They are under 30 and barely out of school, but many young adults are skipping the rental market and going straight to homeownership.
With an increasing number of diverse and flexible loan products available, young adults are finding it easier to secure a mortgage and purchase a home in their early and mid-20s. Bay State lenders say this emerging market is good for business but admit that not everyone in their 20s is ready for the responsibility of owning a home.
Rosella Campion, senior loan officer at Boston-based Summit Mortgage, said young adults are showing interest in the real estate market and she has closed loans for many borrowers in their 20s. However, she said the trend isn’t steady and depends on the time of year. Typically, during the end of the school year, more young buyers come to her office looking for a mortgage. Borrowers who are finishing professional educations, such as law school, also are interested in purchasing homes.
Campion sells properties in the Fenway, South End, Dorchester and Roxbury neighborhoods of Boston. She said young adults are purchasing condos in those locations, except for the South End, where condo prices typically are higher.
Other lenders are seeing more steady business with young professionals purchasing condos in similar areas of the Hub.
Charlie Nilsen, New England regional manager at JP Morgan Chase in Braintree, said he has seen an increase in the number of young adults investing in condos during the past year. Between 10 percent and 15 percent of the company’s Boston business is being driven by young adults. Most of them are purchasing “fixer-uppers” or recently renovated condos in neighborhoods such as South Boston, East Boston and the South End.
“There is a lot of supply right now,” Nilsen said of condominiums and starter homes within the price range of many younger buyers.
Loft developments in places like Lowell, Lawrence, Chelsea, South Boston and the South End have also been popular among young buyers, said Brian Koss, senior vice president of Countrywide Home Loans in Waltham.
‘Early Stages’
Those who aren’t buying within the Boston city limits aren’t going far outside. George DeMello, senior vice president of resident lending at Bank of Canton, said younger borrowers most often are buying properties close to Boston. A typical purchase price is approximately $350,000.
Because borrowers in their early to mid-20s often do not have substantial savings, lenders are seeing a higher loan-to-value ratio on the mortgages for which they apply. DeMello said there are some 100 percent LTVs, but most are an 80/20 combination, where 80 percent of the loan has a fixed rate and 20 percent has an adjustable rate attached to it. Such two-part loans can lower payment by allowing the borrower to avoid paying private mortgage insurance. The Bank of Canton also uses some of MassHousing’s first-time homebuyer products.
“They [MassHousing] understand the Massachusetts market much clearer than larger [mortgage] investors,” DeMello said.
Borrowers between 25 and 35 years old make up approximately 30 percent of the bank’s lending business.
Nilsen said a five-year adjustable rate is popular among the younger age group.
“They’re thinking shorter-term,” Nilsen said.
The other lenders agree, saying few, if any, borrowers in this age group are looking past three to five years. Fifty percent of Bank of Canton’s young borrowers are seeking mortgage products that lock in rates for three to five years, DeMello said.
Because few of these borrowers have the money for a 20 percent down payment, most lenders accept between zero and 10 percent down.
“They tend to have very little money to put down,” Nilsen said.
While some of the young adults will receive monetary gifts from parents, which increases their down payment, most are not so lucky. Nilsen said he tries to bring the borrower to a point where their monthly mortgage payment is a close to what they are paying in rent or, if they are not renting, what they would be paying for an apartment in the market where they wish to live.
Other options for these new borrowers sometimes come from a seller or developer. Nilsen said there are instances where the developer of a condo project will pay the buyer’s condos fees for the first year. Other times, sellers or developers will subsidize the buyer’s closing costs. Such initial breaks may be important to younger, educated buyers who expect their incomes to increase over time.
At Summit, the most popular loans for young adults are 30-year fixed, five-year adjustable-rate or five-year interest-only mortgages.
For those with little credit history, common for recent college graduates, Campion evaluates other methods to validate their ability to repay a loan, such as 12 months’ worth of rental payments.
The young adult borrowers usually fit a certain profile. Nilsen described many of his clients in their 20s as college educated with a few years behind them at a job. Others are in law or medical school with the potential for a strong earnings capacity in the future. The young-adult borrowers of 2005 are not the same young adults as yesteryear, Koss said.
“They’re more sophisticated,” he said, adding that homeownership was something people more often waited five to seven years after college to pursue in years past. These days, young adults often are eyeing home purchases much sooner.
Many young adults have more credit history than ever before, as well, especially with the proliferation of credit cards. Credit history can be a double-edged sword, however.
“Some have abused it,” Koss said. “[But many are] more sophisticated in the ways of utilizing debt early on.”
Many younger borrowers cite specific reasons for buying a home now rather than waiting.
“They are buying hoping for [price] appreciation,” DeMello said.
Other tangible benefits of owning a home include tax breaks, DeMello said.
Nilsen said there are intangible benefits, as well. Owning a home taps into a basic desire for many young professionals.
“They look at it as an opportunity to invest in the American dream,” Nilsen said.
Koss pointed out that owning a home has become a right of passage for many 20-somethings and is growing more commonplace.
“It’s become more socially acceptable, almost cool, to jump into the housing market,” Koss said.
Young adults typically put less money Young adults typically put less money down and become a higher risk loan, which can be a drawback for lenders, Nilsen said. Not every loan for a young adult is approved, of course. Countrywide does a lot of pre-approvals for people between the ages of 22 and 25, but there are many times when the loan officer will advise the client to wait. Some younger would-be borrowers simply don’t understand budgeting or don’t have the savings. Although some borrowers will get approved with an 80/20 product, Koss said he likes to assure they have monetary reserves and will not to max themselves out if they have no savings or a retirement account.
“We like to see they’re doing something balanced,” Koss said.
Although younger borrowers can be a riskier, the lenders agree that granting mortgages to those who are qualified gives them an opportunity to capture a borrower for life. Koss said if the borrower has an aggressive approach as a 20-something, they will likely be a good-risk borrower in the future. Bigger loans are possibly in store as well, as young condo owners mature into owners of single-family homes.
Nilsen agrees.
“We like to get to people early in the buying stages,” said Nilsen.
But Koss warns that giving a young person with marginal credit a loan simply to secure future business is risky. He advises lenders to look at the long-term rather than short-term gain.
“We want to make sure we don’t hurt these people,” Koss said. Lenders must be careful not to grant mortgages to young loan seekers who may not yet be ready for the responsibility of homeownership.
Lenders expect younger borrowers to continue their interest in purchasing property around Massachusetts. However, if home price appreciation moderates, Nilsen said that could temper the trend somewhat.
