Why first-time homebuyers face a stacked deck right now
I bought my first home in 2022, attempting to purchase property before the rock-bottom mortgage rates from the Covid pandemic soared beyond reach. Apparently, everyone else in the greater Seattle area had the same idea. So did real estate investors. I tried buying six different houses that spring, ...
Overview
I bought my first home in 2022, attempting to purchase property before the rock-bottom mortgage rates from the Covid pandemic soared beyond reach.
Apparently, everyone else in the greater Seattle area had the same idea. So did real estate investors.
I tried buying six different houses that spring, but most of those times, investors beat me out with high down payments or all-cash bids. It was grueling to be a first-time homebuyer in an expensive, competitive housing market, especially when I could only afford to put 3% down.
First-time homebuyers have a tougher time buying a house than people buying second homes or investment properties, according to research by the Federal Reserve Bank of St. Louis.
And although first-time buyers face the brunt of the hardship, they aren't the only ones struggling. After combing through Home Mortgage Disclosure Act (HMDA) data, the St. Louis Fed uncovered a surprising statistic.
Your mortgage application is more likely to be denied if you're buying any primary residence you plan to live in — not just your first home — than a second home or investment property.
Higher borrowing standards don't deter certain homebuyers
After calculating numbers pulled from 2018-2024 HMDA data, the St. Louis Fed found that mortgages for investment properties were the most likely to be accepted, second residences were the next most likely, and owner-occupied primary residences came in dead last.
The exception was 2024, when second and investment properties swapped — but principal homes were still third.
Why is this mortgage denial statistic surprising? Because people buying second homes and investor properties don't benefit from more lenient borrowing requirements.
Actually, the opposite is true.
To buy a home other than your primary residence, a mortgage lender typically requires a larger down payment, lower debt-to-income (DTI) ratio, and more cash reserves.
Related: Redfin sees shift in housing market, home prices
But these high standards don't deter people buying second houses and investment properties. Because, in general, buyers in the position to buy these types of homes are more financially well off.
This makes them less risky mortgage applicants.
In 2024, the median down payment from those buying a primary residence was 9%, according the St. Louis Fed's research. For people buying second homes or investment properties, it was 25%.
Primary home buyers' median DTI ratio was 41%. Second-house buyers' median DTI ratio was 36%, and investment property buyers' median was 37%.
"These buyers of nonprimary residences don’t just sit below underwriting thresholds; they sit comfortably far from them," wrote St. Louis Fed Associate Economist Manu Garcia and Director of Research Carlos Garriga. "This segment of the market is effectively insulated from the disqualification channel."
Mortgage rates present an even greater disadvantage
"These applications remain mechanically safe even as interest rates rise," Garcia and Garriga wrote, referring to second-home and investment-home applications. "That makes their approval almost a mathematical certainty."
Details
A June study by real estate technology Redfin revealed that monthly mortgage payments had reached their highest point in a year. The average hit $2,647, just $100 under the 2023 high.
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Mortgage rates have sat around 6.5% for six weeks, according to Freddie Mac. Rates are a major reason housing payments have hit this record high.
Your monthly mortgage payment affects affordability in two ways. The more obvious one is that the payment may simply be too high for you to comfortably buy a house within your budget.
The second is that if your monthly mortgage payment is too high, it ups your DTI ratio, and mortgage lenders are less likely to approve your application.
First-time homebuyers face more hurdles than repeat buyers
The numbers already favor investors over families buying primary residences. But the deck is stacked against first-time homebuyers in particular.
All of the borrowing criteria mortgage lenders look at — income, DTI ratios, down payments — are even tougher for the typical first-time buyer than people who are simply moving and buying a primary residence for the second or third time.
The average down payment for first-time homebuyers was 10% in 2025, according to the National Association of Realtors, while repeat buyers' average was 23%.
A lower down payment means lower collateral. Everything else being equal, if an investor or second-home buyer applied for a mortgage with 25% down, a repeat buyer with 23% down, and a first-time homebuyer with 10%, the mortgage lender probably isn't going to choose the applicant with less than half for a down payment than the others.
People buying second residences and investment homes typically use conventional loans, but first-time buyers are more likely to use FHA loans.
You don't have to be a first-time buyer to qualify for a mortgage backed by the Federal Housing Administration, but these loans have unofficially been dubbed "first-time homebuyer loans." Eight out of 10 FHA loan borrowers were first-time buyers from 2020-2024, according to the U.S. Department of Housing and Urban Development.
FHA loans come with a lot of perks, but they also present their own challenges.
Not all mortgage lenders offer FHA loans, narrowing first-time buyers' options for which companies they can use. FHA loans also charge mortgage insurance premiums (MIPs), and this extra charge increases an applicant's DTI ratio.
"In this environment, a rise in interest rates does more than increase the cost of debt; it triggers a cascade of institutional barriers that effectively closes the door on homeownership," Garcia and Garriga wrote.
"For this segment of the market, the 'stacked deck' means that even small shifts in the macroeconomy can lead to a total loss of credit access."
Tips for first-time homebuyers
The St. Louis Fed authors claimed that policy changes were necessary to address the home-buying problems facing people with less wealth.
But until some policy takes effect, what can first-time homebuyers do to increase their changes of mortgage application approval? Here are some tips:
- Shop with several mortgage lenders. Apply for prequalification or preapproval with several lenders to see which will accept your application and offer you the best deal. Try applying with different types of companies, such as bank and non-bank lenders.
- Compare conventional and FHA loans. When evaluating lenders, talk to their loan officers about whether you qualify for a conventional loan. If so, ask them to pull up estimated costs for a conventional versus FHA loan so you can see the cost differences.
- Save more for a down payment. This may be easier said than done, but it can be a crucial part of competing with other types of buyers. It might just mean waiting another six months or a year to buy a house.
- Pay down debts. By reducing your monthly debt obligations, you'll lower your DTI ratio. This leaves more wiggle room should you, say, need to get an FHA loan that charges monthly mortgage insurance premiums.
- Search for creative homebuying solutions. High home prices and mortgage rates have made it difficult to get your foot in the door as a homeowner. Consider an outside-the-box strategy like co-buying with a family member or friend. This approach allows you to combine incomes on your application and pool your money for a higher down payment.
Related: Berkshire Hathaway says to ignore this home-buying red flag
Source
Originally published at www.thestreet.com.
