Debt Doesn’t Have to Be a Deal-Breaker for Buyers

Anyone buying a home for the first time knows the financing learning curve is steep. And when issues crop up — as they sometimes do — it’s tempting for buyers to give up on the mortgage process and walk away. 

But there’s compelling evidence that persistence pays off: Some buyers apply two, three, even four or more times before securing a mortgage to buy their home.

Overall, 18% of all buyers get turned down for financing at least once, 11% are denied at least twice, and 4% are turned away four or more times, according to the Zillow Group Consumer Housing Trends Report 2019.

Younger buyers, who are more likely to be buying their first home, have a harder go of it.  

One in four (25%) Gen Z/millennial buyers (ages 18-39) who obtain a mortgage are turned down at least once before getting lender approval; 16% are denied at least twice, and 6% apply four or more times before their loan is approved.

By comparison, 82% of Gen Xers (ages 40-54) and 95% of baby boomers or silent generation buyers (ages 55-75) who buy their home with a mortgage get financing on their first try.

The data on mortgage denials only includes those who were able to secure financing, so the number of potential buyers who encounter issues due to financing is likely much higher.

The difficulties young buyers face include carrying heavy debt when they reach what have historically been prime home-buying years.

But debt isn’t always a deal-breaker. Exploring down payment options, interest rates and special programs for first-time buyers and certain professions — such as teaching and law enforcement — can help keep the door open for home ownership.

Buyers find success with traditional lenders, online options

Mortgages are the main source of financing for most buyers — 77% of all buyers take out a mortgage to buy their home. They’re especially common with younger buyers: 84% of millennials and 81% of Gen Xers take out mortgages, compared with 67% of boomers and 42% of Silent Gen buyers.

Of those who successfully obtain a mortgage, exactly half (50%) are either somewhat or very concerned about qualifying for one.  

Those who eventually obtain a mortgage do so mostly from a traditional bank, credit union or financial institution. Nearly 3 in 4 buyers (74%) finance their home through a traditional lender, compared with 15% who use an online mortgage lender, 2% who finance through a builder and 9% who use some other institution.

Debt affects housing options, down payments 

There are many reasons why a prospective buyer would be turned down for a mortgage, but one of the most significant factors appears to be debt.

One in four buyers (25%) say they were denied home financing or turned down for a rental due to debt. Student debt delayed buying for 39%.

Still, a majority of buyers (56%) say they have some kind of debt. Credit card debt is the most common — 42% say they owe money on their cards, followed by student loans (20%) and medical debt (16%).

 The Zillow Group Consumer Housing Trends Report shows that people worry that their debts will scuttle their ability to qualify for a loan: 58% of households who eventually buy a home with a mortgage worry that their debts will derail their ability to qualify for a loan, compared with 35% of buyers without debt. 

Those with medical debt carry the greatest burden: 67% worry about qualifying for a mortgage.

And yet, many do ultimately qualify for a mortgage and buy a home. With some guidance and coaching, your clients could make it across the threshold too.

Takeaways:

Educate clients about down payments. Younger buyers in particular may not be aware that they can buy a home with less than 20% down. Two out of three mortgage buyers who have debt put down less than 20%, compared with 40% of those without debt. For buyers with student debt, about 3 in 4 (76%) put down less than 20%.

Make them aware of assistance programs. There are more than 2,000 programs at the state and local levels in the United States that provide down payment assistance. See if any of them fit your clients’ circumstances. 

Educate clients about loan options. Government-backed loans may be a good option for people with a low credit score or an inability to fund a 20% down payment. There also are a host of loans for unique situations, including first-time buyers and certain professions such as teachers and first responders. 

Encourage them to shop for lenders. The federal Consumer Financial Protection Bureau  recommends that people talk to at least three lenders when shopping for a loan. Develop relationships with lenders who understand the challenges of younger buyers.

Encourage them to pre-qualify. Knowing what they’re up against before they face a wall of denials can help them better prepare.