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Posted 10/28/2015

Consumers: “We Think Mortgages Are Too Hard To Get”

Consumer Survey: It's too hard to get a mortgage

Consumers Think Mortgages Are Too Hard To Get

Is it hard to get approved for a mortgage today? Data says no. Consumers say "yes".

According to a survey of TheMortgageReports.com readers, nearly sixty percent of those responding said that, in today's housing market, it's "too hard to get approved" for a mortgage.

The sentiment appears to contradict data, however.

The quarterly Senior Loan Officer Survey, which is published by the Federal Reserve, shows that U.S. lenders have steadily loosened prime mortgage guidelines since 2012.

In addition, the most recent Origination Insight Report from Ellie Mae, a mortgage software firm which helps to process more than 3.7 million mortgage applications annually, shows more loan applicants making their way to closing than during any period this decade.

Lenders have removed the hurdles to a mortgage-loan approval this decade, and now support a myriad of low- and no-money-down mortgage programs.

If you're a consumer and you're worried about getting an approval for your mortgage, maybe the best advice is: "Just apply".

Getting a mortgage approval may not be hard at all.

Click to see today's rates (Sep 27th, 2016)

How Are Mortgages Approved?

In order to understand the mortgage approval process, we should start by answering "What is a mortgage?"

The textbook definition of mortgage -- interest in a home, given in exchange for a loan -- can be confusing because it's not how we think of the role that mortgages play in housing.

It helps, then, to think of mortgages as loans to finance real estate.

For example, if you want to purchase a home and don't want to use cash to buy it outright, you can give a mortgage to the bank in exchange for loaning you the money you need to buy the home.

The terms of a mortgage loan will vary by bank and by product (which is why it's recommended to "shop around").

However, the process of getting approved for a mortgage is fairly standard.

  1. You tell a bank you'd like to apply for a mortgage
  2. The bank verifies that you meet the loan's minimum qualification standards
  3. If your loan meets minimum standards, the mortgage is approved

From start-to-finish, the mortgage application process can be completed in a week, or can take up to two months or longer.

Here's how it works.

Giving A Mortgage Application

First, when you're ready to begin your mortgage application, you'll contact one or more mortgage lenders to give a formal mortgage application.

A formal mortgage application covers seven main areas -- all of which are considered as part of your mortgage loan approval.

These areas include your name and date of birth; your employment history; your annual income; your residence history; and, information about your savings and retirement accounts, among others.

There's no need to specify to which mortgage program you're applying at this time.

You are welcome to indicate to the lender that you prefer a low-downpayment loan or a no-money-down loan, as examples, but right now, you're just giving the basics.

With Your Lender, Decide Which Loan Program Is Most Suitable

Next, after your application is complete, the lender will likely ask if you have a downpayment preference and more specific questions about your financial goals.

Don't worry if you don't have all the answers at this point. A good lender will ask the right questions and help you determine the best path and choice for you.

For example, if it's important for you to make as small of a downpayment as possible because you have good income but not much saved in the bank, your lender may recommend a program such as the Conventional 97 loan, which only requires a down payment of 3 percent; or an FHA loan, which allows for down payments of 3.5 percent.

Or, if you have a 20% downpayment but qualify as a "military borrower", your lender may recommend that you use the VA home loan program via your VA benefits because VA mortgage rates tend to beat conventional mortgage rates by 30 basis points (0.30%) or more.

This chart can help you decide which mortgage loan is best for you.

Underwriting Your Mortgage Application

Once a loan program is selected, your lender will begin to underwrite your loan. To "underwrite" a loan  means that it will verify that the borrower meets the loan program's minimum qualification standards.

Minimum qualification standards vary by program.

The FHA mortgage program, for example, requires borrowers to have credit scores of at least 500 whereas the zero-percent down USDA mortgage program requires a minimum credit score of at 620.

As another example, conventional mortgages require private mortgage insurance (PMI) for all purchase loans with a downpayment of less than 20 percent. VA mortgages, by comparison, never charge mortgage insurance -- even when the borrower chooses to put no money down.

Author's Note: PMI is not necessarily bad.

Matching your mortgage application to a loan program's underwriting guidelines can be challenging for an underwriter. Guidelines change frequently, and staying on top of those changes can require extra time and effort to make sure you, the borrower, are getting the best possible outcome.

Getting Your "Final" Mortgage Loan Approval

Remember -- lenders are in the business of lending and lenders can't lend unless underwriters approve loans. However, lenders also want to be sure that the loans they make to customers are good loans.

What's a "good loan"? A good loan is a loan which meets minimum qualification standards without a doubt.

This is an important point.

Sometimes, mortgage underwriters will go to great lengths just to make sure that your loan meets such standards.

As a result, as part of the approval process, you may be asked to provide supplemental information about your job; or, about your income; or, about your bank accounts; or, about anything else included on your application.

At times it can feel onerous or cumbersome. It can also appear nit-picky.

However, an underwriter will never request paperwork it doesn't need in order to approve your loan; and will request every piece of paper it does need. It's all a part of the process.

Once your application has been verified against the mortgage program guidelines, it's "approved" and cleared-to-close.

A loan which is "cleared-to-close" can be prepared for closing; and monies for the loan can be sent to the settlement table.

Click to see today's rates (Sep 27th, 2016)

Today's Common Mortgage Programs

According to a survey of 1,000 readers of TheMortgageReports.com, it's too hard to get approved for a mortgage in today's market.

  • 59.8% of readers said it's too hard to get approved for a mortgage
  • 40.2% of readers said it's not too hard to get approved for a mortgage

After doing an analysis of today's mortgage market, though, one might assume that the majority of TheMortgageReports.com readers are over-stating their situation.

After all, Ellie Mae reports that 71% of all loan applications made it to settlement in September; and that the average FICO score of an approved loan is now 723 -- a three-point drop from last year's average.

This is the lowest average FICO for an approved loan since such data has been tracked.

Additionally, the average debt-to-income (DTI) of today's approved mortgage borrowers is higher, meaning that mortgage applicants are getting approved with lower income levels (or higher debt levels) as compared to recent years.

Despite these loosening and the willingness of underwriters to approve more loans, some borrowers believe mortgage guidelines are still too tough.

For these potentially-pessimistic borrowers, perhaps it would make sense to apply for a loan -- or re-apply for one -- in today's more forgiving market.

There are plenty of loans from which to choose.

Conventional Mortgage

Typically reserved for "prime borrowers" with a downpayment of 20% or more, conventional mortgages can be used for primary residences, second homes, and investment properties.

Conventional loans are backed by Fannie Mae and Freddie Mac, and available via most mortgage lenders. They are available with a 3% down payment option, and can be piggybacked as a 10% down loan.

Roughly half of all closed loans are conventional.

VA Home Loan

VA home loans are loans which are guaranteed by the Department of Veterans Affairs as part of the G.I. Bill and the Veterans Benefits package.

VA loans allow for 100% financing and mortgage insurance is never required. Furthermore, VA loans give access to one of the most aggressive refinancing programs -- the Interest Rate Reduction Refinance Loan (IRRRL) -- which can be used anytime mortgage rates drop.

VA mortgage rates tend to offer a 30 basis point (0.30%) discount as compared to conventional loans; and a 15 basis point (0.15%) discount as compared to FHA loans.

FHA Mortgage

FHA mortgages are loans which are insured by the Federal Housing Administration. FHA loans are best known for their minimum downpayment requirement of 3.5%, but the program's home construction loan -- the FHA 203k -- is also in-demand among today's mortgage borrowers.

FHA loans were once popular among borrowers on the margins; those with below-average credit scores and relatively low income as compared to their monthly debt. In recent years, however, FHA loans have moved to the mainstream.

FHA loans account for roughly 1-in-4 loans in today's market.

Click to see today's rates (Sep 27th, 2016)

USDA Mortgage

The USDA mortgage is more commonly called the "Rural Housing Loan" because it's available only in less-densely populated parts of the country, which includes rural zones, most exurbs, and many U.S. suburbs.

The program's official name is the Section 502 loan and it's backed by the U.S. Department of Agriculture. The loan offers 100% financing and very low mortgage insurance rates for eligible borrowers.

Jumbo Mortgage & Portfolio Loans

Not all loan applications fit within the government's "Big 4" programs, listed above. Some loans are best left to non-government banks with special programs meant to help homeowners with unique circumstances.

Jumbo loans are one such example. A jumbo loan is a loan for which the loan size exceeds the local area's loan limit, which can range up to $625,000, depending on where you live. Loans over your local mortgage limit are typically best handled by a jumbo loan program.

Portfolio loans work in a similar way. Rather than use government-backed financing, portfolio loans are handled by banks targeting a specific clientele, such as borrowers with large amounts of investable assets; or, borrowers with more than 4 properties financed with mortgages.

What Are Today's Mortgage Rates?

Mortgage rates change daily, and mortgage guidelines do, too. It may be simpler to get approved than you think and there are plenty of programs from which to choose.

Take a look at today's real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

Click to see today's rates (Sep 27th, 2016)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2016 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)