In the current economic climate, home loans can be difficult to obtain for young adults. For graduating college students and other young adults looking to own a home, the mortgage approval and financing process can be complicated and confusing. However, with some knowledge and some preparation, young adults can obtain home mortgage loans and purchase property.
To better prepare younger loan applicants, here is a list of five things that lenders will consider when determining whether or not to fund a loan for a young adult borrower:
Following the housing market collapse, zero-down loans have essentially disappeared. Today, lenders expect borrowers to share the risk by putting forward more money up front toward the home purchase. For conventional loans, borrowers should anticipate a down payment of at least 5% of the property’s purchase price, although some lenders may require down payments as high as 20% or even 25%.
Young adult borrowers who cannot afford to make a sizeable down payment should consider putting off first home purchase until these funds can be acquired. Another option is to use gift funds from a relative. As long as the borrower has 5% of their own money, gift funds can be used for the rest of the down payment.
In addition to down payment, lenders are much more likely to approve younger borrowers with money set aside, either in a savings account or in assets, to cover any unforeseeable emergency situations. This money may be used to make mortgage payments during times of unemployment, periods between employment, and financial hardship. Without some money stored away in savings, young adult borrowers may find lenders reluctant to issue them a loan.
For young adults and college students, lenders will require proof of steady, full-time employment before approving you for a loan. This proof may be established through pay stubs or previous income tax returns.
On the other hand, part-time workers will be perceived as a higher risk and may not qualify. Furthermore, self-employed borrowers will need to provide ample proof to substantiate stated income and to establish reliability. These entrepreneurs may be slowed during the approval process by requirements for additional tax returns and extra documentation.
In any loan transaction, higher credit score translates to lower mortgage rates and a more cost-effective loan. Typically, the optimal interest rates are reserved for borrowers with credit scores exceeding 740, far above the credit score range of most young adults. While qualification can still be possible with a FICO score within the 600 range, even minute differences in interest rates can translate into tremendous savings over the course of a loan.
As such, young adult borrowers should consider whether it would be more advantageous and financially worthwhile to purchase a home immediately or wait several years to build up a respectable credit history.
In order to develop a higher credit score, young adult borrowers and college students should make consistent and on-time payments for any outstanding student loan debt. When attempting to prove reliability to a lender, student loan debt can be exceptionally valuable for younger borrowers as a means to build credit.
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