Young People: Avoid Excessive Consumer Debt

Young people in the "Millennials" generation need to stop borrowing so much money for cars they can't afford and expensive vacations. These debts are keeping them from home ownership and ultimately may have a negative effect on their ability to generate wealth later on. The baby Boomers set a bad example or over extending themselves on credit and younger people would be wise not to follow them. Other economic factors that are in place now, make borrowing money on credit cards and other consumer debt far more dangerous than it was for the Boomers.

From the NAR:

Prospect of Homeownership for Millennials

Under QM regulations that took effect in January, one of the underwriting criteria for a loan to be originated as a Qualified Mortgage is that the borrower must meet a monthly debt to income ratio (DTI) of no more than 43 percent [2]. The monthly debt payments include recurrent debt obligations such as student loans, auto loans, revolving debts, and any existing mortgages not paid off before getting a loan [3].

The chart below ("Right") shows NAR Research’s calculations of the debt to personal income ratio for student debt, auto, and credit card debt with mortgage debt (red ) and without (blue) across age groups based on household debt and income data in 2012 [4]. Using income data for persons with at least an Associate degree, all age groups will meet the 43% DTI except for the “21 to less than 30 year old” group. For this age group, the monthly student, auto and credit card debt payments are about 30 percent of income. Now, with mortgage payments for a starter price home of $149,425 in 2012 at 10% down payment and a 30-year fixed term [5], the debt to income ratio (red) increases to 61 percent.