For many, the path to becoming a first-time homeowner is an uphill climb. Student debt, low wages, high housing prices, and massive down payments can mean putting home-owning dreams on the back burner. But a new report provides a flicker of light for wannabe home buyers: It’s getting pretty easy to land a mortgage again, regardless of these hurdles.
People with higher levels of debt are getting approved for mortgages—and with lower down payments, too, says a new analysis from Core Logic, a real estate data and analytics firm. The study states that 20 percent of all conventional conforming mortgage loans (aka the ones that can be purchased and guaranteed by the federally-owned mortgage companies Fannie Mae and Freddie Mac) are now going to traditionally “risky” borrowers (or those with large income-to-debt ratios of 50 percent). Additionally, conventional purchase loans with a down payment of less than 5 percent (compared to the standard 20 percent down) are now making up 9 percent of all these loans, compared to just 2 percent in 2014.
Now, if you’ve already paused at the word “easy mortgage,” don’t necessarily think we’re gearing up for another great economic disaster (thought experts have said there could be a new recession coming in the next couple of years). If you remember the Great Recession of 2008 (or you’ve recently streamed “The Big Short” on Netflix), you know these easy mortgages were one major cause in millions of people losing their jobs, banks needing bailouts, and stock markets across the globe crashing.
Unlike the time leading up the to 2008 recession, today’s borrowers must provide full documentation of their income and ability to repay the loan. The study also states that the average credit score for homebuyers to get a mortgage remains at 755—unchanged in the past year. This means that they’re fiscally responsible candidates, they just might have a little more risk than the banks have previously been comfortable with.
This may have something to do with the overall housing market slowing, too. It seems to be that the banks are realizing that there aren’t that many viable mortgage candidates left that can hit all the marks. So if they want to keep selling mortgages (and profiting off of them), they’re going to loosen up their restrictions. Still confused? Think of it this way, with a Tinder metaphor: For the past decade or so, banks have been mostly swiping right on objective hotties. But they’ve done that for so long that their Tinder feeds are now only showing still conventionally attractive, very date-abe people (the horror). Now, while they’ve usually swiped left on these people, they’re all of a sudden DTF (down to finance, that is).
Now, before you jump into a big bank’s king-sized bed, you need to ask whether this is financially beneficial for you, too. Easier mortgages are still fraught with risk, so it’s important to look at your financial situation before you decide to go out and apply for a mortgage.
For those who can afford the monthly mortgage, but not so much a 20 percent down payment, these smaller down payment mortgages might not be worth it, regardless if it’s “easy” or not. “It does call into question how much of a safety buffer exists,” says Douglas Boneparth, president of Bone Fide Wealth, a financial advisor firm geared towards millennials. If the mortgage you can now be approved for would max out your monthly budget or come at risk of adding money to your long term savings, you should probably keep renting.
Whitney Morrison, a certified financial planner in Austin, Texas, echoes this statement, noting that even if your monthly mortgage payment is lower than rent in your area (and you have a low down payment), it will still take, on average, between two and four years (and more than 18 years in places like New York City) to break even on a home. That means when you factor in the down payment, closing costs, taxes, and other fees, your overall monthly cost, coupled with the equity you’ve appreciated, only actually becomes equal to renting after a couple of years (or maybe even decades). In short, if you’re looking for a way to save money on housing, these easy mortgages aren’t exactly an easy way to save cash.
But, as with anything financial, there is no one-size-fits-all answer: A lower down payment mortgage could be a great thing for you, especially if owning a home is a priority. If you have enough money in the bank and would prefer not to fork over more of your cash to the bank for a low-rate mortgage, then it would make sense to take advantage of one of these easier mortgages, says Boneparth. If homeownership is not your main priority—but you’re interested in a long-term investment that will pay dividends, there might be better options for you out there.
So what’s the final answer to the question, “Easy Mortgages: Good or Bad?” TLDR: It largely depends on your particular situation and priorities, and you may want to talk to a financial planner about your options.