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Monday, December 4, 2023

Why some mortgages are harder to get — and what you can do about it

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Mortgage lenders are tightening rules on certain types of home loans due to growing economic concerns, making it more challenging for some borrowers. However, many opportunities exist for borrowers to meet the qualifications needed to secure a mortgage.

Why mortgage lenders are extending less credit

According to the Mortgage Bankers Association (MBA), in April, mortgage credit availability reduced to its lowest point since January 2013.

According to Joel Kan, the MBA deputy chief economist, the decrease in demand for loan programs (including adjustable-rate mortgages, cash-out and streamlined refinances, and those with lower credit score requirements) was the reason behind the contraction.

In 2013, after the Great Recession, the U.S. housing market started to recover, and lenders were cautious about giving out too many loans. Over time, they became more relaxed with their standards, but they became stricter at the start of the pandemic. According to MBA’s index, credit is currently even more limited than it was during the pandemic’s uncertain period.

Lenders have become less interested in extending credit for several reasons.

  • The banking sector has hit a rough patch. During March and May last year, three major bank failures occurred in the United States: Silicon Valley Bank and Signature Bank in March and First Republic Bank in May. Even though these banks didn’t play a big role in the mortgage industry, their closure still caused a disturbance in the lending markets that made headlines.
  • The economic outlook is uncertain. The Federal Reserve has increased interest rates for ten meetings in a row in an effort to reduce inflation. Although employment growth has been good, the Fed’s actions may eventually cause a slowdown. This could lead to higher unemployment rates and more defaults by borrowers, causing lenders to be more careful.
  • The boom went bust. During the pandemic, low mortgage rates led to a surge in people refinancing and buying homes. However, as rates began to rise in 2022, this activity decreased. Lenders who were employed during the boom have now resorted to layoffs during the slump. Consequently, lenders now have a reduced capacity to handle loan applications compared to before.

Niche loans are most affected

Although it may appear to be a problem for mortgage borrowers, it’s probable that the majority won’t even be aware of the reduction.

According to a survey conducted by the Federal Reserve, the stricter standards do not impact the majority of mortgages originated in the U.S., which are conventional conforming loans bought by Fannie Mae and Freddie Mac, as well as loans issued through the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) programs.

Lenders are refraining from offering specialized products like subprime mortgages, HELOCs, and non-QM jumbo mortgages.

What tighter mortgage credit means for you

You can still be eligible for a mortgage as long as you fulfill the lender’s credit and other requirements, such as having enough income and employment history. However, if you’re seeking a loan type that has become harder to obtain, there are a few ways to increase your chances of being approved.

  • Boost that credit score as high as you can. Melissa Cohn, regional vice president of William Raveis Mortgage in Delray Beach, Florida, states that individuals with lower credit scores are experiencing difficulties presently. She adds that your credit score is still the most crucial factor in deciding your mortgage rate. New rules from Fannie Mae and Freddie Mac have raised the threshold for the best mortgage rates from 740 to 780. Although it’s still possible to get a mortgage with a credit score in the 600s, it may cost you more or be harder to find.
  • Make as much of a down payment as possible. Putting in more money as a down payment on a home decreases your loan-to-value (LTV) ratio. This leads to more lenders being open to giving you credit. Although you can still qualify for a conventional loan with 3% down or an FHA loan with 3.5% down, you may have to pay higher fees and mortgage insurance to make up for the lower initial investment.
  • Don’t stretch your budget too far. If the amount you want to borrow will result in a large portion of your monthly budget being used for your mortgage payment, a lender may deny your application, even if your other financials are good. However, you can increase your chances of qualifying by ensuring your mortgage payment is around 30% of your income. Also, note that some lenders may only consider borrowers eligible for an adjustable-rate loan based on a higher payment and not the initial lower payment.
  • Build up your cash reserves well in advance. According to Cohn, lenders are enforcing stricter rules regarding the origin of your down payment and cash reserves. If you plan to use a gift from your family to purchase a home, deposit the money in your bank account as soon as possible. This will allow for a “seasoning” period that will increase the chances of your loan being approved by lenders.

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