Lending Standards Are Not Like They Were Leading Up to the Crash

You might be worried we’re heading for a housing crash, but there are many reasons why this housing market isn’t like the one we saw in 2008. One of which is how lending standards are different today. Here’s a look at the data to help prove it. 

Every month, the Mortgage Bankers Association (MBA) releases 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. Take a look at the graph below of the MCAI since they started keeping track of this data in 2004. It shows how lending standards have changed over time. It works like this: 

• When lending standards are less strict, it’s easier to get a mortgage, and the index (the green line in the graph) is higher.

• When lending standards are stricter, it’s harder to get a mortgage, and the line representing the index is lower.

In 2004, the index was around 400. But, by 2006, it had gone up to over 850. Today, the story is quite different. Since the crash, the index went down because lending standards got tighter, so today it’s harder to get a mortgage.

Loose Lending Standards Contributed to the Housing Bubble

One of the main factors that contributed to the housing bubble was that lending standards were a lot less strict back then. Realtor.com explains it like this: 

“In the early 2000s, it wasn’t exactly hard to snag a home mortgage. . . . plenty of mortgages were doled out to people who lied about their incomes and employment, and couldn’t actually afford homeownership.” 

The tall peak in the graph above indicates that leading up to the housing crisis, it was much easier to get credit, and the requirements for getting a loan were far from strict. Back then, credit was widely available, and the threshold for qualifying for a loan was low.

Lenders were approving loans without always going through a verification process to confirm if the borrower would likely be able to repay the loan. That means creditors were lending to more borrowers who had a higher risk of defaulting on their loans.

Today’s Loans Are Much Tougher To Get than Before

As mentioned, lending standards have changed a lot since then. Bankrate describes the difference: 

“Today, lenders impose tough standards on borrowers – and those who are getting a mortgage overwhelmingly have excellent credit.”

If you look back at the graph, you’ll notice after the peak around the time of the housing crash, the line representing the index went down dramatically and has stayed low since. In fact, the line is far below where standards were even in 2004 – and it’s getting lower. Joel Kan, VP and Deputy Chief Economist at MBA, provides the most recent update from May:

“Mortgage credit availability decreased for the third consecutive month . . . With the decline in availability, the MCAI is now at its lowest level since January 2013.”

The decreasing index suggests standards are getting much tougher – which makes it clear we’re far away from the extreme lending practices that contributed to the crash.

Bottom Line

Leading up to the housing crash, 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. This goes to show, these are two very different housing markets, and this market isn’t like the last time.

One of the major questions real estate experts are asking today is whether prospective homebuyers still believe purchasing a home makes sense. Some claim rapidly rising home prices are impacting demand and, by extension, leading to the recent slowdown in sales activity.

However, demand isn’t the real issue. Instead, it’s the lack of supply (homes available for sale). An article from the Wall Street Journal shows this is true for new home construction:

“Home builders have sold more homes than they can build. Now they are limiting their sales in an effort to catch up.”

The article quotes David Auld, CEO of D.R. Horton Inc. (the largest homebuilder by volume in the United States since 2002), explaining how they don’t have enough homes for the number of buyers coming into their models:

“Through our history, to have somebody walk into our models and to tell them, ‘We don’t have a house for you to buy today’, is something that is foreign to us.”

Danielle Hale, Chief Economist for realtor.com, also explains that, in the existing home sale market, the slowdown in sales was a supply challenge, not a lack of demand. Responding to a recent uptick in listings coming to market, she notes:

“. . . if these changing inventory dynamics continue, we could see a wave of real estate activity heading into the latter part of the year.”

Again, the buyers are there. We just need houses to sell to them.

If the slowdown in sales was the result of demand waning, we would start to see home prices beginning to moderate – but this isn’t the case. As Mark Fleming, Chief Economist for First American, explains:

“There’s a lot of conversation around rising prices and falling quantity in the housing market, and there’s this concept, or this idea, that it’s a demand-side problem . . . . But, if demand were falling dramatically, we would actually see less price pressure, less home price growth.”

Instead, we’re seeing price appreciation accelerate throughout this year, as evidenced by the year-over-year percentage increases reported by CoreLogic:

• January: 10%

• February: 10.4%

• March: 11.3%

• April: 13%

• May: 15.4%

• June: 17.2%

(July numbers are not yet available)

There’s a shortage of listings, not buyers, and there are three very good reasons for purchasers to still be interested in buying a home this year.

1. Affordability isn’t the challenge some are claiming it to be.

Though home prices have risen dramatically over the last 18 months, mortgage rates remain near historic lows. Because of these near-record rates, monthly mortgage payments are affordable for most buyers.

While homes are less affordable than they were last year, when we adjust for inflation, we can see they’re also more affordable than they were in the 1970s, 1980s, 1990s, and much of the 2000s.

2. Owning is a better long-term decision than renting.

A recent study shows renting a home takes up a higher percentage of a household’s income than owning one. According to the analysis, here’s the percentage of income homebuyers and renters should expect to pay now versus at the end of the year.

While the principal and interest of a monthly mortgage payment remain the same over the lifetime of the loan, rents increase almost every year.

3. Owners build their wealth. Renters build their landlord’s wealth.

Whether you’re a homeowner or an investor, real estate builds wealth through growing equity year-over-year. If you own, your household is gaining the benefit of that wealth accumulation. Fleming says:

“The major financial advantage of homeownership is the accumulation of equity in the form of house price appreciation . . . . We have to take into account the fact that the shelter that you’re owning is an equity-generating or wealth-generating asset.”

Odeta Kushi, Deputy Chief Economist at First American, elaborates in a recent article:

“. . . once the home is purchased, appreciation helps build equity in the home, and becomes a benefit rather than a cost. When accounting for the appreciation benefit in our rent versus own analysis, it was cheaper to own in every one of the top 50 markets, including the two most expensive rental markets, San Francisco and San Jose, Calif.”

Today, that equity buildup is substantial. The National Association of Realtors (NAR) reports:

“The median sales price of single-family existing homes rose in 99% of measured metro areas in the second quarter of 2021 compared to one year ago, with double-digit price gains in 94% of markets.”

In 94% of markets, there was a greater than 10% increase in median price. That means if you bought a $400,000 home in one of those markets, your net worth increased by at least $40,000. If you rented, the landlord was the recipient of the wealth increase.

Bottom Line

For many reasons, housing demand is still extremely strong. What we need is more supply (house listings) to meet that demand.

Headlines matter. Right now, it’s hard to read about real estate without seeing a headline that suggests homes have become unaffordable for most Americans. In reality, there’s hard evidence that shows how owning a home is more affordable than renting in most parts of the country, as record-low interest rates are keeping monthly mortgage payments about 23% lower than the typical payment of 20 years ago. Despite the facts, misleading headlines persist, and they impact how hopeful homebuyers perceive the market.

In a recent survey by realtor.com, home shoppers indicated they were surprised by what they could actually afford when buying their first home. In fact, 47% discovered their budget was larger than they expected. George Ratiu, Senior Economist at realtor.com, explains:

“For first-time buyers, especially, the drop in the 30-year mortgage rate…has provided unexpected leverage. Lower rates allowed many buyers to stretch and buy more expensive homes while keeping their monthly budget the same.”

So why do these negative headlines that cast doubt on affordability continue to exist?

Most analysts only look at two of the three elements that make up the affordability equation: price and income. It’s true that incomes haven’t kept up with the price of houses. However, affordability is about the cost of the home, not just the price. For that reason, mortgage rates, the third element of the affordability equation, are important to consider.

For example, here’s the typical mortgage payment for assorted dates going back to 2000, as calculated by CoreLogic:

Outside of the housing crash (when short sales and foreclosures drove prices down), it’s more affordable to buy a home today when you consider all three elements of the affordability equation: price, income, and mortgage rate.

Bottom Line

Whether you’re a first-time buyer or a move-up buyer, don’t let the headlines scare you away from your dream of homeownership. Instead, connect with mortgage and real estate professionals to determine what you can afford and what’s available at that price. Like almost half of the buyers in the survey, you may be pleasantly surprised.

It seems you can’t find a headline with the term “housing affordability” without the word “crisis” attached to it. That’s because some only consider the fact that residential real estate prices have continued to appreciate. However, we must realize it’s not just the price of a home that matters, but the price relative to a purchaser’s buying power.

Homes, in most cases, are purchased with a mortgage. The current mortgage rate is a major component of the affordability equation. Mortgage rates have fallen by over a full percentage point since December 2018. Another major piece of the affordability equation is a buyer’s income. The median family income has risen by 3.5% over the last year.

Let’s look at three different reports issued recently that reveal how homes are very affordable in comparison to historic numbers, and how they have become even more affordable over the past several months.

1. National Association of Realtors’ (NAR) Housing Affordability Index:

Here is a graph showing the index going all the way back to 1990. The higher the column, the more affordable homes are:

We can see that homes are less affordable today (the green bar) than they were during the housing crash (the red bars). This was when distressed properties like foreclosures and short sales saturated the market and sold for massive discounts. However, homes are more affordable today than at any time from 1990 to 2008.

NAR’s report on the index also shows that the percentage of a family’s income needed for a mortgage payment (16.5%) is dramatically lower than last year and is well below the historic norm of 21.2%.

2. Black Knight’s Mortgage Monitor:

This report reveals that as a result of falling interest rates and slowing home price appreciation, affordability is the best it has been in 18 months. Black Knight Data & Analytics President Ben Graboske explains:

“For much of the past year and a half, affordability pressures have put a damper on home price appreciation. Indeed, the rate of annual home price growth has declined for 15 consecutive months. More recently, declining 30-year fixed interest rates have helped to ease some of those pressures, improving the affordability outlook considerably…And despite the average home price rising by more than $12K since November, today’s lower fixed interest rates have worked out to a $108 lower monthly payment…Lower rates have also increased the buying power for prospective homebuyers looking to purchase the average-priced home by the equivalent of 15%.”

3. First American’s Real House Price Index:

While affordability has increased recently, Mark Fleming, First American’s Chief Economist explains:

“If the 30-year, fixed-rate mortgage declines just a fraction more, consumer house-buying power would reach its highest level in almost 20 years.”

Fleming goes on to say that the gains in affordability are about mortgage rates and the increase in family incomes:

“Average nominal household incomes are nearly 57 percent higher today than in January 2000. Record income levels combined with mortgage rates near historic lows mean consumer house-buying power is more than 150 percent greater today than it was in January 2000.”

Bottom Line

If you’ve put off the purchase of a first home or a move-up home because of affordability concerns, you should take another look at your ability to purchase in today’s market. You may be pleasantly surprised!

There is a lot of uncertainty regarding the real estate market heading into 2019. That uncertainty has raised concerns that we may be headed toward another housing crash like the one we experienced a decade ago.

Here are four reasons why today’s market is much different

1. There are fewer foreclosures now than there were in 2006

A major challenge in 2006 was the number of foreclosures. There will always be foreclosures, but they spiked by over 100% prior to the crash. Foreclosures sold at a discount and, in many cases, lowered the values of adjacent homes. We are ending 2018 with foreclosures at historic pre-crash numbers – much fewer foreclosures than we ended 2006 with.

2. Most homeowners have tremendous equity in their homes

Ten years ago, many homeowners irrationally converted much, if not all, of their equity into cash with a cash-out refinance. When foreclosures rose and prices fell, they found themselves in a negative equity situation where their homes were worth less than their mortgage amounts. Many just walked away from their houses which led to even more foreclosures entering the market. Today is different. Over forty-eight percent of homeowners have at least 50% equity in their homes and they are not extracting their equity at the same rates they did in 2006.

3. Lending standards are much tougher

One of the causes of the crash ten years ago was that lending standards were almost non-existent. NINJA loans (no income, no job, and no assets) no longer exist. ARMs (adjustable rate mortgages) still exist but only as a fraction of the number from a decade ago. Though mortgage standards have loosened somewhat during the last few years, we are nowhere near the standards that helped create the housing crisis ten years ago.

4. Affordability is better now than in 2006

Though it is difficult to afford a home for many Americans, data shows that it is more affordable to purchase a home now than it was from 1985 to 2000. And, it requires much less of a percentage of your income today than it did in 2006.

Bottom Line

Today’s conditions are fundamentally different compared to a decade ago, the graphs above show that the market is much healthier than it was prior to the crash ten years ago. Though no one can know the future, the likelihood of a nationwide home price collapse is near nil for the foreseeable future.

Millennials.

They’re the generation of people born between the 1980s to early 2000s, or also called the Generation Y. Many stereotypes have influenced how they have been viewed by the public, including the typical assumptions that they jump from one job to another, that they couldn’t even save for a down payment, or that they overspend.

But the recent 2018 Better Money Habits Millennial Report by Bank of America says otherwise. “Millennials deserve more credit — both from themselves and from others — for their mindfulness when it comes to money and their lives, ” says Andrew Plepler, Global Head of Environmental, Social and Governance. This key takeaway is related to how millennials are saving and managing their money. And when it comes to saving, at least 33 percent of millennials prioritize saving towards buying their first home.

In the NAR Home Buyer and Seller Generational Trends Report 2017, it is expected that 66 percent of millennials will buy homes in the next five years. And while each generation is different, there’s no doubt that millennials have their own set of unique attitudes and preferences towards home buying.

“Millennials are shaping the market more than anyone realized,” says Jeremy Wacksman, Chief Marketing Officer at Zillow Group. According to the 2016 Zillow Group Report on Consumer Housing Trends, 50 percent of today’s US home buyers are under 36 or those who are called Millennials, which means they are shaping the future of real estate. They are having an impact on the industry through their growing influence on the market.

Here’s how the millennial generation is changing the real estate market:

1. They are tech-savvy researchers

More than any other generation, millennials prefer to approach the home buying process in a more digital fashion. The Zillow report further stated that the process of finding or selling a home is a much more collaborative process for them. They bring all available tools to the process, such as their smartphones, social media and online networks.

In the NAR Real Estate in a Digital Age 2017 Report, a whopping 99 percent of Millennials searched on online websites while looking for a home, compared to the 89 percent of Older Boomers and only 77 percent of the Silent Generation. At least 58 percent of millennials also found the home they decided to purchase on their mobile devices. They also rely on online customer reviews more than any other generations.

As they technically live in a world that is ruled by technology, real estate investors, firms, and even real estate agents need to boost their online presence in order to attract more millennial buyers and sellers.

2. They are very comfortable trusting a realtor when purchasing their home

Despite being the most tech-savvy home buyers, millennials were the number one buying group to purchase their home from a realtor. They might have done their research first before stepping into homeownership, but they are still very comfortable in trusting the experts. At least 92 percent of millennials purchased their home through a realtor, and 74 percent said they wanted help in understanding the purchase process. They value the personal experience and insights that only a top real estate agent can provide. Millennials expect real estate agents to become trusted advisers and strategic partners. Likewise, it might also be related to the fact that their age group had more difficulty handling paperwork and understanding the process than any other generation.

3. They want specific must-have features in a home

As the real estate sector becomes more focused on millennials as home buyers, the market is also focusing on what millennials specifically want in their homes.

Millennials mostly want to buy newly-constructed homes, rather than fix-uppers, to avoid dealing with renovations and other plumbing and electricity problems. Likewise, they also have specific features that they want in a home they purchase. Some of the features they prefer include a spacious kitchen and an open floor plan, a dedicated workspace for those who are working from home, energy efficient appliances, updated kitchen and bath, and new technology and smart home systems.

A unique study was also conducted by Northshore Fireplace in 2016 to know what millennial buyers are looking for in a home. The results have revealed millennials value these features most: new appliances, a large master bedroom, a 2-car garage, solar panels/energy storage, and a luxury kitchen.

Millennials are also most likely to choose a home that is located closer to their work, so they can save time and gas. At least 65 percent say convenient location to their job is the most important factor when choosing a neighborhood.

4. They are least likely to view homeownership as permanent

Only 11 percent of millennials said they view homeownership as permanent, compared to 37 percent of seniors and 29 percent of baby boomers. It was also revealed in the Bank of America 2017 Homebuyers Insights Report that 68 percent of millennial homeowners say their current home is only a stepping stone towards their dream home. They see the value in buying early but realize it may mean putting their dream home on hold for now. It also reflects the average of six years that millennials are keeping their home before selling, compared to 10 years for the rest of homebuyers. This trend can influence would-be buyers to purchase sooner.

5. They highly associate homeownership with the American Dream

This is probably one of the main reasons why they currently dominate the housing market. At least 65 percent of people aged 18-34 associated home ownership with the American Dream, more than any other age group. It is despite the fact that they wait longer to buy their first home compared to their older generations. Most of today’s home buyers are also redefining the so-called “starter homes,” which is now as large as the median homes for “move-up buyers.”

With all of the volatility in the stock market and uncertainty about the Coronavirus (COVID-19), some are concerned we may be headed for another housing crash like the one we experienced from 2006-2008. The feeling is understandable. Ali Wolf, Director of Economic Research at the real estate consulting firm Meyers Research, addressed this point in a recent interview:

“With people having PTSD from the last time, they’re still afraid of buying at the wrong time.”

There are many reasons, however, indicating this real estate market is nothing like 2008. Here are five visuals to show the dramatic differences.

1. Mortgage standards are nothing like they were back then.

During the housing bubble, it was difficult NOT to get a mortgage. Today, it is tough to qualify. The Mortgage Bankers’ Association releases a Mortgage Credit Availability Index which is “a summary measure which indicates the availability of mortgage credit at a point in time.” The higher the index, the easier it is to get a mortgage. As shown below, during the housing bubble, the index skyrocketed. Currently, the index shows how getting a mortgage is even more difficult than it was before the bubble.

2. Prices are not soaring out of control.

Below is a graph showing annual house appreciation over the past six years, compared to the six years leading up to the height of the housing bubble. Though price appreciation has been quite strong recently, it is nowhere near the rise in prices that preceded the crash.There’s a stark difference between these two periods of time. Normal appreciation is 3.6%, so while current appreciation is higher than the historic norm, it’s certainly not accelerating beyond control as it did in the early 2000s.

3. We don’t have a surplus of homes on the market. We have a shortage.

The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory which is causing an acceleration in home values.

4. Houses became too expensive to buy.

The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fourteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased and the mortgage rate is about 3.5%. That means the average family pays less of their monthly income toward their mortgage payment than they did back then. Here’s a graph showing that difference:

5. People are equity rich, not tapped out.

In the run-up to the housing bubble, homeowners were using their homes as a personal ATM machine. Many immediately withdrew their equity once it built up, and they learned their lesson in the process. Prices have risen nicely over the last few years, leading to over fifty percent of homes in the country having greater than 50% equity. But owners have not been tapping into it like the last time. Here is a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out over $500 billion dollars less than before:

During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owned was greater than the value of their home). Some decided to walk away from their homes, and that led to a rash of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. That can’t happen today.

Bottom Line

If you’re concerned we’re making the same mistakes that led to the housing crash, take a look at the charts and graphs above to help alleviate your fears.

Last March, many involved in the residential housing industry feared the market would be crushed under the pressure of a once-in-a-lifetime pandemic. Instead, real estate had one of its best years ever. Home sales and prices were both up substantially over the year before. 2020 was so strong that many now fear the market’s exuberance mirrors that of the last housing boom and, as a result, we’re now headed for another crash.

However, there are many reasons this real estate market is nothing like 2008. Here are six visuals to show the dramatic differences.

1. Mortgage standards are nothing like they were back then.

During the housing bubble, it was difficult not to get a mortgage. Today, it’s tough to qualify. Recently, the Urban Institute released their latest Housing Credit Availability Index (HCAI) which “measures the percentage of owner-occupied home purchase loans that are likely to default—that is, go unpaid for more than 90 days past their due date. A lower HCAI indicates that lenders are unwilling to tolerate defaults and are imposing tighter lending standards, making it harder to get a loan. A higher HCAI indicates that lenders are willing to tolerate defaults and are taking more risks, making it easier to get a loan.”

The index shows that lenders were comfortable taking on high levels of risk during the housing boom of 2004-2006. It also reveals that today, the HCAI is under 5 percent, which is the lowest it’s been since the introduction of the index. The report explains:

“Significant space remains to safely expand the credit box. If the current default risk was doubled across all channels, risk would still be well within the pre-crisis standard of 12.5 percent from 2001 to 2003 for the whole mortgage market.”

This is nothing like the last time.

2. Prices aren’t soaring out of control.

Below is a graph showing annual home price appreciation over the past four years compared to the four years leading up to the height of the housing bubble. Though price appreciation was quite strong last year, it’s nowhere near the rise in prices that preceded the crash.There’s a stark difference between these two periods of time. Normal appreciation is 3.8%. So, while current appreciation is higher than the historic norm, it’s certainly not accelerating out of control as it did in the early 2000s.

This is nothing like the last time.

3. We don’t have a surplus of homes on the market. We have a shortage.

The months’ supply of inventory needed to sustain a normal real estate market is approximately six months. Anything more than that is an overabundance and will causes prices to depreciate. Anything less than that is a shortage and will lead to continued appreciation. As the next graph shows, there were too many homes for sale in 2007, and that caused prices to tumble. Today, there’s a shortage of inventory, which is causing an acceleration in home values.

This is nothing like the last time.

4. New construction isn’t making up the difference in inventory needed.

Some may think new construction is filling the void. However, if we compare today to right before the housing crash, we can see that an overabundance of newly built homes was a major challenge then, but isn’t now.

This is nothing like the last time.

5. Houses aren’t becoming too expensive to buy.

The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fifteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased, and the mortgage rate is about 3%. That means the average homeowner pays less of their monthly income toward their mortgage payment than they did back then. Here’s a chart showing that difference:As Mark Fleming, Chief Economist for First American, explains:

“Lower mortgage interest rates and rising incomes correspond with higher house prices as home buyers can afford to borrow and buy more. If housing is appropriately valued, house-buying power should equal or outpace the median sale price of a home. Looking back at the bubble years, house prices exceeded house-buying power in 2006, but today house-buying power is nearly twice as high as the median sale price nationally.”

This is nothing like the last time.

6. People are equity rich, not tapped out.

In the run-up to the housing bubble, homeowners were using their homes as personal ATM machines. Many immediately withdrew their equity once it built up, and they learned their lesson in the process. Prices have risen nicely over the last few years, leading to over 50% of homes in the country having greater than 50% equity – and owners have not been tapping into it like the last time. Here’s a table comparing the equity withdrawal over the last three years compared to 2005, 2006, and 2007. Homeowners have cashed out almost $500 billion dollars less than before:During the crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owed was greater than the value of their home). Some decided to walk away from their homes, and that led to a wave of distressed property listings (foreclosures and short sales), which sold at huge discounts, thus lowering the value of other homes in the area. With the average home equity now standing at over $190,000, this won’t happen today.

This is nothing like the last time.

Bottom Line

If you’re concerned that we’re making the same mistakes that led to the housing crash, take a look at the charts and graphs above to help alleviate your fears.

Hello, World!

Get Ready To Buy a Home in 2025

If buying a home is on your goal sheet this year, there are things you need to do now to make it happen. But above all else, connect with a trusted agent and lender so you have expert advice every step of the way.

#homebuying #homebuyingtips #keepingcurrentmatters

Data Sources

• https://downpaymentresource.com/

• https://themortgagereports.com/68062/8-things-to-do-now-to-prepare-to-buy-a-house

While there’s certainly a huge debate on renting vs buying a home, no one could argue that it’s a major decision for many people. Some say renting is like throwing money down the drain and you’re just paying off someone else’s mortgage. Others insist that there’s no way they could give up their flexibility and be tied up in one place. 

If you’re finally thinking about taking the plunge into homeownership this year, how do you know that it’s time for you to take that leap? The decision on whether to rent or buy is a huge and costly endeavor, but you can always justify it based on logic and emotion. To help with your case, we’ve laid out seven signs you’re ready to make the switch from renter to homeowner.

 

1. Your rent payments keep going up.

Rents keep on escalating in many parts of the country, and this is one of the biggest reasons why any renter would want to buy a home. In some neighborhoods and real estate markets, the cost of renting is even higher than the average monthly mortgage of a single-family home. If you already feel trapped with the uncertainty of your rent payments, you might be better off purchasing a home where your mortgage is consistent, and you’ll be gradually putting equity into your biggest asset.

 

2. You have steady employment. 

Employment plays a huge role in the mortgage application process since lenders and mortgage companies take into account your employment history before approving you for a loan. Typically, they would want to see that you spent at least two years working for the same company or in a similar field, and that you’ll likely continue having the funds to pay your debt. If you’re a freelancer or a gig economy worker, you need to prove that you have a steady source of income for a couple of years through your W-2s, tax returns, and other documents. Just remember that for lenders, a stable job means a stable income, which lowers your risk as a borrower.

 

3. You’ve saved up for a down payment, closing costs, and other costs associated with owning a home.

 For many home buyers, the most difficult step in the home buying process is saving for a down payment, according to the 2019 NAR Profile of Home Buyers and Sellers. Setting aside money for a down payment towards their dream home is made even harder because of student loans and credit card debts. So if you have a stable job for a while now and your income has improved, there’s a better chance for you to save up enough extra money to cover up the added expenses of homeownership.

And remember that the 20 percent down payment requirement for you to qualify for a mortgage is already a myth. In fact, mortgage insured by the Federal Housing Administration, also known as FHA loans, require only 3.5 percent of the home’s purchase price. Meanwhile, government loans guaranteed by the U.S. Department of Veterans Affairs (VA Loans) and the U.S. Department of Agriculture (USDA Loans) require no down payment at all, so there’s no need to scrape all your money just to cover the 20 percent down payment if it means leaving zero balance in your savings. 

You know you’re ready to get the keys to your new home instead of renewing your lease if you have also saved up for closing costs and other homeownership expenses, such as property taxes, maintenance funds, and homeowner’s insurance.

 

4. You’re managing your debts.

It isn’t necessary for you to be totally debt-free when you apply for a mortgage. Loan companies simply need to make sure that you aren’t carrying too much debt compared to what you make, and that you’ll be able to afford to take on additional responsibility, such as your potential monthly mortgage payment. They do this by determining your debt-to-income (DTI) ratio, which measures how much of your monthly income goes toward paying off your debts. 

Lenders ideally prefer a ratio lower than 36 percent, but borrowers with no more than 43 percent DTI ratio can still get qualified for a home loan. Getting your debt down to a more manageable level will help put you in a stronger position to get pre-approved. Assess your spending habits even while still renting, and change them as much as possible to improve your chances of finally owning your first place.

 

5. Your credit score is in good shape.

One of the biggest reasons why renters can’t make the leap to owning a home is because of their low credit score. Having good credit matters because it will determine how much money you can borrow and how much you’ll pay in interest. A good FICO score is usually about 690 and higher, although borrowers with a credit score as low as 500 can already qualify for a mortgage depending on the loan program. 

When was the last time you’ve checked your credit report? If your credit is looking healthier because you’re making timely payments and settling your debts, you can have access to more conventional loan programs with lower down payments. Once you have addressed this important issue, you can rest assured that homeownership is now within your reach.

 

6. You’re ready to settle in a neighborhood you love.

This one’s quite subjective, but your preferred location and your capability to settle in one place are also huge considerations when buying your first home. If you anticipate moving in a few years, you know that you’ll only live in a particular area for a year or two, or you just can’t imagine yourself being tied down in one place, renting is likely your best option since you can leave whenever you want. Renting is also your smarter bet if you want to test out the waters in different areas where you’re thinking of buying a place. 

But once you’re ready to settle down in a neighborhood you love, you’re secured in your job, and that you can see yourself putting down roots in the next five years, purchasing a home is your next sensible step.

 

7. You’re ready to finally become a homeowner.

In the 2019 Home Buyers and Sellers Generational Trends Report by the National Association of RealtorsⓇ, 29 percent of all buyers cited their main reason for purchasing was the desire to own a home. Your readiness to become a homeowner matters above everything else. When you own a property, you’ll be in charge of all the repairs, maintenance, and upkeep costs. If you’re not comfortable with these tasks and you’d rather leave the problem to a landlord, you may be better off renting for longer. Many people simply prefer to rent instead of taking advantage of lower interest rates because of this reason.

If the idea of home maintenance no longer intimidates you, you actually enjoy fixing things up in your place, and you’re ready to stay for the weekends just to mow the lawn and do other yard work, these are signs that you’re finally ready to call a place your home. You know you’re ready for the huge responsibility that is homeownership and you’re ready to be your own landlord.