Rich Buyer, Poor Buyer. When Mortgage Lenders Give Away Money, Who Gets It?

U.S. Treasury Secretary Scott Bessent recently declared that we’re getting past the “K-shaped economy.” In a K-shaped economy, lifestyles get better for those at the top, while others’ financial situations wilt. One segment of the population keeps climbing; the other keeps slipping.

Pushing back at suggestions that the economy is returning to a balanced state, Realtor.com® insists that the class divide in U.S. housing is serious. Senior economist Jiayi Xu says the people looking for starter homes are sidelined. Interest rates are elevated. Inexpensive homes are hard to find. This is causing an “exodus of entry-level demand.” In short, we have a housing market that frustrates buyers of modest incomes.

The leading edge of the baby boom is turning 80. Seniors are passing their deeds along. And so, the supply of big-ticket homes has grown significantly over the past five years. Expensive home buyers are less concerned about interest rates. Many pay cash.

The picture painted by this economy? People who need starter homes are intimidated; luxury buyers are doing well. Looks awfully K-shaped.

Some Mortgage Lenders Are Giving Away Money

With many would-be buyers getting cold feet, lenders must work hard to get business. And feet are indeed cold in this economy. “Uncertainty brings fear of taking action, and because we’re bombarded with the kind of economic news that keeps people guessing, they are nervous about committing to a purchase,” real estate agent Victor Currie told Realtor.com.  

So, we continue to see large mortgage lenders offering borrower credits. Especially if you’re borrowing from a large bank, you might get assistance at closing, even if you never applied for it. Many of these offers are geared specifically for use with fixed-rate loans backed by Fannie Mae or Freddie Mac.

Here’s some of what you might encounter:

• There are big banks giving borrowers $7,500 or more in lender credits for closing costs, or $10,000 for the down payment. Example: the $10,000 Homebuyer Access® Grant, from Wells Fargo. This grant doesn’t have to be repaid and can be used in conjunction with other programs.

• Wells Fargo itself has an additional program: Wells Fargo Dream, which represents an extra $5,000 in assistance for the mortgage borrower paying for an appraisal or processing costs at closing. Other banks (Bank of America, PNC, and the like) normally have similar offerings today.

• Credits or grants are often based on a ZIP code or county that qualifies—regardless of the personal characteristics of the borrower. They can be based on a combination of the borrower’s earnings and location of the property.

• There may be surprise assistance that the borrower finds out about in the late stages of the lender’s approval process. This happens because the borrower is identified as qualified for the assistance through the underwriting phase.

• Look also for cash-back rebates, and for relationship-based loan discounts for people who already hold assets with the particular lender.

One of the big drivers of assistance is the federal Community Reinvestment Act. The law presses federally insured banks to meet the needs of local communities. To carry out their Community Reinvestment obligations, the banks allocate funds and must spend them. When a borrower meets certain criteria, presto! The assistance is applied.

Buying a house or condo? Have you looked into the grants for down payment assistance offered by your state? Many come with no strings attached.

What to Ask the Mortgage Company That’s Offering a Grant or Credit

Down payment grants are great! Closing credits are, too. Know that they’re out there. Acquiring a deed may not be as tough as it seems. And even if it’s not tough, you still might receive a contribution from the bank.

If you are presented with an addendum on your loan agreement that provides assistance with your closing:

• Ask which program is generating the assistance, so you can read up on the program and understand it.

• Ask the mortgage consultant for a statement confirming that there is no lien associated with the assistance, that your interest rate will be no higher, and that your cash to close is the same.

• Find out from your tax professional whether the assistance becomes taxable income. (A tax doesn’t make the assistance undesirable—but borrowers need to know their responsibilities.) In the paperwork you receive before you close, you should see information from the lender as to potential tax impacts, if any. An IRS form from the mortgage consultant might not show up until next year, when you’re preparing to file your federal return.

• Find out whether you’ll be expected to take a home buyer course. And if so, there’s no reason to be put off. These are free courses, quickly finished, and informative.   

• Ask whether you must live in your new home for a certain time to keep the funds.

While due diligence is vital at every stage of the loan approval process, none of this is meant to be critical of lenders’ assistance programs. Many are purely helpful, with no downside. Mortgage consultants are glad to offer money to their customers when it’s allocated and an applicant meets the criteria.

What Do You Think?

So, is the housing market “in balance”? Or have affordability seekers just thrown in the towel? Now you know about the down payment and closing cost assistance that banks will give out to somebody. And that could suggest that more seekers of affordable homes need to be out there, actively looking for good mortgage loans.  

Just five years ago, hopeful deed holders were out there, mainly populating the lower price band. The market seemed out of balance because so many people were actively seeking affordably priced homes.

Now, there’s not much activity in the lower price band. So, we’re getting more balanced, right? Well, the pushback against that view from Realtor.com seems more realistic. Hopeful deed holders don’t cease to exist just because they give up actively looking.

Bessent’s claim that the K-shaped economy is ending assumes household incomes and spending power are catching up. But consider this. If you are seeking a deed and earning $75K a year, only 23% of U.S. listings would be within your means. Could we call that a “balanced” market? No, it’s a market in which a whole lot of buyers feel discouraged and many just don’t go out to tour homes.

At least knowledge about lender credits and grants gives the disadvantaged buyer some hope. Remember, some of these grants go to top earners because the banks have to give them out. And those top earners have nothing holding them back from buying with a mortgage if they wish. So, they’re in the sights of banks with grants to give out. Now you know. Rather than trying to wait out an uncertain market, could it make better sense to find out what banks have to offer? As always, not financial advice…just an aspect to consider.