A successful purchase mortgage loan is made when both parties to the loan — a lender and the homebuyer—are confident the buyer is ready for the financial responsibilities of homeownership. But do lenders and buyers always recognize that readiness.
The idea of mortgage readiness is explored in a
What Is a Mortgage Ready Buyer?
In a comprehensive analysis of the anonymous credit bureau records of 115.2 million Americans, Freddie Mac researchers evaluated homeownership potential based on detailed debt and credit information alongside demographics such as race and ethnicity, age, gender, and geographic location.
Examining non-borrowers aged 18-45, researchers determined mortgage readiness using the factors of debt, time to save, and affordability. They found, not surprisingly, that race and ethnicity play a role in each of these factors. For example, while 36% of non-Hispanic whites were considered mortgage ready, only 22% of Black Americans and 34% of Hispanic Americans fit that category.
Using basic credit standards, they segmented the study group into four categories:
- Mortgage Owners: Those that had a non-zero number of open mortgage-type tradelines reported in the previous six months as of January 2021. This group comprises 22% of the overall credit visible population ages 45 and younger.
- Mortgage Ready: Individuals that:
- Do not have a current mortgage
- Are 45 years old or younger
- Have credit scores of 661 or higher
- Have a back-end debt-to-income ratio not exceeding 25%
- Have no foreclosures or bankruptcies in the past 84 months
- Have no severe delinquencies in the past 12 months
- Near Mortgage Ready: Individuals that meet all of the above criteria but with credit scores between 600 and 660.
- Not Currently Mortgage Ready: Any consumer who doesn’t fall into either of the above categories.
They Have Debt, but the Composition of That Debt Matters
Mortgage ready doesn’t mean debt-free. For example, millennials, who make up the largest portion of the study group, carry a large amount of debt as a group. But how that debt shakes out in terms of consumptive versus investment debt is a better indicator of their debt management habits.
As the most
Furthermore, an analysis of the debt held by mortgage-ready consumers found that:
- Two-thirds have revolving trades (where credit card transactions are part of the revolving trade. Other examples include home equity lines of credit).
- More mortgage-ready consumers have auto loans than student loans across all races/ethnicities.
- Unpaid balance for student loan debt exceeds the unpaid balance for all other types of loans.
- Black consumers have the highest student loan debt.
- Hispanic consumers have the highest auto debt.
Additionally, auto loan payments are a significantly heavier burden than student loans across all groups when looking at how mortgage-ready consumers’ debt affects their month-by-month budgeting. Getting an auto loan to buy a car is a consumption debt while getting a student loan to acquire more education is an investment debt.
Good habits can help future borrowers be less burdened by consumption debt and transition into homeownership faster.
Overestimating What is Needed for a Down Payment
While debt and living in a high-cost area slow down saving for a down payment—particularly for minorities who have the added burden of lower average incomes and less help from family members—another barrier lives only in the mind of the potential borrower. An Urban Institute report states that
The researchers calculated the median time to save in years for each group for 20%, 5%, and 3% down payments. They did this by dividing the down payment amount needed on a median-priced single-family home in each U.S. county by the monthly saving amount based on the average monthly after-tax income of each race/ethnicity group and average personal savings rate of 7.5%.
With the time to save for a 20% down payment ranging from 16 to nearly 23 years for all groups, it is easy to see why they would become discouraged, but the lower down payment percentages would likely encourage the mortgage ready to keep saving. Some interesting findings among the groups:
- Hispanic Americans have the longest time to save not only because they have the lowest disposable income but also because they are highly concentrated in high-cost areas.
- Black Americans are less concentrated in high-cost areas so their saving time is similar to white Americans even though their median disposable income is lower.
- Asian Americans have the highest disposable income on average, but they still have the second-longest time to save because they tend to live in the country’s most expensive areas.
Targeting Borrowers with Consumer Education and Financial Capability
With an understanding of a borrower’s mortgage readiness profile, lenders and other housing professionals can better determine how to help more Americans get into homes. For example, high auto loan payments combined with the high rent in metro areas—where the majority of mortgage-ready consumers live—dramatically affects the time needed to save for homeownership. Also, down payment misconceptions and challenges, particularly for Hispanic and Black borrowers, can be a significant barrier to homeownership. As a result, lenders and other mortgage professionals should focus their efforts on educating future borrowers on:
- Good versus bad debt to become more
financially capable , includingcredit education to understand if they’re ready for homeownership. Low down payment programs for eligible borrowers.- Down payment assistance programs.
Savings match programs , such as automated savings paired with dollar matching.
With a better understanding of what it means to be mortgage-ready, lenders and other housing professionals can help borrowers overcome barriers to homeownership. By doing so, lenders and housing professionals can continue to build a pipeline of solid borrowers and become an integral part of the solution to get more Americans into homes.
