“Rates aren’t coming down as quickly as originally thought; people are overextending themselves in the hope rates will drop soon, using features like temporary buydowns but not being able to truly afford the full note rate payment,” Alex Peters, a California-based loan officer for Bluefire Mortgage Group, said in the report.
The affordability crisis extends beyond mortgage payments. Attom’s Q4 2024 Home Affordability Index revealed that the down payment on a median-priced home reached $72,950 — not far below the average annual wage of $89,649.
Property insurance premiums and property tax hikes have also added financial strain, particularly in disaster-prone regions like the Southeast and West, where insurance carriers are passing on higher costs to homeowners.
“I believe the concerns for the market at this point are dramatically related to geographics. The buyers have to understand the marketplace on a micro level more than ever,” said Reid Waltzer, a New Jersey-based loan officer for CrossCountry Mortgage.
Shifting homeownership trends
To combat rising costs, more buyers are exploring multigenerational housing and accessory dwelling units (ADUs). A 2024 Marketplace report noted a significant uptick in multigenerational living arrangements, driven by affordability challenges.
“Multi-generational homes have become a growing trend as families seek ways to make homeownership more affordable,” said Judy L. Jones, a Colorado-based LO for Lower-backed Universal Lending Home Loans.
“With current interest rates and home prices, many young adults are staying in their parents’ homes longer, contributing financially to help cover housing costs.”
ADUs are also gaining popularity as homeowners seek rental income to offset mortgage expenses. “ADU is a big requirement now. Every borrower is looking for a property with a basement to rent,” said Andreia Faustino, a Utah-based LO with American Pacific Mortgage.
Financial pressures, nontraditional loans
Loan officers surveyed by HomeLight indicated that many homeowners fear rising property taxes and insurance costs. In California, for example, State Farm recently requested a 22% rate increase following the devastating wildfires in the Los Angeles area.
“We write so many mortgages at maximum debt-to-income ratios, then taxes and insurance go up, and people struggle to afford their home very quickly,” said Matt Hefner, an LO with Fairway Independent Mortgage Corp.
Meanwhile, climate-related risks are also impacting home values. A report from First Street projected a potential $1.5 trillion reduction in real estate value over the next 30 years due to climate migration, shifting real estate fundamentals and skyrocketing insurance premiums.
With affordability concerns mounting, buyers are increasingly turning to nontraditional mortgage products, including interest-only loans, adjustable-rate mortgages and balloon loans. HomeLight’s survey found that 75% of lenders have seen an increase in these alternative financing methods.
“Reduced obstacles to financing relative to traditional financing — reduced documentation requirements, reduced invasiveness, and less restrictive guidelines — are attracting borrowers,” said Dirk Nelson, a California-based loan officer.
Nonqualified mortgages (non-QM) have also risen in popularity. According to CoreLogic, non-QM loans accounted for 5% of mortgage originations in 2024, up from less than 3% in 2020. These loans are often sought by self-employed buyers, those with multiple properties, or individuals with high debt-to-income ratios.
“Being self-employed and using tax returns with large write-offs can be challenging,” Fairway loan officer Troy Gamble said. “NQMs provide an alternative for borrowers who don’t fit the conventional mold.”
Role of AI in mortgage lending
The mortgage industry is also growing increasingly reliant on artificial intelligence (AI). HomeLight, for example, raised $20 million in 2024 for its AI-powered Buy Before You Sell product, designed to streamline financing options for homebuyers.
But AI-driven lending tools have raised concerns about bias. A study from Lehigh University found that AI exhibited racial discrimination in underwriting, often charging Black applicants higher interest rates or denying them loans at a higher rate than white applicants.
“This suggests that LLMs (large language models) are learning from the data they are trained on, which includes a history of racial disparities in mortgage lending,” the study stated. It recommended human oversight to mitigate bias.
Despite the rapid adoption of AI, many loan officers emphasize the importance of human judgment in mortgage decisions.
“AI is great for vanilla applications and driving loan production costs down, but not great for complex transactions,” said Shane Weicberger, a Pennsylvania-based LO with CrossCountry.
Strategies for homebuyers
As the market continues to challenge buyers, loan officers emphasize the importance of strategic planning.
“Don’t obsess with finding the ‘perfect’ first home. Consider instead that your first home will eventually be retained and converted to your first investment property,” Texas-based LO Jay Atterstrom of Primary Residential Mortgage said.
Some lenders are also noting an increased number of estate sales as homeowners locked into low mortgage rates are hesitant to sell.
“I have noticed a big increase in borrowers purchasing homes that are part of an estate. In this environment with mortgage lock-in, sometimes I feel like half the people who are selling a home are deceased,” loan officer Matt Hunter said.
“Go talk to a lender early. Find out what kinds of programs they have for first-time homebuyers or buyers who have not owned a home in the last three years. Assess your credit and see what you can do to increase your scores and pay off debt ahead of time.”
