As if rising house prices and fierce competition weren’t enough, home buyers now face a different challenge: stricter mortgage standards.
According to Mortgage Bankers Association, mortgages became more difficult to issue in the last month (in fact, 8.5% less than in May). Overall mortgage availability is now at its lowest level since September 2020, “indicating tightening standards.”
“When mortgage availability drops, it becomes more difficult to get a mortgage,” says Joey Abdullah, managing director of Bellco Home Loans. “Typically, you should have a higher credit rating, sometimes higher down payments, or, if you refinance, a higher equity position in the home.”
Conventional loans are the hardest to get
MBA data show that standards have tightened for conventional and eligible loans – those that can be purchased by Fannie Mae and Freddie Mac. In June, they decreased by 23.5%.
Refinancing organizations, investors, self-employed buyers and second home buyers should be the most worried when it comes to qualifications, Abdullah said.
“We are seeing this especially for home refinancing,” he says. “The availability of credit has also diminished for non-owner-occupied homes.”
Tighter standards stem from pandemic-triggered policy changes implemented by both Fannie and Freddie, making it difficult for those with high loan balances to refinance mortgages. The two government-sponsored agencies have also reduced the number of investment and secondary home loans they could acquire, so the number of loan options has also diminished.
Fortunately, the hardships don’t have to last long – at least refinancers… First, there is a slight lag between MBA data and reports. For example, Brian Koss, executive vice president of Mortgage Network, says he has already seen things improve in recent weeks.
“It’s actually a little weakened because you see the economy getting better,” says Koss.
Additionally, Fannie Mae and Freddie Mac launched new refinancing programs this month, which should make refinancing easier for low-income, high-loan borrowers.
The Federal Office of Housing Finance has also recently removed fee for unfavorable market last year he demanded refinancing of loans. This should reduce interest rates what ordinary borrowers see when refinancing.
“Your interest rates are more attractive than they were this time last week,” says Koss. “It’s about one-eighth of a percent.”
Government loans are not that hard
The problem seems to be isolated from conventional loans, so for borrowers who opt for government-backed mortgages: FHA loans, VA credits as well as USDA loans, there should be no new challenges. According to the MBA, lending standards for these products have remained fairly stable since the beginning of last year.
“The Government Mortgage Availability Index has changed only marginally,” said Mike Tasson, CEO of Own Up, a mortgage marketplace. “This indicates that the most at risk borrowers – those with low down payments, lower average loan and / or lower income – higher debt-to-income ratios – have not seen a significant loss of credit availability.”
According to Tassone, lenders in the Own Up market currently require around 600 points on FHA loans. While this is slightly higher than before the pandemic, where lows ranged from 500 to 580 in some cases, it is “definitely an improvement” from what it was a few months ago, he says.
Another privilege of these loans? The FHA recently softened the question of how to treat student loan debt for borrowers. Tassone says it “should significantly improve access to credit for those borrowers who have student loans and are looking for a mortgage.”
How to improve your chances
If you are struggling to get a mortgage, there are several ways to improve your chances. According to Emanuel Santa Donato, vice president of capital markets for mortgage company Better, increasing your credit rating one of the best strategies.
“Tighter lending standards mean the higher your credit rating, the better,” Donato says. “The higher your credit rating, the more financing options and better rates you can get, which can lead to significant savings over the life of your mortgage.”
You can also work on a downgrade debt-to-income ratio – or how much of your monthly income goes towards paying off debt.
Abdullah says that if you can’t improve your credit score or DTI fast enough to make an impact, you can still buy or refinance a home, but expect a more thorough review when you do.
“Don’t be discouraged by this data or one month,” Abdullah says. “Just be prepared for a more detailed review of the loan process in the future.”