Smaller Down Payments/Easier Loan Qualifications Change Mortgage Market

Housing prices have soared dramatically in recent years, in virtually all markets around the U.S. and in major markets around the world. Shortages of inventory and low mortgage interest rates combined with the fact that investors purchased large numbers of homes to place on the rental market have driven housing prices higher and higher. At the same time, new household formation surged, as many young people moved out of their parents’ homes and purchased or rented houses. Through early 2022, massive numbers of existing homeowners refinanced their mortgages in recent months with 30-year loans at about 3% or less. However, this refinancing trend fell apart in mid-2022 when interest rates soared due to government efforts to tame very high inflation. Higher mortgage rates make it more difficult for buyers to afford to purchase a home due to higher monthly payments. This recent rise in mortgage interest rates led to a drop in home sales.

The Federal Reserve reported a total outstanding mortgage debt in the U.S. of $19.9 trillion in 2023 (both residential and commercial). Home ownership in the U.S. was estimated at 66.0% in early 2023, down from 66.6% of households at the end of 2020.

Both FannieMae and Freddie Mac offer mortgages with down payments as little as 3% of the home’s purchase price. FannieMae’s My Community Mortgage program is open to first time buyers with a minimum credit score of 620. Freddie Mac’s Home Possible Advantage mortgages are available to first time and other qualified borrowers.

Bank of America offers a mortgage product with down payments as little as 3%. The loans, which are backed in a partnership with FreddieMac and the SelfHelp Ventures Fund, are available to borrowers with a credit score of at least 660, higher than the Federal Housing Administration’s (FHA’s) requirement. Well Fargo also offers mortgages with down payments of as little as 3% to borrowers with credit scores as low as 620 (on a scale of 300 to 850).

Another trend offering relief to consumers with less than perfect credit is a rent-to-own program. Home Partners of America (www.homepartners.com) offers a lease with a right to purchase plan.

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