The mortgage market is booming, but getting approved for a home loan has been as difficult as it has been for years.
Mortgage credit availability, a measure of lenders’ willingness to issue mortgages, is near its lowest level since 2014, according to the Mortgage Bankers Association, or MBA.
The tight lending environment illustrates a growing divide in the mortgage market: more home loans are made than almost ever before, but they go almost exclusively to borrowers with impeccable credit histories and large down payments. Borrowers with credit qualifications that fall just outside the stellar category find fewer lenders willing to approve their applications. A segment of borrowers who qualified for a mortgage early last year is out of luck, considered too risky.
“Because mortgage credit is more difficult to obtain, it is an overall more competitive environment,” said Dr. Lawrence Yun, chief economist at the National Association of Realtors.
About 70% of mortgages issued in 2020 went to borrowers with a credit score of at least 760, up from 61% in 2019, according to the Federal Reserve Bank of New York.
The median credit score of borrowers approved for mortgages reached 786 in the fourth quarter of 2020, up from 770 during the same period in 2019.
Americans looking to enter the housing market this spring face many other challenges. Home prices tend to fall in a slowing economy, but they have jumped during the coronavirus pandemic, preventing many families from accessing homeownership.
Home prices are rising at the fastest rate in 15 years, propelled by a record number of homes for sale and an influx of well-to-do workers looking for second homes or home office space. The median price of existing homes surpassed $ 300,000 last summer and has remained there ever since.
And mortgage rates, while still historically low, have risen significantly from record lows last year, pushing monthly payments higher for potential buyers.
Mortgage loan availability fell 35% year over year in 2020, when lenders wanted to protect themselves from lending to borrowers who were at risk of losing their jobs during the pandemic. The MBA mortgage credit index has increased since last fall, but remained about 31% lower in February than at the same time last year.
“In a week last spring, jobless claims were in the millions,” said Tendayi Kapfidze, chief economist at LendingTree. “A borrower who was doing well one week could be a much riskier borrower next week.”
Lenders’ concerns about the financial stability of borrowers prompted them to increase employment and income verification. Some borrowers were asked to sign statements stating that they did not intend to seek forbearance after being approved for a mortgage. Some lenders ask that documents used in mortgage loan applications, like bank statements and pay stubs, be no more than 30 days old, whereas they once allowed them to be 60 days or more.
Stricter credit requirements have emerged more clearly at each end of the mortgage market. The average credit score of borrowers approved for Federal Housing Administration loans increased to 672 in fiscal 2020, from 666 in 2019. FHA loans generally have lower incomes and lower down payments.
At the same time, lenders have increased requirements for giant mortgages, which tend to cater to affluent buyers. Jumbo mortgages too big to sell to government-funded mortgage giants Fannie Mae and Freddie Mac,
banks therefore often keep them in their own books and bear the risk of default.
Jeanne Griffin’s local credit union in Minnesota turned down her mortgage application earlier this year. She said she was told her credit score of 713 and that the fact that her student loans were under a pandemic-related forbearance had disqualified her.
“They said if I had applied a year ago, I would have been approved,” said Griffin, who saved nearly $ 20,000 for a down payment.
The credit union encouraged her to start paying off her student loans and to pay off about $ 4,000 in credit card debt before reapplying.
The explosive growth in house prices has made some lenders hesitate to recruit first-time buyers or others they deem slightly risky. Lenders who were comfortable offering mortgages of $ 300,000 or $ 320,000 to borrowers with good but not great credit histories might not be willing to lend the $ 350,000 or more now needed to buy. the same property.
Loan officers and underwriters weigh a handful of variables in deciding whether to approve a mortgage application: employment history, source of income, credit score, and level of debt, among others.
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Strict loan requirements play an important role in keeping the housing market healthy. Making sure borrowers can afford mortgage payments is key to limiting defaults. Ultraliberal lending policies, including loan approvals for people with histories of unequal income or mountains of debt, helped trigger the 2008-09 financial crisis.
Lending standards are unlikely to widen significantly until housing demand declines, economists have said. The shortage of homes for sale means that lenders can only select the best from a multitude of applications.
Still, credit requirements are expected to ease slightly this year as interest rates rise, drying up refinancing, said Mike Fratantoni, MBA chief economist.
“Since lenders are not inundated with refinancing calls, more of their resources can be used to reach first-time buyers for purchases,” Fratantoni said.
Refinancing loans are expected to represent 46% of the mortgage market in 2021, up from 59% in 2020, according to the MBA.
Write to Orla McCaffrey at [email protected]
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