An innovative model for reducing gaps in homeownership
Buying a home can be daunting. First, you have to find the right home. Then, you have to find a bank that will give you a mortgage, and you have to make sure you can afford the monthly payments and upkeep. And last but not least, you have to come up with the dreaded down payment.
What if you don’t have a lot of savings and don’t have family members who can lend money to help you put down a significant chunk of change? Does that mean that you’ll be trapped in the rental world and never build equity in a home of your own? These are the challenges for many first-time homebuyers and low-to-medium-income families.
Our recent study of a homeownership support nonprofit in New Mexico called Homewise suggests there is an alternative way of providing sustainable homeownership to people who don’t have enough money for a large down payment.
A promising model to support homeownership
Through this model, Homewise issues two mortgages—the first is for 80 percent of the home’s value, and the second is for 18 percent.
The first mortgage is resold on the secondary market to raise capital for additional clients, and Homewise holds on to the riskier second mortgage so that the client pays only a 2 percent down payment while still eliminating the need for mortgage insurance. Homewise services both loans so that they can monitor loan performance on each and intervene early if there is a problem.
Homewise also offers a suite of other services including financial counseling, homebuyer education, real estate development, real estate sales, mortgage origination, and loan servicing, as well as an in-house incentivized savings program.
But isn’t this risky for Homewise? Doesn’t it lose money when families can’t pay their mortgage? Our results show that the answer is no, and that Homewise’s purchasers not only pay their loans just as well as other purchasers in their area, but they actually have lower delinquency rates than similar households buying apart from the program.
For every 100 home purchasers, clients purchasing homes through Homewise have 6.3 fewer 30-day delinquencies, 2.3 fewer 60-day delinquencies, 1.8 fewer 90-day delinquencies, and 1.1 fewer 180-day delinquencies in the first two years of their mortgage than a matched comparison group of purchasers.
This is likely because of the entire suite of services Homewise offers, which can help households purchase homes when they are ready, at prices they can afford, and without the additional monthly costs of private mortgage insurance.
An opportunity to break the wealth gap cycle
These results have implications not only for improving homeownership rates among households with little wealth, but also for reducing the race gap in homeownership.
Black families, on average, have less wealth than white families and are less likely to own a home. Low homeownership rates mean that less wealth is accumulated over generations. Models like Homewise’s could break the wealth gap cycle and help families who have been traditionally left out of homeownership purchase a home, build wealth, and help the next generation do the same.
With support from programs like Homewise, homeownership does not have to be only for families who have wealth built up from prior generations of homeowning. Ownership can be accessible to households who are otherwise ready but don’t have significant savings for a downpayment.
More organizations and lenders should consider models such as Homewise’s to break the cycle of lack of wealth and homeownership and increase the pool of sustainable homeowners.
A "for sale" sign hanging in front of a home in Atlanta on Jan. 26, 2016. Photo by John Bazemore/AP.