Home > Mortgages > Is Bad Credit Keeping Young Americans From Buying Homes?

Comments 1 Comment

We’ve noted before that young adults are just as likely to live “at home” as own a home — even though they seem to be shopping around. Could low credit scores be holding them back?

That’s the theory put forth by a recent TransUnion survey, which found that while nearly one-third of those aged 18-34 said they hope to purchase a home in the next 12 months, 43% of that group are saddled with a subprime credit score.

“Credit scores are a crucial component of the home-buying process, impacting everything from the size of a mortgage payment to the interest rate on a home loan,” said Ken Chaplin, senior vice president for TransUnion. “People with subprime credit may face financial barriers to homeownership, making it difficult for their dream home to become a reality.”

There seems little argument that credit scores for young adults are low. TransUnion found that one-third of adults up to age 34 have VantageScores between 300 and 600, or what it defines as subprime. Earlier, Experian said that the average VantageScore for that crowd is 625, compared with a national average of 667.

FICO data also show that credit scores are lower among young adults than other age groups, though FICO does not categorize scores as prime or subprime — it leaves that task to lenders. Still, this chart shows that the largest group of 18-29 year olds have FICO scores below 699, meaning they wouldn’t be able to obtain a bank’s best rate to borrow money.

FICO’s India McKinney said that 32% of FICO “scorable” consumers aged 18-34 have a score under 600 — and that doesn’t include the 10% of the population that has no credit score. That group would have real trouble getting a mortgage.

“It makes intuitive sense why the younger generation has lower credit scores,” FICO said in a post about the topic. “More younger consumers have a missed payment on file, and on average, the missed payment occurred more recently than for older consumers.” They also have shorter credit histories, naturally.

But are they really longing for their own homes? Earlier this year, we reported one sign that millennials are at least window shopping. LendingTree said the 34-and-under crowd made up nearly half the mortgage requests that flowed through its site during the prior 12 months for cities like Boston, Pittsburgh, and Washington, D.C.

Low credit scores worry the house-shopping set, TransUnion found — 47% said so — but they are even more worried about building up their bank accounts for a down payment. Nearly 60% said getting a down payment was their primary concern.

Are Low Credit Scores Really a Big Deal?

But not everyone agrees that low credit scores, or large down payments, for that matter, are blocking young people from the housing market. Housing expert and loan officer Logan Mohtashami said he sees banks give low-score, low-down-payment buyers loans all the time.

“Low FICO score loans have been present this entire cycle,” he said. Buyers with scores as low as 620 can qualify, he said. And loans with down payments as low as 3.5% are available, too.

When asked how many would-be buyers he’s seen completely shut of getting a mortgage, he answered simply, “zero.”

On the other hand, adults with low scores are probably struggling with finances, so they probably aren’t even looking.

“(It) means your cash flow is bad and you don’t have much in liquid assets. Which means you aren’t taking on the biggest debt and debt payment in your life (right) now,” Mohtashami said.

So it’s possible that low-score young adults are keeping themselves out of the mortgage pool. But what else might be keeping them out? An interesting theory was suggested in a Bank of America research paper and survey published earlier this year. It found that first-time buyers aren’t interested in purchasing a starter home and trading up later. Rather, many are content to wait until they are ready to purchase their dream, long-term home.

“First-time homebuyers are prioritizing their long-term residential needs. They’re willing to save more and pay down debt to buy the home they want … 75% of first-time buyers would prefer to bypass the starter home and purchase a place that will meet their future needs,” the survey found.

If that’s accurate, it’s a sensible strategy. Trading up worked for prior generations, but the Great Recession showed that it’s far from a guaranteed strategy. Buying a home because you love the home and can afford the payments is a great idea. Buying a home so it will build equity so you can do what you really want later can be a risky strategy that might end badly, as many buyers from last decade learned the hard way.

If you’re in the market to buy a home, it’s a good idea to check your credit before you apply, since a good credit score will help you qualify for better terms and rates. You can see where you currently stand by viewing your two credit scores, updated each month, for free on Credit.com.

If your credit is looking lackluster, you can try to improve your score by disputing errors on your credit report, paying down high credit card balances and limiting new credit inquiries.

More on Mortgages & Homebuying:

Image: Geber86

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • freefighter

    A lot of us can’t stay in a location long enough to buy a house. Of course I would love to own a home, but seeing as how the corporate ladder and pension system is just a shadow of what it was for other generations, many of us are forced to “chase” the money.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team