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.
You’ve probably asked yourself lately: Is it even worth trying to buy a home right now?
With high home prices and stubborn mortgage rates, renting can seem like the safer choice right now. Or maybe your only choice. That’s a very real feeling. And perhaps buying today isn’t your best move; it’s not for everyone right away. You should only buy a home when you’re ready and able to do it, and if the timing is right for you.
But here’s the thing you need to know about renting.
While it may feel like a safer bet today – and in some areas might even be less expensive month-to-month than owning – it can really cost you more over time.
In fact, a recent Bank of America survey found that 70% of aspiring homeowners worry about what long-term renting means for their future. And they’re not wrong.
Owning a home may seem way out of reach, but if you make a plan now and steadily work toward it, homeownership comes with serious long-term financial benefits.
Homeownership Builds Wealth Over Time
Buying a home isn’t just about having a place to live – it’s a step toward building your future wealth.
Why? Home prices typically rise over time, which means the longer you wait, the more expensive it is to buy. And even in some markets where home prices are softening today, the overall long-term trend speaks for itself (see graph below):
And as home values rise, so does your equity when you’re a homeowner. That’s the difference between what your home is worth and what you owe. So, with every mortgage payment, that equity grows. Over time, that becomes part of your net worth.
Today, the average homeowner’s net worth is nearly 40X greater than that of a renter. That’s a shocking difference, and the dollars in the visual below don’t lie (see graph below):
And it’s one of the big reasons why Forbes says:
“While renting might seem like [the] less stressful option . . . owning a home is still a cornerstone of the American dream and a proven strategy for building long-term wealth.”
The Biggest Downside of Renting
So, short-term, why does renting feel like a simpler choice? Lower monthly payments, less responsibility, no strings attached. But long-term? It can sting.
For decades, while home prices have been rising, rent has gone up too. And while rent has held rather steady more recently, history shows the overall trend is up and to the right. That makes saving for a home more complicated than ever (see graph below):
That kind of financial uncertainty has a real impact. In the same Bank of America survey, 72% of potential buyers said they worry rising rent could affect their current and long-term finances.
Because rent doesn’t build wealth. It doesn’t come back to you later. It pays your landlord’s mortgage – not yours.
So, whether you rent or own, you’re paying a mortgage. The question is: whose mortgage do you want to pay?
Renting vs. Buying: What Really Matters
Think of it this way. Renting means your money is gone once you pay it. Owning means your payment builds equity – like a savings account you can live in. Sure, buying comes with responsibility. But it also comes with the kind of reward that grows over time. And that’s why you need a solid plan to get there.
As Joel Berner, Senior Economist at Realtor.com, explains:
“Households working on their budget will find it much easier to continue to rent than to go through the expenses of homeownership. However, they need to consider the equity and generational wealth they can build up by owning a home that they can’t by renting it. In the long run, buying a home may be a better investment even if the short-run costs seem prohibitive.”
Bottom Line
Renting may feel more do-able today. But over time, it could cost you more – without helping you build anything for your future.
If homeownership feels out of reach today, you’re not alone. And the first step toward getting out of the rental trap is to set a plan. Connect with an agent to set your specific goals and explore your options – so you’re ready when the time is right.
For 80 years, Veterans Affairs (VA) home loans have helped countless Veterans buy a home. But even though a lot of Veterans have access to this powerful program, the majority don’t know about one of its core benefits.
According to a report from Veterans United only 3 in 10 Veterans are aware they may be able to buy a home with no down payment with a VA loan (see visual below):
That means 7 out of every 10 Veterans could be missing out on a key homebuying advantage.
That’s why it’s so important for Veterans, and anyone who cares about a Veteran, to be aware of this program. As Veterans United explains, VA home loans:
“. . . come with a list of big-time benefits, including $0 down payment, no mortgage insurance, flexible and forgiving credit guidelines and the industry’s lowest average fixed interest rates.”
The Benefits of VA Home Loans
These loans are designed to make buying a home more achievable for those who have served. And, by extension, they also give their families the opportunity to plant roots and build equity in a home of their own. Here are some of the biggest advantages for this type of loan according to the Department of Veterans Affairs:
- Options for No Down Payment: One of the biggest perks is that many Veterans can buy a home with no down payment at all.
- Limited Closing Costs: With VA loans, there are limits on the types of closing costs Veterans have to pay. This helps keep more money in your pocket when you’re finalizing your purchase.
- No Private Mortgage Insurance (PMI): Unlike many other loan types, VA loans don’t require PMI, even with lower down payments. This means lower monthly payments, which can add up to big savings over time.
If you want to learn more, your best resource for all the options and advantages of VA loans is your team of expert real estate professionals, including a local agent and a trusted lender.
Bottom Line
VA home loans offer life-changing assistance, and a trusted lender and agent can help make sure you understand the details and are ready to move forward with a solid plan.
Do you know if you’re eligible for a VA home loan? Talk to a trusted lender who can help you see if you’d qualify.
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