A Gen Z couple buy a house with an FHA mortgage and put down less down payment

How Gen Z is Getting a Jump Start on the American Dream

A Gen Zer  bought a house with a mortgage perfect for a first time home buyer

The American Dream--the American ethos of life, liberty, and the pursuit of happiness--has long included homeownership. Since the end of the Depression and World War II, owning a home has been the hallmark of this dream. The introduction of the Federal Housing Administration and the modern mortgage in the 1930s meant that owning a home was within the reach of almost anybody, not just the wealthy who could afford a 50% down payment. Also, prior to that, you'd make a balloon payment for the entire amount after three or five years.

Gen Z Is Already Buying Homes

Two Gen Zers sitting down after moving into a house they purchased with a mortgage to achieve the American Dream.Gen Z--the cohort of Americans born between 1996 and 2015, is nearly 74 million strong. They're between four and 24 years old, so the oldest Gen Z'ers are out of grad school and starting their careers. They're also buying houses—and in greater numbers than the Millennial generation that precedes them. Why are the youngsters out buying houses when their older siblings are happy to rent?

Age is one factor--they're too young to remember the brunt of the recession. What they do have ingrained in their collective psyches is careful attention to money: how it's saved and how it's spent. This is evident in student loan debt--Gen Z'ers are choosing less expensive colleges, so their debt isn't nearly as crushing. They're also financially savvy and saving for retirement as soon as they land jobs--if not sooner. 

What Generation Z Definitively Wants in a Home

This is the generation that grew up on HGTV and Lifetime, so buying a "project" for their first home isn't a daunting prospect. In fact, they think that anybody with a tape measure and a crowbar can renovate a house. Thus, they're more than willing to take on the houses that need a lot of TLC, those fixer-uppers are like catnip to a kid fresh out of college. 

Gen Z homebuyers are definitive about what they want--great deals. In December 2019, the median price a Gen Z buyer paid was $160,000--that's 37% less than millennials, who paid an average of $248,000 in June 2019. 

What's the takeaway here? Gen Z buyers are risk averse. They aren't going to buy at the top of the market, and they're not going to buy a house they can't afford. Again, they were young when the recession hit full force, but they understand the lessons: don't overbuy and take out adjustable-rate mortgages. Further, they are reluctant to buy in areas where the property values are likely to decrease. 

Gen Z'ers Aren't Buying Directly in Urban Areas 

A Gen Zer working from home she purchased with a mortgageCities and close-in suburbs are the most expensive places to buy, so Gen Z'ers, who work remotely more often than not, look to smaller towns for their first home purchase. Their mindset seems to be, "if I can get Whole Foods to deliver, I don't need to be five minutes away". These kids grew up with the internet, so shopping for a new town via social media is perfectly normal. Some small towns are experiencing a renaissance of young homeowners, boosting the local housing market and economies.

Some may wonder how a generation this young is already able to close on mortgage because it is believed that a mortgage requires a down payment of 10-20%. However, an FHA mortgage offers a lot of flexibility and lower down payments, which makes it a great option for first-time homebuyers. 

Take Advantage of an FHA Home Loan to Buy Your First Home

The original FHA loan program was unique in that a borrower only had to put down 20% to get the mortgage. Times change, and 20% down on house is a huge chunk of change that makes homeownership out of reach for most first-time buyers. Fortunately, FHA has lowered the required minimum down payment to a mere 3.5%, something that is easily attainable for even the youngest Gen Z buyer.

FHA sweetens that offer two ways. The down payment money can be a gift, and your closing costs can be paid by the seller, and that money too can be gifted to you. 

Here are some of the FHA guidelines make home buying a possibility for Gen Z'ers. There are three basic factors an underwriter considers when they're reviewing a loan application--employment, credit, and debt. 

Employment 

Don't think you can't qualify for a home loan just because you haven't had your job for two years. With an FHA mortgage, you may even be able to get financing with a written offer, as long as you start work within 60 days of closing. 

Low Down Payment

FHA guidelines let you buy a house with as little as 3.5% down. That's only $5,621 on that median $160,600 home, or roughly 900 venti lattes. 

Generous Credit Requirements

One of the disadvantages of youth is that you haven't had the time to build up a strong credit file, and you may not have a strong credit score yet. Or you had some youthful indiscretions with a credit card in college that hit your limited profile pretty hard. FHA accepts scores as low as 600 for that 3.5% down payment, and even lower when you can put more down. 

Flexible Debt Ratios

FHA also provides a higher debt ratio than conventional lenders, up to 45% in some cases. Your debt ratio is the calculation of your monthly obligations--car payment, credit card, student loans, and any other monthly debt you carry--divided by your gross monthly income. If your income is $3500 per month, FHA allows you $1575 in monthly debt. This number does include your house payment.

Competitive Interest Rates

FHA offers very competitive interest rates, especially when you consider the overall guidelines of the program. Most borrowers opt for the 30-year fixed-rate loan. 

Overall Payment Structure

The base of any mortgage payment is Principal and Interest (PI). When you calculate a mortgage payment on your own, this is the number you probably get. Then there is a monthly premium for your homeowner's insurance and real estate taxes (TI). When you see a payment that your loan officer calculates, you'll see PITI noted by that amount. 

Additionally, if you put down a minimum amount, you'll pay a Mortgage Insurance Premium (MIP) every month, usually between .45 and 1.05% of the loan amount. Assuming you bought a house for that $160,600 and put down the minimum 3.5%, your MIP adds about $8 a month to your payment. 

Find a Mortgage to Help Jump-Start Your American Dream

Buying a house is completely within your reach. At PrimeWay, we're here to educate you on the home buying process so that you are ready to buy a home a lot sooner than you ever thought possible. 

About the Author

Chad Carpenter


chad-carpenter

Look up digital marketing master in the dictionary and you will see Chad’s face. Chad has more than 18 years of digital marketing experience, including several years in the agency world. When he’s not clacking away on his keyboard optimizing PrimeWay’s digital presence, Chad enjoys good food, good friends and good movies (just don’t expected him to watch any in interactive 4D). Chad has two cats, one that loves him and one who is aloof.