Credit Ratings and Closing Costs
This week we'll take a look at two items that affect every buyer--credit scores and closing costs. The former is becoming a difficult item for Millenials, while the latter is in the midst of a downward trend. Well, one out of two is not bad.
Millennials make up the largest percentage of the U.S. population and recently surpassed Generation X as the biggest portion of the labor force, but the younger generation’s credit score could be a factor that’s delaying or preventing more of them from entering the housing market.
In fact, Generation Y has the lowest credit score of all generations says a report from credit bureau Experian. The study says that millennials – defined here as 19- to 34-year-olds – have an average credit score of 625, below the national average of 667. The average millennial was $52,120 in debt, and that figure would be cut in half excluding mortgages.
Generation X doesn’t meet the national credit-score standard either, notching a 650. This age group was on average $125,000 in debt, and they too would owe about $26,000 were it not for mortgage payments.
Baby boomers and the greatest generation had the best average credit score, a combined 709. These generations were $87,438 in debt — right in line with the national average — and would be $19,217 in debt excluding mortgages.
When it comes to credit usage and debt, millennials and Generation X have diverged in a few key ways, Experian notes. Today, auto loans make up 14 percent of all new accounts opened by millennials. In 1998, car loans comprised just 1 percent of accounts opened by Gen Xers. Millennials are also slightly more reliant on student loans than the preceding generation, with 24 percent opening such accounts compared with 20 percent of Gen Xers when they were the same age.
Gen Xers, on the other hand, favor bank and credit cards. Nearly half – 46 percent – of new accounts opened by this age bracket were for bank cards compared with 27 percent for millennials. Gen Xers are also far more likely to use these cards frequently, carrying an average balance of $6,752, twice as much as millennials.
Millennials may just actually be taking a little longer to develop credit than previous generations, due in part to the tough economic conditions in which they came of age. Experian Vice President of Analytics and Business Development Michele Raneri said that while the numbers might indicate that millennials are financially irresponsible, they will have ample opportunities to build solid credit.
“The best way to do that is to understand credit before using it,” she said.
FICO offers a number of credit-education resources at its myFICO website, including tips for understanding and improving credit scores.
Good news for homebuyers: Closing costs have dropped 7.1 percent over the past year, falling from an average of $1,989 in 2014 to $1,847, according to a nationwide survey by Bankrate.com. Costs are slightly lower in California, averaging $1,834.
Bankrate.com requested good-faith estimates from up to 10 lenders in the nation’s largest cities for a hypothetical $200,000 mortgage for a single-family home, assuming a 20 percent down payment. Some highly variable costs were excluded, such as homeowner’s insurance, discount points, title insurance, and taxes, so the final charges on closing day likely would be considerably higher than the averages found in the survey results.
In the survey, average third-party fees rose nearly 22 percent, while origination fees fell by the same percentage. The jump in third-party fees may have been caused by inflation, Bankrate.com noted, while origination fees may have followed the decline in mortgage rates.
In California, the average $1,834 in closing costs included origination fees charged by the lender such as document preparation, broker/lender fees, and tax services, together averaging $937. Third-party fees, averaging $896, included an appraisal, attorney fees, a credit report, flood certification, inspections, postage, and surveys.
Nationwide, closing costs ranged from $1,613 in Ohio to $2,163 in Hawaii. The overall decline in costs followed two years of increases.
Bankrate.com’s survey results included a statement from nonprofit organization NeighborWorks America reminding borrowers that they can shop around for competitive closing costs.
“Compare the service you get, the reputation and the costs, along with the rate,” Marietta Rodriguez, vice president of national homeownership programs at NeighborWorks America said, “and then go with what you think will fit your needs the best after doing just a little bit of research.”
Borrowers will see changes in the mortgage and closing process in the months ahead as lenders adopt new regulations established by the Consumer Financial Protection Bureau (CFPB) under the 2010 Dodd-Frank Act. The regulations are intended to make the process more transparent, and one of the changes will combine four forms that borrowers get during the application and closing processes into two simpler documents.
The new forms had been scheduled to take effect Aug. 1, but the CFPB has delayed them until Oct. 3.