AUSTIN (KXAN) — It’s becoming increasingly difficult for many Texans to qualify for a mortgage loan.
New research from the Texas A&M’s Real Estate Research Center (TRERC) indicates the federal reserve’s announcement to raise interest rates will affect low-income and first-time homebuyers the most.
“The federal funds rate had previously hovered between 0% and about 0.25%. So now it will hover between 0.25% and 0.5%,” explained assistant research economist at TRERC Clare Losey. “And why that is important is because the fed funds rate indirectly affects mortgage interest rates.”
Losey said mortgage interest rates have already increased since 2021, when they were at an all-time low of 2.65% for the average on a 30-year fixed rate. By the end of 2021, that jumped to about 3.1%. This month, it reached 3.85%.
So, what does that mean for the Austin metro area?
Well, not only would you be paying more for your mortgage, said Losey, but a family would have to earn more to qualify for a mortgage loan.
For example, in 2021, the median home price was $435,000 in the Austin MSA. Losey said a family would have needed a household income of about $114,000 to qualify for a mortgage loan. Now, they’d need $124,000.
“So, you’re seeing about a $10,000 differential and their required income to qualify for mortgage loan based on that 1.2 percentage point increase in the mortgage interest rate,” Losey said.
Those numbers get higher if you want to buy a home in the City of Austin, where Losey said the median home price hit $537,000 last year.
“That’s really going to affect homebuyers, particularly those on the margin or households … whose income, wealth and credit is sort of just barely sufficient to qualify for a mortgage,” she said. “So, any sort of uptick in the mortgage interest rate could actually push them out of the potential to attain homeownership.”
That includes Samantha Tello, who was already having a hard time securing a loan due to her student debt.
“Because of my loans, I don’t make enough to — for loan companies to want to help me,” she said.
Her mother and grandmother both own homes in Montopolis, and she wants to become the third generation in her family to also buy a home there.
“It just seems very grim for honestly anybody trying to purchase a house … that already lives in Austin and wants to stay in Austin,” she said.
Losey said the Federal Reserve indicated this week it’s planning to increase the funds rate a total of seven times this year, with many predictions putting the mortgage interest rate at 4% by the end of 2022. She anticipates it will be closer to 4.5% or even higher.
“And that’s a pretty precipitous climb from … 2.65% at the beginning of 2021, so that’s, you know, potentially two percentage point increase,” she said.
That also matters, because Losey said a higher percentage of minority buyers are low-income, and a higher percentage of first-time homebuyers are dependent on federally-backed loans.
Add in other factors, and homeownership becomes even further out of reach.
“So now, potential homebuyers are facing this triple threat of very high home price appreciation, low supply and now rising mortgage interest rates,” Losey said.
“It’s definitely discouraging to realize that I’m never going to be able to live in my own neighborhood that I grew up in,” Tello said.
TRERC research indicates in 2020, more than 60% of Texas households earned the required income to qualify for a conventional loan on a $200,000 house at a 2.5% interest rate. However, that drops to 56.7% when the interest rate increases to 4%.