Written By: Joel Palmer, Op-Ed Writer
A pair of recent reports by the Urban Institute show that mortgages are taking up a greater share of people’s budgets. There also remain barriers to assessing homeownership for low and middle-income people.
The institute’s monthly Housing Finance at a Glance for September showed:
•The monthly payment on a median priced home would take up nearly 23 percent of the U.S. median income, assuming a family made a 20 percent downpayment. If the downpayment was 3.5 percent, the monthly payment would take up 26.4 percent of median income. These percentages are comparable to the peak housing boom period of 2001-2003. By comparison, at the bottom of the recent housing crisis in 2011, one could spend 16.7 percent of the median income on a mortgage payment.
•The use of adjustable rate mortgages have fallen in half in the last five years. ARMs accounted for 12 percent of new originations in 2013. In July 2018, that percentage had fallen to 6.4 percent.
•On the flip slide, 15-year fixed loans are accounting for more new purchase mortgages. The 15-year fixed-rate mortgage accounts for 7.5 percent of new originations in July 2018.
•The Housing Credit Availability Index (HCAI), which assesses lenders’ risk tolerance and credit availability, increased for the third quarter in a row and to its highest level in five years. “This increase continues to be driven by the credit expansions within both the GSE and government channels, thanks to higher interest rates and lower refinance volumes,” read the report.
The institute’s Barriers to Accessing Homeownership report shows that the mortgage industry could do more to educate first-time buyers about low-downpayment assistance programs.
“With rising home prices, rising interest rates, and tight lending standards, the path to homeownership has become more challenging, especially for low-to-median-income borrowers and potential first-time homebuyers,” read the report. “Yet most potential homebuyers are largely unaware that there are low– down payment and no–down payment assistance programs available at the local, state, and federal levels to help eligible borrowers secure an affordable down payment.”
A survey of both renters and homeowners show only 12 to 13 percent believe a 5-percent downpayment is enough to buy a home. Likewise, 30 percent of homeowners and 39 percent of renters believe they need at least a 20 percent downpayment to get a mortgage.
In addition to ignorance of downpayment requirements, potential buyers are also hamstrung by credit standards, with access remaining “tight by historic standards.”
According to the report, the median credit score of new purchase mortgage originations has increased considerably since 2008. The median credit score for purchase mortgages is 738 as of April 2018. Before the crisis, in 2005 and 2006, median credit scores were between 696 and 705. Borrowers with lower credit scores are more heavily concentrated in the FHA channel.
On a positive note for potential buyers, requirements for debt-to-income ratios have loosened in recent years, with ratios drifting up since 2013.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.