Lenders Cannot Afford to Ignore Affordable Lending

This piece originally appeared in the January 2024 edition of MortgagePoint magazine, online now.

The U.S. population is changing.

The Congressional Budget Office has reported that the nation’s population growth from 2023-2053 will be increasingly driven by immigration. So, it follows that, over the next few decades, U.S. demographics will be changing.

This means the borrowers the mortgage industry serves are also changing. The “average” borrower will not look the same anymore. Less people will have traditional credit scores, and less people will be familiar with the U.S. housing market and the options available to help them buy a home.

While this may sound like a challenge on the horizon, it is actually a viable opportunity. Lenders that want to be successful must acknowledge these changes and adapt. Not only will borrowers need more education than ever before, but lenders will also need to expand their affordable lending options to help reach more borrowers and keep their business moving for years to come.

Education
Affordable housing options can change the game for borrowers, but only if they are aware of them. There are many misconceptions about homebuying and homeownership today—especially regarding affordability. Most borrowers or other hopeful homebuyers believe that they must put 20% down to buy a home, some may think a 30-year fixed-rate loan is the only option, while others believe they need to have a perfect credit score in order to buy a home. However, none of these things are true, and today’s buyers have a range of options available to help them get into a home.

With so much confusion regarding what it takes to buy a home, lenders must take the time to educate their borrowers on their options and break down any misconceptions. With a changing population, lenders can expect to see more first-time homebuyers who, regardless of their background, will need some education on what they can afford, what the homebuying process looks like, the responsibility of owning a home, and the different options available to them for buying that home.

Affordable Options
So, what affordable options are available to them? There are many new and different products in the market that can help lenders get their buyers into a home. It is critical that lenders are not only fluent in these affordable options in the market, but that they start offering and promoting these products, as well.

• Down payment assistance: For those who don’t have equity in a previous property, down payment assistance helps them get started in the housing market. Down Payment Resource reported that 33% of declined applications were actually eligible for homebuyer assistance. This represents a huge opportunity to get more buyers into homes.
• Alternative credit scoring: Many hopeful buyers do not have a traditional credit history, either because they are young, new to the American financial system, or simply because they have not been educated on the importance of a credit score. Using rental history or other utility payments that are not usually reported to the credit bureaus can help demonstrate a borrower’s ability to repay, even when they lack a traditional FICO score.
• Manufactured housing: Today’s manufactured homes are not the mobile homes most people picture. Many resemble a traditional single-family home, while others take the shape of the ever-popular tiny homes seen on TV or social media. Manufactured homes are much more affordable than a site-built home, and help buyers build equity that they can use to move to a more traditional home down the road.
• Renovations: While many buyers, especially first-time homebuyers, may not be able to afford a move-in ready home in the neighborhood they want, there are still options. Borrowers can consider renovations as a way to help them create the best home that fits their needs. This is especially helpful when inventory is low. Picking the worst house in the best neighborhood can give them an affordable way to get into the market.
• GSEs: Fannie Mae and Freddie Mac have pilot programs for affordable options like these listed and participating can be a great way for lenders to start their affordable journey and reach new demographics in the process.

Industry Impact
Affordable lending is clearly a benefit for borrowers. It promotes diversity and helps close the homeownership gap that exists today. It also gives borrowers a gateway into the market so they can start building equity and moving up the homeownership ladder. It does not stop there, however.

Affordable products are also critical to individual lenders and the industry as a whole. As demographics change, lenders must keep up with their needs if they want to have a fresh pipeline of borrowers to serve. Branching into affordable lending not only helps grow business now but helps ensure their business will still be around in the years to come. Not only does affordable lending build a trusting relationship for repeat business, it also sets lenders up for additional refinances or referrals in the future.

As the “traditional” borrower changes, lenders must rethink their traditional lending strategy. Regardless of where the housing market goes, there will always be borrowers that need affordable options and the lenders that start broadening their affordable products now will help set the tone for the future of the industry.