Imagine growing up in your family home your entire life only to find out that you are unable to afford your own after college. That’s exactly what has happened to millions of millennials who have taken out student loans. According to Pew Research, there were 75.4 million millennials in 2016, towering the number of baby boomers which sat at 74.9 million. This number is expected to continue growing until mortality rates outweigh immigration where their numbers peak at 81 million and land at 79 million.
In a report titled, “Why has home ownership fallen among the young?“, Fisher & Gervais came to the conclusion that home-ownership caused marriage. However, this author has witnessed the exact opposite time and time again. Regardless of who is right, observation will tell you that massive student loan debts combined with the lack of jobs available to their degree of choice will amount to a reduction in home ownership.
While there has been a shift by millennials towards industry relevant degrees, there are large portions of students that chose degrees which haven’t seen industry growth in generations. This has compounded the degree versus relevant-job employment status for the last generation, and will continue for the unforeseeable future. In cities across America, millennials with degrees work mediocre jobs which never match the pay for their intended positions resulting in an inability to pay their student loans.
A recent uptick in home purchases based on census data has put millennials in the lead out of all generations currently purchasing, but the numbers are quite embarrassing when compared to previous generational home-buying sprees. This can all change with a little education on the home sales process however.
How can a millennial buy a home?
The short answer is ‘creative financing’. The concept of creative financing is not new by far. As a matter of fact, you can dust off your old VHS tape of the movie “War Games” for a quick reference to the real estate buying topic.
When thinking of creative financing, the thought of seller carry-back comes to mind most often. But for those experienced in real estate investment are familiar with multiple techniques. The most mainstream is the lease/option, however, there are some groups that don’t consider such a thing to be “creative financing” because of the option aspect.
If the buyer does not use their option at the end of the term, then there is no actual sale. Furthermore, it is important when using a lease with option to purchase as to ensure it does not appear to be a sale. This is why some people who choose to sell using the method will not allow for a rent credit to be applied to the sale price if the buyer does decide to exercise their option. “Rent to own” took on a whole new meaning after the implementation of the infamous Dodd-Frank law came into existence, which tackled the owner-occupant rules when it comes to seller financing. With a lease/option, the property is not sold unless the option is exercised, at which time the buyer pays cash for the purchase price or obtains a loan – thus no seller financing is taking place.
For the purpose of this article, we will lump in the lease option with the creative financing topic because it is a creative way to purchase (and sell) real estate – (or reduce property management responsibilities in the case of REI).
Can you owner occupy with seller financing?
Yes you can. However, the process is heavily regulated until the Dodd-Frank law changes. The buyer must qualify as if they were dealing with a bank. The seller has to use a registered loan processor, and verify that the buyer is capable of taking on such an expense.
Seller financing can be a little less strict than a bank-financed sale because the seller can set the limits (as allowed by law), making them more competitive. This can mean a much lower down payment and interest rates. If you are purchasing as an investment property though, seller financing gets easier. Registered companies are not limited in their purchasing of seller financed properties like owner occupants are.
Are there any other ways to buy a home?
You may have heard about the contract for deed, also known as the land contract. This agreement sets forth a sale by which the seller retains the title in their name, albeit kept in escrow), until the obligations of the purchaser are met. When the purchase is paid in full, the deed changes hands officially.
In another type of sale called “subject to” or “sub2“, is when the existing financing stays in place while the new buyer takes over the mortgage payments. This is often a go-to method to sell when you have more than one mortgage payment and are looking for a quick way to reduce expenses. When selling in such a way, the seller must understand that the loan is still in their name. There are possible drawbacks, but there are positives when you find a solid buyer.
One thing to remember in this scenario is that the bank’s “due on sale clause” may take hold if selling this way. It does not always happen, but it’s a possibility. If you are purchasing using the sub2 method, be prepared to secure financing in the case the bank activates such a clause.
Both options have their ups and downs, and each method mentioned is independently regulated by the states as well as federal laws. Research is a must to avoid any negative outcomes for buyer or seller. You will find however, that learning about these methods will allow the millennial buyer to open a door that was previously locked shut.
Fisher, J. D., & Gervais, M. (2011). Why has home ownership fallen among the young?. International Economic Review, 52(3), 883-912.
Fry, R. (April 25, 2016). Millennials overtake Baby Boomers as America’s largest generation. Pew Research Center. Retrieved from: http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/
Houle, J. N., & Berger, L. (2015). Is Student Loan Debt Discouraging Homeownership among Young Adults?. Social Service Review, 89(4), 589-621. Retrieved from: https://www.cfpbmonitor.com/wp-content/uploads/sites/5/2014/06/Is_Student_Loan_Debt_Discouraging_Home_Buying_Among_Young_Adults1.pdf