3% Down Mortgages... Yikes

Wells Fargo announced this week that it will launch a mortgage program where buyers will only need to put 3% down towards their home purchase. The institution argued that the current state of the real estate market has sidelined low to moderate income buyers. By easing strict credit policies in place since the Great Recession, more people will be given the opportunity to purchase their home through this new Wells Fargo program. The program also allows buyer’s down payment to come from gifts and community assistance programs and not from their savings account(s). The minimum FICO score to quality is 620, which is significantly lower than the average 750 on most loans issued today.

The new 3% loans will eventually be sold to Fannie Mae so Wells Fargo will still have to adhere to tighter underwriting policies in place. Buyers will likely need to show evidence of high monthly income to offset a credit score in the low 600s.

It is easy to cheer such a programs since it gives a whole new group of Buyers the opportunity to enter the real estate market. These low income consumers can now get a mortgage despite having a low credit score and no personal savings to put towards their down payment. I can’t help but cringe when I saw this headline today when I was browsing real estate news. The real estate market is robust right now with industry professionals and sellers benefiting from this golden period of high home values. In my opinion, we are on track towards another major market correction and those that will suffer the most, like last time, will be these low to moderate income families. The same families who were crushed in 2008-2012 will endure the same fate in this next cycle. And that's because they are buying houses that they really cannot afford.

The last two blog posts have made a dark, sober turn. Not even a picture included here to distract you, It is important to take a moment to reflect on the current state of the market. We’ll go back to Suzy Sunshine topics in the next few days.