The mortgage market is booming, but getting approval for a home loan is just as difficult as it used to be.
According to the Mortgage Bankers Association (MBA), mortgage affordability, a measure of lenders’ willingness to issue mortgages, is close to its lowest level since 2014.
The tight lending environment illustrates a growing split in the mortgage market: more home loans are issued than ever before, but almost entirely to borrowers with a clean credit history and significant down payments. Borrowers with credit qualifications that go beyond the star category are finding fewer lenders willing to approve their applications. The segment of borrowers who could have gotten a home loan early last year are now out of luck as they are considered too much credit risk.
“Since it is more difficult to get a mortgage, it is generally a more competitive environment,” said Dr. Lawrence Yoon, chief economist at the National Association of Realtors.
According to the Federal Reserve Bank of New York, about 70% of mortgages issued in 2020 were made to borrowers with a credit rating of at least 760, up from 61% in 2019.
The average credit rating of borrowers approved for mortgage loans reached 786 in the fourth quarter of 2020, up from 770 in the same period in 2019.
Americans looking to enter the housing market this spring face a host of other challenges. Housing prices tend to fall as the economy slows, but they jumped sharply during the coronavirus pandemic, leaving many families losing their home ownership.
Housing prices are rising by fastest pace in 15 yearsdriven record low supply of houses for sale and flow of wealthy workers looking for a second home or places for home offices. The average price of secondary housing exceeded $ 300,000 last summer and stayed there ever since…
And mortgage rates, although historically low, rose meaningfully from last year’s record lows, leading to an increase in monthly payments for potential buyers.
Mortgage availability fell 35% year on year in 2020 when creditors wanted to protect themselves from providing loans to borrowers who may lose their jobs during a pandemic. The MBA Mortgage Lending Index has risen since last fall, but remained about 31% lower in February than in the same period last year.
“Last spring there were millions of jobless claims in a week,” said Tendai Kapfidze, chief economist at LendingTree. “A borrower who was okay one week may become a riskier borrower the next week.”
Lenders’ concerns about the financial stability of borrowers prompted them to strengthen their employment and income checks. Some borrowers were asked to sign statements confirming that they did not intend to ask for an extension after receiving the mortgage permit. Some lenders ask that documents used in mortgage applications, such as bank statements and pay slips, be no older than 30 days, whereas they once allowed them to be 60 days older.
Tighter credit requirements have been most pronounced at both ends of the mortgage market. The average credit rating for borrowers approved for FHA loans rose to 672 in fiscal 2020, up from 666 in 2019. FHA loans generally have lower income and lower down payments.
At the same time, lenders have increased the requirements for large mortgages, which tend to go to wealthy buyers. Giant mortgages are too big to sell to government-backed mortgage giants
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therefore banks often keep them in their books and carry the risk of default.
Earlier this year, Jeanne Griffin’s local credit union in Minnesota turned down her mortgage application. She said she was told she had 713 credit points and the fact that her student loans were in the form of abstinence related to the pandemic disqualified her.
“They said that if I had applied a year ago, I would have been approved,” said Ms. Griffin, who has accumulated about $ 20,000 in down payment.
The credit union recommended that she start paying off her student loan and pay off about $ 4,000 of her credit card debt before reapplying.
The skyrocketing home prices have led some lenders to be reluctant to hire new home buyers or others whom they perceive to be slightly risky. Lenders who have been quietly offering mortgages of $ 300,000 or $ 320,000 to borrowers with good but not very good credit history may have been reluctant to lend the $ 350,000 or more now required to buy the same property.
Loan officers and underwriters weigh several variables when deciding whether to approve a mortgage application: employment history, source of income, credit rating, and debt level, among others.
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Strict credit requirements play an important role in keeping the housing market healthy. Making sure borrowers can afford mortgage payments is key to curbing non-payment. Ultra-liberal lending policies, including loan approvals for people with irregular incomes or huge indebtedness, helped spark the 2008-2009 financial crisis.
Lending standards are unlikely to rise significantly until demand for housing falls, economists said. The paucity of homes for sale means lenders can only choose the best from a multitude of applications.
However, credit requirements should ease somewhat this year as interest rates rise, cutting refinancing, said Mike Fratantoni, chief economist at the MBA.
“Since lenders are not inundated with calls for refinancing, most of their resources can be used to connect with buyers for the first time,” said Mr Fratantoni.
Refinancing loans are expected to account for 46% of the mortgage market in 2021, up from 59% in 2020, according to the MBA.
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