Home affordability and mortgages

There are 37 million potential homebuyers in the U.S. who have the credit characteristics to qualify for a home and yet don’t have a mortgage, according to Freddie Mac, the agency dedicated to increasing affordable housing in the U.S. A lack of education on the variety of mortgage options available could be what’s holding them back.

For example, many homebuyers are able to purchase a home with as little as 3% down, yet a common myth is that most loans require a 20% down payment. It’s a daunting difference – according to data from Freddie Mac, it would take most Americans between 2-4 years to save for a 3% down payment versus 14-24 years to save for a 20% down payment.

“If I were in the market today as a first-time homebuyer with the misconception that I need a 20% down payment, I may be pessimistic of making the dream of homeownership possible for me,” says Carmen Mercado, Senior Affordable Lending Manager for Freddie Mac. “However, if I knew that I could purchase a home with a 3% down payment, I would be more optimistic and excited about working with an agent on this journey.”

Below, Mercado shares her thoughts on how first-time homebuyers can overcome affordability barriers and why it’s important to increase opportunities for homeownership.

What role does affordability play in homeownership in the U.S?

CM: Affordability is an issue across the U.S., especially in high-cost markets. It is increasingly challenging for low- to moderate-income buyers to afford a home as they are priced out of their own communities. The limited available inventory and high demand is causing multiple offers above asking price, enough to outprice many buyers based on their income and DTI ratios. According to recent data, home prices have risen at twice the rate of wages. That dynamic has created market conditions that make it extremely hard for families to find affordable housing in the same communities where they can find jobs.

Can you describe some of the obstacles that keep prospective homebuyers from being able to save for a down payment?

CM: The increase in rental prices is a contributing factor, making it harder for individuals to save enough money for the down payment and closing costs needed to buy a home. Student loan debt can also be a barrier, but I must note that this number is lower than many perceive. Data shows that only 10% of the U.S. population has student debt. There is also the myth that it’s necessary to have a 20% down payment. In fact, contributing to this myth are the many online mortgage calculators consumers use that default to a 20% down payment. Homeownership is more within reach than many think – buyers can call or visit a Freddie Mac Borrower Help Center in their local area or reach out to a mortgage professional of their choice to obtain information about affordable products and down payment resources. Many can purchase a home with a 3% down payment or less, depending on the down payment resources and programs available.

Why is increasing the affordability of homeownership important?

CM: Homeownership is key to building wealth and provides additional benefits, such as community engagement. Homeowners also contribute to local businesses and bring stability to the household. Addressing affordability also speaks to the gaps in homeownership for many underserved communities.

What does it mean for someone to be “mortgage ready”?

CM: Based on Freddie Mac data, “mortgage ready” is defined by those within the U.S. population who are under the age of 45 that are “mortgage visible” – meaning they have established credit and haven’t applied for a loan, but if they did they would most likely qualify based on the definition of having a FICO® score of 620 or higher, and no late payments or delinquencies over 120+ days. These are buyer transactions that real estate agents could secure if they proactively educate and market to future borrowers.

What do you think keeps these individuals from becoming homeowners and how can real estate agents help?

CM: Affordability, increasing home prices and housing inventory shortage can discourage many buyers in addition to down payment myths and a lack of knowledge about the homebuying process. Real estate agents can help by being proactive and targeted with their promotional materials to help educate and assist first-time homebuyers through the process.

How can supporting “mortgage ready” buyers help increase diversity in homeownership?

CM: Looking at the “mortgage ready” population based on Freddie Mac research criteria and not underwriting requirements, you can see that within the diverse markets there are over 15 million “mortgage ready” buyers (though it’s important to note, this is based on pre-COVID data). If you factor in millennials, which are the most diverse group, the impact on homeownership within the diverse communities would significantly help close the gaps we see today. While there are deep housing affordability challenges that continue to plague low-income and middle-class families of all racial and ethnic backgrounds, Freddie Mac is providing greater access, liquidity and affordability to the housing finance system, expanding options to help families move safely from renting to sustainable homeownership and making sure existing minority homeowners can maintain their homes and preserve housing-related wealth. All of which are critical components to building equity and inclusion in our society.

Why is homeownership important for stability and building wealth?

CM: If a mortgage ready buyer purchases a home versus rents a home, they can start building equity, which translates into building wealth and in many instances generational wealth that can be transferred over to future generations. Renting is an important part of the industry and many times is a stepping stone toward homeownership. If a buyer can pay toward a mortgage that is building wealth for their family, that often is a better option. However, buyers must be prepared for the responsibilities that come with owning their own home. Owning your home provides more financial stability because mortgage costs are generally fixed while rents tend to rise with inflation.

What are some things that can be done to help end the obstacles you’ve described? What are some programs that first-time homebuyers may be able to take advantage of?

CM: It truly starts with education. Real estate agents are many times the first point of contact for buyers, and can provide a wealth of information to the homebuying process with resources such as: o Loan products including Freddie Mac Home Possible® or HomeOneSM, which address down payment barriers by requiring only a 3% down payment. o Discussing down payment resources that are available to help address affordability issues and sharing links with prospective buyers to apply for these resources. o Leveraging resources such as CreditSmart®Homebuyer U and My Home by Freddie Mac® to educate consumers in their market. Agents can become certified CreditSmart® instructors and can use this curriculum to reach out to local employers and offer ongoing financial literacy courses, placing themselves as the local resource and building their business. It’s a win-win situation. Sharing this valuable information on their social media platforms and website can make a big difference for many homebuyers that may be on the sidelines.

Creating more hope for homeownership

Creating more hope for homeownership is one of the goals of a new training initiative by RE/MAX, created in partnership with Freddie Mac. Later this year RE/MAX will unveil a virtual program to help educate agents on low-down payment mortgages and other programs their clients may benefit from.

“RE/MAX was founded with the vision of achieving homeownership for all,” says Mike Reagan, RE/MAX Senior Vice President, Global Growth and Development. “The new initiative to educate agents on more affordable pathways to homeownership will empower agents to be a trusted guide for first-time homebuyers. This program will help us expand the benefits of homeownership to a larger group than ever before.”

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Home affordability and mortgages

AFFORDABILITY

Creating more hope for homeownership

Derek Sunderland

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