Home prices increased nearly 4% in 2019 and are forecasted to trend upward in 2020. While many speculate that market conditions will hinder millennial homeownership, millennials are beginning to harness unconventional financing options to make their home ownership dreams a reality. 

New studies from the Department of Veterans Affairs and National Association of Home Builders demonstrate that VA-backed mortgages, Federal Housing Administration (FHA) loans, and other unconventional financing methods are on the rise among millennials. 

These statistics also indicate a promising future for startups looking to disrupt the industry with new financing options for first-time homebuyers. In this installment of Qualia’s Ownership Series, we’ll look at home financing trends and how they are opening up new paths toward home ownership. 

Unconventional Home Financing on the Rise

According to the National Association of Home Builders, non-conventional forms of financing (as opposed to conventional mortgage loans) include “loans insured by the Federal Housing Administration (FHA), VA-backed loans, cash purchases, and other types of financing such as the Rural Housing Service, Habitat for Humanity, loans from individuals, state or local government mortgage-backed bonds.” Unlike conventional financing, alternative loans are designed for individuals who don’t meet conventional loan credit or income requirements.

According to the National Association of Home Builders, alternative financing for new-build homes is on the rise. Alternative financing comprised 28.6% (compared to 71.4% for conventional financing)  of new-home finance types this year. While the report did not deliver figures for the year prior, it did note that more buyers are leveraging these loan types than years past. 

The Department of Veteran Affairs revealed similar findings indicating that VA-backed loans are on the rise for all home types (not just new-builds). According to the VA’s study, the number of VA-backed loans increased 14% among millennial-generation veterans and active-duty military. 

Earlier this year, the Wall Street Journal reported that in 2018, unconventional mortgages reached a record high since the 2008 financial crisis. While many worry that this type of financing will yield similar catastrophic results as the housing bust, experts note that unconventional loans are much safer today and more highly-scrutinized than those in the early 2000s. 

Regardless of the potential implications of this trend, the statistics  help paint a bigger picture around the current home ownership landscape. Over the past few years, home prices have risen dramatically. At the same time, student loan debt among millennials has reached unprecedented levels. Despite the bleak outlook, millennials continue to view home ownership as an American dream worth pursuing. In fact, 79% of Americans say owning a home is a “hallmark of achieving the American dream” ahead of retirement, a successful career, and owning a car. 

New Home Financing Models Emerging 

Trends around alternative financing may be indicative of what many prospective homebuyers cite as the biggest barrier to ownership: the down payment. According to a Bankrate homebuyer survey, 41% of Americans say they cannot afford  the down payment associated with traditional home financing. 

New startups promise a future where prospective homeowners aren’t limited to FHA and VA-backed loans to avoid costly down payment constraints. Startups are beginning to make waves with new financing models that help renters turn their monthly rent dues into down payment installments on their home. For example, Divvy Homes and ZeroDown buy homes on behalf of their clients and then rent the homes to the clients. With each rent payment, the consumer slowly builds up equity on the home for an eventual purchase. 

What’s to Come?

Much like the iBuying model, startups like Divvy and ZeroDown are focusing their efforts in specific regions of the country right now. ZeroDown currently offers its service in the Bay Area and Divvy Homes offers its service in Atlanta, Memphis, and Cleveland. 

While these startups are currently limited in scale and are only beginning to see home purchases transpire from their rent-to-own offering, it will be interesting to see how their innovative finance options facilitate home ownership in the years to come. 

For more on the future of homeownership, join us at the Future of Real Estate Summit in Austin, Texas this January to hear from experts who are reimagining home ownership models. 

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