The good news for homebuyers is that getting a mortgage is finally getting easier.
After tightening their lending standards during the pandemic, it looks like mortgage lenders are starting to loosen the reins a bit.
In fact, according to the Mortgage Bankers Association, mortgages were about 2.2% easier to obtain in April than in March. What about certain types of loans? The availability of mortgages increased by 12.6%.
Here’s what the change means for homebuyers (and refinancers).
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Why Have Mortgage Requirements Got Tighter During COVID?
The past year has been a risky time for lenders to lend money. Unemployment has reached record levels, many people have lost their jobs and wages, and entire swathes of the economy have been shut down for months.
To protect themselves from these additional risks, many mortgage lenders have increased loan requirements. Some have even stopped offering certain loan programs (namely FHA loans, HELOCs, and non-QM loans).
For the most part, lenders have demanded higher credit scores and larger down payments over the past year.
For example, at one point, Chase raised his credit score requirement to a whopping 700 and asked for 20% down payments on all purchase loans. (Normally, it is possible to get a conventional mortgage with a credit score of 620 and only 3% down.)
Other mortgage lenders have added a second employment check – one just before the closing date – as an extra layer of protection.
Mortgage requirements relax again
According to the MBA Mortgage Availability Index, those high standards are finally starting to ease.
The MCAI rose 2.2% overall in April, indicating that standards are becoming less stringent.
Compliance with loan requirements
Credit score, down payment and other standards loosened the most on compliant loans, jumping 12.6% for the month.
Compliant loans are those that meet the standards set by Freddie Mac and Fannie Mae. Agencies allow credit scores from 620 and down payments of 3-5% or more.
However, lenders are allowed to set their own more stringent requirements in addition to those of Fannie and Freddie (known as âoverlaysâ). These overlays are why mortgage requirements vary so much from lender to lender – and why some lenders reopen faster than others to low-credit borrowers.
If you think you should qualify but are turned down by a lender, it’s worth applying with a few others to see if their different guidelines can work in your favor.
Compare mortgage options. Start here (May 25, 2021)
Requirements for other types of loans
Jumbo loans – which are reserved for real estate purchases at higher prices – also saw a sharp increase in availability of almost 7%.
Government loans, which include FHA, USDA and VA mortgages, are not experiencing the same trend, according to MBA data.
The MCAI for these programs only increased 0.1% from March to April, indicating that lending standards are largely stable.
Credit availability has still not returned to the peaks of 2020
Overall, the availability of mortgage credit is improving. This makes it easier for many Americans to buy a home or refinance.
Yet mortgage requirements have not returned to pre-pandemic levels – or even near them, in fact.
Previously, the mortgage credit index was good in the 170s and 180s. Today it is only 128.1.
As the economy grows after the pandemic – and once fewer mortgages are forgiven – credit availability is expected to continue to improve.
So if you don’t qualify for a home loan today, don’t give up hope. Standards should continue to ease over the year.
If you’re not sure if you’ll qualify now or in the near future, check out:
How to qualify in today’s market
Despite the increase, getting a mortgage is still more difficult than it was a few years ago.
If you’re worried that you might not qualify for a loan, be sure to work on your credit before applying for a mortgage.
You should also save a solid down payment and shop with at least three to five different lenders. Each mortgage lender has different eligibility standards, so shopping around can help you find the best option for your unique situation and budget.
According to Freddie Mac, comparing mortgage deals can also save you a lot of money (around $ 3,000 if you get five or more quotes!)