[PULSE] It's time to look at other qualification requirements for future homeowners

More and more low-income Americans are finding it harder to qualify for home loans and financing due to high qualification requirements. 

Typically, upper- and upper-middle-class Americans meet the sought-after criteria that banks require. However, the reality for low- or moderate-income Americans is oftentimes grim.

Jarred Kessler, Guest Author

Many need multiple jobs or contracted work to pay down student debt, mortgage balances, medical bills and credit card debt, causing an increase to their debt-to-income ratio and further rendering them undesirable by banks for home financing. 

To make matters more challenging for the average American, housing prices have soared, rising almost 7% year over year, according to a report by CoreLogic, and are only expected to continue rising at that rapid pace. 

The rate of increase is quickly narrowing the number of Americans able to afford a home at the current average wages and is one reason why more people are turning to alternative solutions to meet their housing needs such as renting.

A need for a new model

The number of middle-class Americans who have abandoned their mortgage for a monthly rent payment has skyrocketed. 

According to Freddie Mac’s latest survey, 82% of renters view renting as more affordable than homeownership with the number of homeowners sharing that perception also increasing.

Americans are now approaching decisions on housing differently, embracing the decision to rent over owning.

Over 60% of renters were earning middle-class incomes as of 2018, a 45% increase since 2010, according to a recent study by Harvard’s Joint Center for Housing Studies.

However, with the rental demand rising so quickly among the middle-class, the monthly rental costs are also rising quickly. With demand for rentals increasing so rapidly, the average rent nationwide has also gone up 36% over the last decade.

While the current rental market may work well for a high-income population, there still remains a huge percentage of the country that does not fit that mold.

The same Harvard study found that 62% of renters earned middle-class incomes between $30,000 and $75,000 but households need to earn $53,300 or more annually in order to afford a home. After paying rent each month, the median low-income household earning $15,000 in 2018 was left with a mere $410 left for remaining basic needs. 

As some Americans find it more challenging to qualify for home loans, due to issues such as stagnant wages, skyrocketing housing costs and FICO’s new scoring model, they are, in turn, becoming more comfortable with the idea of not owning a home.

Given this shift in mindset, the housing industry, across the board, will need to meet rising demand in a way that is accommodating and inclusive of the average middle-class American, such as looking beyond FICO score qualifications or eventually replacing FICO’s outlook completely.

These changes would go a long way to help the industry shift to a more thoughtful and inclusive system for all Americans, rather than one with sole reliance on FICO.

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