Why Mortgage Programs Are Starting to Meet the Needs of Shared Households
As fewer Millennials have lived independently of their parents (as shown by a low household formation rate), more Americans have been establishing shared households in which parents, children, and even grandparents — or other extended family — may live together in a home and contribute to household expenses, including rent or mortgage.
According to a recent working paper by Fannie Mae economist Walter Scott, nearly 30 percent of all households are shared, including with relatives and non-relatives.
This arrangement appears more prevalent for certain ethnic groups. While only about 25 percent of non-Hispanic whites have shared households, 36 percent of Asians, and 44 percent of Hispanic households are shared.
Rise of the Shared Household
One of the causes for this trend is the Great Recession, which caused a crunch on housing affordability, not only for purchasing a home, but even for striking out on one’s own and forming a household.
The U.S. Census Bureau’s estimate of the total number of households in the United States remained flat from 2012 through most of 2014, only picking up steam in 2015. This low rate of household formation suggests that it’s difficult, especially for younger Americans, to find a place to live.
Likewise, in May 2016, the Pew Research Center announced the findings of a study that indicated that for the first time since they’ve been recording the data, more Americans between the ages of 18 and 34 were living at home with their parents — a larger share than those living alone or with a partner. The “Millennial” cohort that fits this age range is coming later to homeownership, having weathered the economic challenges of the recession and its aftermath.
New Perspective for Lenders
In his research, Scott paid particular attention to extended-income households (EIH), those in which an adult in the household — other than the borrower or the spouse — contributes at least 30 percent of the income of the household.
Based on data from the 2013 American Community Survey (ACS) conducted by the U.S. Census Bureau, 15 percent of all mortgage holders are in an extended income household — a figure which is higher for Asian (18 percent), African American (20 percent), Hispanic (24 percent), and immigrant (20 percent) households.
According to Scott, the analysis means that a considerable number of households in the United States depend on the income of the EIH for their housing and other household expenses. Likewise, he states, “Mortgage lenders… [should] review their treatment of non-borrower and boarder income.”
To that end, Fannie Mae created the HomeReady® mortgage, which takes into account extended-income households in assessing the household’s total income in certain situations.
As profiled earlier in The Home Story, HomeReady supports households that may include another wage earner—as well as the greater trend toward shared living. Other enhancements to the product were announced in late July.
According to Anne McCulloch, Fannie Mae’s senior vice president for credit and housing access, Scott’s research demonstrates that extended income households have particular strengths that can be important to lenders. These households stay together when times are tough. They are more likely to continue to pay their mortgage, even when house values decline, and their incomes are more consistent because their earnings come from multiple sources.
Notes McCulloch, “[Walt’s] research and the HomeReady mortgage are examples of how Fannie Mae focuses on understanding the choices consumers make and building affordable, sustainable mortgages that align with those choices.”