The American Dream of owning your own home is becoming more distant for many millennials. From 2006 to 2011, consumers between the ages of 25 and 34 experienced the largest decline in homeownership of any age group, according to Census Bureau data.
What is causing this change, and what can millennials do to prepare themselves for homeownership? First, there are a few clear reasons why this younger generation may be losing ground in the homeownership game: creditworthiness, debt and urbanization.
Reason #1: Creditworthiness
According to Credit Karma data, U.S. consumers between the ages of 18 and 34 have an average credit score of 624.* For most conventional home loans, the minimum credit score requirement is 620. Digging further into the data, we find that only 49 percent of millennials have a credit score above that minimum.
For those who do meet the minimum score, they'll end up paying a great deal more in interest than those who have scores above 720, which is traditionally considered the threshold to get the best rates and terms on loans. Even just a percentage point difference in interest rates can mean thousands of dollars in savings over the lifetime of a home loan.
Reason #2: Debt
For those millennials who do meet the minimum credit score requirements, there's the looming shadow of new debt. Consumers between the ages of 18 and 34 with student loan debt have on average about $27,500. They're also saddled with approximately $3,400 in credit card debt.
For most consumers, a home loan is the largest debt load they'll ever take on at once, so it's no wonder many millennials are opting to rent or even move home with Mom and Dad instead. Adding several hundreds of thousands of dollars in debt to their already accrued $30,000 is a lot to stomach.
Reason #3: Urbanization
Younger millennials -- those in their late teens and twenties -- are migrating to urban centers, preferring them to the typically more affordable suburban streets of their youths. Once they're ready to settle down in the urban outskirts or suburbs, they've dealt with years of paying for costly rent and other city commodities, which could be another aspect stunting their homeownership ability.
How to Build Your Credit for a Home Loan
But all is not lost. No matter what your age, there's a lot you can do to get in homeownership shape. Here are a few steps to get you started:
Check your credit score. The first step is to know where you stand. Use a site like Credit Karma to check your credit score for free.
Keep track of the factors affecting your score. There are six main factors to keep an eye on:
- Credit card utilization: This rate shows how much of your credit limits you're using. Typically, the lower this rate, the better.
- Payment history: This represents how many of your bill payments you've made on time. The closer this rate is to 100 percent, the better off your score will be.
- Derogatory marks: These include items like accounts in collections, bankruptcies, civil judgments and liens. They can cause significant damage to your credit score.
- Length of credit history: When it comes to credit scores, the past predicts the future. Having a lengthy credit history of on-time bill payments shows that you'll probably continue to be a responsible borrower.
- Total accounts: Similar to the length of your credit history, the more accounts you have in good standing, the better. Of course, that doesn't mean you should open more accounts just for the sake of adding to your total.
- Credit inquiries: Each time you apply for credit, it initiates a hard inquiry. Too many hard inquiries can signal to potential borrowers that you may be desperate for credit.
Assess your debt situation. You don't have to be debt-free to buy a home, but finding out how long it may take you to pay back your debt could give you some perspective. Use a debt repayment calculator to find out how long it will take you to pay off your debt and how much interest you will have paid toward the debt. If you want to accelerate your debt repayment, consider paying more toward your minimum monthly payments.
Get an emergency savings fund. No one knows what the future holds, no matter how secure your income. Try working toward a savings of six to 12 months of living expenses a little bit at a time. Make sure your fund is not too easily accessible, but that you can get to your money in a real emergency. Once you're a homeowner, you'll have this little rainy day fund set aside for your mortgage payments, in case of an emergency.
Young adults may not be becoming homeowners as early as they used to, but who's to say that it isn't a shift for the better? Times have changed, and perhaps so should our perception of the American Dream.
What do you think?
About the author: Bethy Hardeman writes on credit, personal finance and the economy for CreditKarma.com, a free credit management website that helps more than 25 million people access their credit score for free. Find her on Google Plus and Twitter.
*Based on a sample size of 1,057,156 Credit Karma members who pulled their credit data in 2014.