Banks Easing Up on Tight Mortgage Guidelines in 2015

In the slow recovery of the housing crisis, the mortgage industry is definitely starting to see significant improvement.  While the lending criteria has certainly been tightened up over the past year, the good news is that mortgages are moving in the right direction and eligible borrowers are starting to apply for loans and refinancing once again.  Additionally, certain banks are beginning to ease up on the stricter guidelines, as long as potential borrowers meet specific criteria.

  • Senior bank officers were recently surveyed, and here are some interesting results:
  • Banks easing up on mortgage guidelines – 6.1%.
  • Banks implementing tighter guidelines – 1.5%.
  • No change in guidelines either way (e.g.) tightening or loosening – 92.3%.

While there is a bit of loosening going on, the change is definitely for the better. This latest survey actually is the ninth in a row where less than 10 % of lending institutions have reported tightening their standards.  This is good news for potential borrowers that are looking to purchase a home in 2013 or 2014, as the demand for homes is slowly but surely growing.  So, while there are definitely tighter qualification criteria overall, there are a variety of  banks that are willing to bend.  Additionally, mortgage software provider Ellie Mae has recently reported a 5 % overall increase in the amount of approved mortgage and refinance applications.

With the lenders slowly easing up on their credit standards combined with the high demand for credit, Americans are finding that borrowing from banks is starting to become easier, which in turn supports overall spending, contributing positively to the economy.  And there is no better time than the present, as a government budget cut is right around the corner.

FHA Home Loans Are Becoming the New Sub-Prime

More and more borrowers are turning to FHA loans, due to the fact that FHA lenders are willing to counsel them and advise on how to fix the areas of their credit that may be hindering them from obtaining loans.  They are also helpful when it comes to rescoring the borrowers’ overall credit.  While at one point in time FHA loans were only popular among first time home buyers, many of today’s borrowers are previous homeowners that may have issues with past credit, mainly due to unemployment and the economic crisis. FHA loans can help these borrowers move forward by allowing lower down payments and more leniency with the mortgage application process.

Mortgage Statistics For 2012

Based on statistics reported from the mortgage automation company Ellie Mae, here is what the average mortgage loan process looked like in the year 2012:

  • The average closing time on a mortgage loan in 2012 was 48 days.
  • The average mortgage loan down payment in 2012 was approximately 21%.
  • The required credit score to obtain a mortgage was 748. Currently, only 37% of 200 million Americans hold a 748 or higher.
  • In 2012, the debt to income ratio was 34% overall household debt compared to a 23% monthly mortgage payment.
  • The average interest rate in 2012 was 3.90%.

While the statistics definitely show improvement, it is important for anyone looking to obtain a home loan to understand that while certain banks are easing up on the strict guidelines, there is also specific criteria that all borrowers must meet.  It is always a good idea to take a good look at your finances and current job situation before making the final decision to apply for a mortgage.  While the economy is slowly making its way back, there are still quite a few roadblocks that borrowers may come up against, so it is always wise to proceed with caution when it comes to taking out a large loan.

The Aftermath Of The Housing Bubble

In the early 2000’s, mortgages were very easy to obtain, almost too easy in many cases, and this is one factor that ultimately lead to the bursting of the housing bubble.  Five or ten years ago, high risk borrowers could potentially obtain loans with minimal down payments and less than perfect credit, and while these loans were helpful at first, all it took was one or two missed payments to start a downward spiral, eventually leading to foreclosure.

In today’s lending world, however, there has been a complete turnaround when it comes to qualifying potential borrowers, such a big turnaround, in fact, that many hopeful borrowers are completely surprised by the rigorous application process that now goes along with obtaining a mortgage, due to new Federal regulations that lenders must stand by.

Here are a few roadblocks you may come across when applying for a mortgage in today’s post housing crisis world, and some tips on what you can do to ensure approval.

Down Payments

While qualifying for a loan without a down payment is still possible in certain cases, it is definitely not the norm anymore.  If you are looking to obtain a loan with a low or no down payment, there are a few options.  There are a few loan programs that are backed by the Dept. of Veterans Affairs that allow qualified borrowers that meet specific guidelines the option for a loan with no down payment, and FHA loans are still allowing for low down payments.  However, FHA loans used to allow for down payments of 3 percent or less, and now the minimum percentage has moved up to 3.5.

Debt-to-Income Ratio

Five to ten years ago, many families could qualify for a mortgage with a 60 or 70 percent dent-to-income ratio.  In today’s world, the standard is approximately 43 percent.  There are various factors that contribute to this that include the current economy and job market, and lenders simply do not want to take the risk that borrowers will be using their funds to take care of additional debt instead of paying their mortgage on time.  Additionally, today’s lenders will investigate further when it comes to borrower’s employment.  They will inquire about overtime as well as length of employment in order to get a true picture of what a borrower can afford, and this can definitely be a roadblock to those who have recently started working again after a lengthy bout of unemployment.

Proper Documentation

If you are hoping to obtain an affordable mortgage loan, you will want to make sure you have all the proper documentation in order before starting the application process.  Documentation you will need includes bank statements, tax returns, and social security information.  Lenders have an obligation to thoroughly review these documents as well as compare notes with the IRS, so it is important to have all your ducks in a row before getting started. It is also important to note that when the lenders compare bank statements to income statements, they will expect a full explanation of any extra money that is not coming directly from an employment check, so it is always a good idea to keep your receipts, especially if you do contract work in addition to your regular job.

Credit Score Requirements

At one point in time, a mortgage could easily be obtained with a credit score of 580 or higher.  Today’s rules typically require at least a 620 score, and that is on the low end.  The average credit score that is preferred now is between 720 and 765.  If your credit score is currently on the low end, you may wish to hold off on applying for a mortgage until some of your debt is paid off and you have increased your score.  Not only will this better your chances of qualifying, it will also help eliminate excess monthly debt that you can put toward your mortgage payments.

New Mortgage Lending Standards

While today’s mortgage application process can be a bit frustrating for potential borrowers, the reality is that something had to be done in the wake of the economic collapse and housing crisis.  Not only were risky borrowers defaulting on their mortgages, hard working individuals were losing their jobs and ending up in default as well.

With the newer standards, there is definitely hope for more stability in the mortgage market.  Potential borrowers now need to take a realistic look at their finances and overall ability to pay, and lenders are cracking down in order to keep the market in check.  While the detailed application and approval process may annoy seasoned borrowers, borrowers that are new to the home buying process will definitely benefit from the changes.

A high credit score and verifiable income assures lenders that these mortgages will not go into default, and potential home buyers will be able to obtain mortgages with confidence and the peace of mind that they can realistically cover their payments each month, allowing for a win-win situation for both lender and borrower.