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Why Today’s Mortgages Aren’t the Same as 2006-2007

If you remember the Great Recession of 2008, you might be concerned about the current crazy housing situation and worried we’re in the midst of another bubble. 

The market is constantly evolving, but real estate is generally an excellent investment, even right now. But whether you’re ready to buy your dream home or a rental property, you’ll need to be prepared for much more rigorous lending standards than in the past, due to lessons learned from those events. 

Let’s explore the crucial differences between today’s market and the subprime mortgage quagmire of 06-07. 

Ancient history

Back in the mid-2000s banks made it ridiculously easy for just about anyone with a first and last name to qualify for a loan, regardless of their credit worthiness. (Don’t worry about Oprah, she does fine with just one name.) These subprime mortgages were a siren song to those with low or no credit scores who wouldn’t be approved for a conventional product.

Many hopeful buyers lacked the financial literacy to realize they were signing on to buy houses they couldn’t afford — or even worse, agreeing to sub-prime interest-only or “payment option” adjustable-rate mortgages (ARM) that they didn’t understand. 

While an ARM can potentially save you money over the life of your loan, the monthly payment fluctuates according to the interest rate. Between 2004 and 2006, the two Federal Reserve Chairmen raised the rate fourteen times, resulting in substantially higher rates in a relatively short amount of time.

Homeowners suddenly found that their mortgage payments had skyrocketed at the same time their property values plummeted, leaving people unable to pay for houses that they couldn’t sell for a profit. This unpleasant situation is known as being “underwater,” and it happened to millions of American citizens. Many lost their homes entirely.

The result was a flood of foreclosures and all of those previously lucrative securities bolstered by a frenzy of bad mortgages lost horrifying amounts of money. Money that came from people’s pension funds and retirement savings. Banks that were considered “too big to fail” did exactly that.

This triggered a disturbing global domino effect which hastened the Great Recession. 

Current events

While real estate prices are reaching record highs in 2022, today’s mortgage loan landscape is vastly different than it was 15 years ago. There are new regulations, lenders have changed their practices, and consumers face new challenges. 

The US has suffered a historic housing crisis in the two years since the pandemic, with the construction industry facing delays due to supply chain issues and a sharp rise in demand. While new listings surged in June by 19%, inventory still hasn’t reached the pre-Covid levels. 

In most major cities, a real estate shortage has resulted in escalating prices at a time when many are feeling the pinch of high prices paired with wage stagnation. 

But the housing environment has changed drastically since 06-07:

  • A major difference between now and then is that more Americans want to work remotely, and spend more time at home now as opposed to attending huge public events. People want more space for a home office or for entertaining friends and family outdoors. 
  • Technological advancements in the last fifteen years brought wifi connectivity and fiber optics to rural areas and underserved communities, allowing people to have more choices in where they decide to live and work.
  • Also, there’s been an increase in multigenerational households, according to a recent Pew Research report, as more young adults are staying close to alleviate financial burdens and aging relatives face the need for caregivers.
  • The DIY movement during the pandemic brought about renewed interest in restoring older homes, and special programs were developed to assist these buyers, such as Fannie Mae’s HomeStyle Renovation Loan and FHA 203(k) mortgages guaranteed by the government. 
  • The populace is substantially more educated now regarding financial health, saving, investing, and the real estate industry, thanks in part to easy-to-use mobile apps, online banking, and fintech.

The future is bright

Though it’s more difficult to get a conventional mortgage loan today than it was back in the old days, it’s still accessible to most Americans. Lenders are more regulated now, and borrowers need to meet minimum credit score requirements and be prepared to make at least a 3% down payment.

In this volatile market, sellers have the advantage, so if you’re serious about making a purchase, you should start by getting your financial documentation in order. Mortgage loan underwriters in this era typically require quite a bit of paperwork that confirms your: 

  • Identity
  • Debt-to-income ratio
  • Bank accounts
  • Employment records
  • Tax returns
  • Credit history
  • Additional assets

Once you receive your pre-approval letter, you can make a serious offer as soon as you find the home you love. 

It’s vitally important to work with a real estate team and a mortgage broker that is completely focused on your success. With in-depth local knowledge and years of experience, I can help you navigate the Chicagoland market and discover the perfect mortgage for your needs. Let’s talk!

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