For Buyers
There’s No Reason To Panic Over Today’s Lending Standards
Today, some are afraid the real estate market is starting to look a lot like it did in 2006, just prior to the housing crash. One of the factors they’re pointing to is the availability of mortgage money. Recent articles about the availability of low down payment loans and down payment assistance programs are causing fear that we’re returning to the bad habits seen 15 years ago. Let’s alleviate these concerns.
Several times a year, the Mortgage Bankers Association releases an index titled The Mortgage Credit Availability Index (MCAI). According to their website:
“The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit. The MCAI is…a summary measure which indicates the availability of mortgage credit at a point in time.”
Basically, the index determines how easy it is to get a mortgage. The higher the index, the more available mortgage credit becomes. Here’s a graph of the MCAI dating back to 2004, when the data first became available:
As we can see, the index stood at about 400 in 2004. Mortgage credit became more available as the housing market heated up, and then the index passed 850 in 2006. When the real estate market crashed, so did the MCAI (to below 100) as mortgage money became almost impossible to secure. Thankfully, lending standards have eased somewhat since. The index, however, is still below 150, which is about one-sixth of what it was in 2006.
Why did the index rage out of control during the housing bubble?
The main reason was the availability of loans with extremely weak lending standards. To keep up with demand in 2006, many mortgage lenders offered loans that put little emphasis on the eligibility of the borrower. Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to repay the loan.
Some of these loans offered attractive, low interest rates that increased over time. The loans were popular because they could be obtained quickly and without the borrower having to provide documentation up front. However, as the rates increased, borrowers struggled to pay their mortgages.
Today, lending standards are much tighter. As Investopedia explains, the risky loans given at that time are extremely rare today, primarily because lending standards have drastically improved:
“In the aftermath of the crisis, the U.S. government issued new regulations to improve standard lending practices across the credit market, which included tightening the requirements for granting loans.”
An example of the relaxed lending standards leading up to the housing crash is the FICO® credit score associated with a loan. What’s a FICO® score? The website myFICO explains:
“A credit score tells lenders about your creditworthiness (how likely you are to pay back a loan based on your credit history). It is calculated using the information in your credit reports. FICO® Scores are the standard for credit scores—used by 90% of top lenders.”
During the housing boom, many mortgages were written for borrowers with a FICO score under 620. Experian reveals that, in today’s market, lenders are more cautious about lower credit scores:
“Statistically speaking, 28% of consumers with credit scores in the Fair range are likely to become seriously delinquent in the future…Some lenders dislike those odds and choose not to work with individuals whose FICO® Scores fall within this range.”
There are definitely still loan programs that allow a 620 score. However, lending institutions overall are much more attentive about measuring risk when approving loans. According to Ellie Mae’s latest Origination Insight Report, the average FICO® score on all loans originated in February was 753.
The graph below shows the billions of dollars in mortgage money given annually to borrowers with a credit score under 620.
In 2006, mortgage entities originated $376 billion dollars in loans for purchasers with a score under 620. Last year, that number was only $74 billion.
Bottom Line
In 2006, lending standards were much more relaxed with little evaluation done to measure a borrower’s potential to repay their loan. Today, standards are tighter, and the risk is reduced for both lenders and borrowers. These are two very different housing markets, so there’s no need to panic over today’s lending standards.
Some Highlights
- Are you wondering what to expect if you buy or sell a home in the second half of the year? Here’s what the expert forecasts tell you.
- Mortgage rates are expected to come down slightly. There will be more homes available for sale. And as inventory rises, home price growth will moderate.
- Want to know what this could mean for your plans? Connect with a local agent and talk through it together.
Did you know? According to a recent study, 72% of people with student loans think their debt will delay their ability to buy a home. Maybe you’re one of them and you’re wondering:
- Do you have to wait until you’ve paid off those loans before you can buy your first home?
- Or is it possible you could still qualify for a home loan even with that debt?
Having questions like these is normal, especially when you’re thinking about making such a big purchase. But you should know, you may be putting your homeownership goals on the backburner unnecessarily.
Can You Qualify for a Home Loan if You Have Student Loans?
In the simplest sense, what you want to know is can you still buy your first home if you have student debt. Here’s what Yahoo Finance says:
” . . . student loans don’t have to get in your way when it comes to becoming a homeowner. With the right approach and an understanding of how debt impacts your home-buying options, buying a house when you have student loans is possible.“
And the data backs this up. An annual report from the National Association of Realtors (NAR), shows that 32% of first-time buyers had student loan debt (see graph below):
While everyone’s situation is unique, your goal may be more doable than you realize. Plenty of people with student loans have been able to qualify for and buy a home. Let that reassure you that it is still possible, even as a first-time buyer. And just in case it’s helpful to know, the median student loan debt was $30,000. As an article from Chase says:
“It’s important to note that student loans usually don’t affect your ability to qualify for a mortgage any differently than other types of debt you have on your credit report, such as credit card debt and auto loans.”
If your income is steady and your overall finances are solid, homeownership can still be within reach. So, having student loans doesn’t necessarily mean you have to wait to buy a home.
Bottom Line
Having student loans doesn’t mean buying a home is off the table. Before you count yourself out, talk to a lender to get a clearer picture of what you can afford and how close you are to taking the first step toward homeownership.
Especially in areas where inventory is rising, both homebuilders and sellers are sweetening the deal for buyers with things like paid closing costs, mortgage rate buy-downs, and more. In the industry, it’s called a concession or an incentive.
What Are Concessions and Incentives?
When a seller or builder gives you something extra to help with your purchase, that’s called either a concession or an incentive.
- A concession is something a seller gives up or agrees to in order to reach a compromise and close a deal.
- An incentive, on the other hand, is a benefit a builder or seller advertises and offers up front to attract and encourage buyers.
Today, some of the most common ones are:
- Help with closing costs
- Mortgage rate buy-downs (to temporarily lower your rate)
- Discounts or price reductions
- Upgrades or appliances
- Home warranties
- Minor repairs
For buyers, getting any of these things thrown in can be a big deal – especially if you’re working with a tight budget. As the National Association of Realtors (NAR) says:
“. . . they can help reduce the upfront costs associated with purchasing a home.”
Builders Are Making It Easier To Buy
It’s not just one builder willing to toss in a few extras. A lot of builders are using this tactic lately. As Zonda says:
“Incentives continued to be popular in March, offered by builders on 56% of to-be-built homes and 74% of quick move-in (QMI) homes, which can likely be occupied within 90 days.”
That’s because they don’t want to sit on inventory for too long. They want it to sell. And according to the National Association of Home Builders (NAHB), one of the strategies many builders are using to keep that inventory moving (and not just sitting) is a price adjustment (see graph below):
Around 30% of builders lowered prices in each of the first four months of the year. While that also means most builders aren’t lowering prices, it also shows some are willing to negotiate with buyers to get a deal done.
This isn’t a sign of trouble in the market, it’s an opportunity for you. The fact that the majority of builders offer incentives and roughly 3 in 10 are lowering prices means if you’re looking at a newly built home, your builder will probably try to make it easier for you to close the deal.
Existing Home Sellers Are Offering More, Too
More existing homes (one that someone has lived in before) have been hitting the market, too – which means sellers are facing more competition. That’s why over 44% of sellers of existing homes gave concessions to buyers in March (see graph below):
And, if you look back at pre-pandemic years on this graph, you’ll see 44% is pretty much returning to normal. After years of sellers having all the power, the market is balancing again, which can work in your favor as a buyer.
But remember, concessions don’t always mean a big discount. While more sellers are compromising on price, that’s not always the lever they pull. Sometimes it’s as simple as the seller paying for repairs, leaving appliances behind for you, or helping with your closing costs.
And considering that home values have risen by more than 57% over the course of the past 5 years, small concessions are a great way for sellers to make a house more attractive to buyers while still making a profit.
Bottom Line
Whether you’re looking at a newly built home or something a little older, there’s a good chance you can benefit from concessions or incentives.
If a seller or builder offered you something extra, what would make the biggest difference to help you move forward?
Connect with an agent to talk about it and see if it’s realistic based on inventory and competition in your local market.
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