr. van den Brand says he founded Lenda in response to his frustration with traditional mortgage lending that involves face-to-face meetings and what he considers high commissions and administrative fees. “I shop with Amazon Prime and it’s on my doorstep in two days,” he says. “I want the same experience with my home loan.”

Currently, Lenda’s average borrower is age 41, down from age 45 a year ago, and more than 20% of users of the refinance tool are millennials, he adds.

Quicken Loans, the largest mortgage lender outside traditional banks, is also improving its mobile mortgage tools to integrate the entire process from origination through servicing, says Bob Walters, chief economist for Quicken Loans. “We’re now hearing from a lot of clients, especially millennials, ‘Why do I have to talk to you?’” Mr. Walters says.

Compared with previous generations, the leading edge of millennials has had a slow start at homeownership. First-time home buyers accounted for only 29% of pending home sales in February, compared with a 40% historical norm, according to the National Association of Realtors.

The recession, high unemployment rates and student-loan debt have been barriers toward homeownership for millennials, says Mr. Walters. “The cost of college tuition has gone up dramatically, and students today have taken on more debt than in past generations,” he adds.

Here are other considerations for millennial borrowers:

Budgeting for a mortgage. Millennials may need to consider cutting back on dining and entertainment, or other lifestyle expenses, to save for a down payment or afford monthly payments, Zillow’s Ms. Olsen says. “Affordability in many ways is a personal question,” she adds.

Help from Mom and Dad. Young home buyers often close the down-payment gap by turning to their baby boomer parents, Ms. Olsen says. By now, parents have likely paid down their mortgages, and with home values on the rise in many areas, they have plenty of equity to dig into to help their children if they choose, she adds.

First-time borrower rules. When a borrower has no history of making payments, many lenders may cap mortgages at $1 million. They’ll also look closer at assets and reserves—especially if monthly mortgage payments are substantially higher than rent, Mr. Carson says. “Lenders like to see strong compensating factors,” he adds.

 

Anya Martin
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