Consumers No Longer Fear Applying For A Mortgage
Less than five years ago, only 4-in-10 consumers thought it would be easy to get a mortgage.
Lenders were still recovering from the Great Recession. Home prices were dropping in many areas of the country. Only top-echelon borrowers were getting approved.
But, my, how things have changed.
Home values are rising. Houses that were once underwater now have decent equity — more than enough for a standard refinance.
Perhaps most important, people have jobs with which to qualify for a home loan.
This year, confidence rules the market, not fear. Now, nearly 60% of consumers think it would be “easy” to qualify for a mortgage.
Study Reveals Growing Confidence Among Potential Mortgage Shoppers
Once each month, the country’s largest mortgage agency, Fannie Mae, publishes its National Housing Survey.
It polls 1,000 consumers each month, asking each respondent more than one hundred questions about the future of housing, mortgage rates, and the state of the economy.
One hundred thousand questions later, Fannie Mae compiles the report. In April, the results were surprising: it revealed consumers are not as fearful of applying for a mortgage as they used to be.
In July 2012, consumers were more pessimistic about getting a mortgage than any time since Fannie Mae started collecting data. Just 41% believed it would be easy to get a mortgage.
These were probably borrowers with high-paying jobs despite the recession, and great credit scores. For some home purchase and refinance applicants, it will always be “no sweat” to get a loan.
The problem was, not everyone is as fortunate.
That month, 56% said it would be “difficult” to get a loan to buy or refinance property. These were likely applicants to which lenders were unwilling to lend, for a number of reasons:
- Small down payment available
- Low credit scores
- No money in the bank after closing
- Inadequate income
- High debt, including student debt
These issues are fading. Fannie Mae’s most recent report in April revealed that 57% of consumers believe it would be easy to get a mortgage — a survey high.
Recently, new provisions have rolled out addressing each of the above “problems” that face mortgage consumers. Those wanting to finally buy a home — or refinance into the best rate possible — now have a very good chance of doing so.
Making A Down Payment: The Choice Is Yours
Down payments are optional. Many loans today offer between 0% and 5% down.
Many mortgage consumers assume they need at least 10-20% down to qualify, but that’s not the case. Years ago, low-down-payment loans were harder to come by. Fannie Mae and Freddie Mac required sky-high credit scores for their low-down options.
Lenders were quite strict about FHA and VA loans, too.
Now, lenders are making concessions to attract these home buyers. With the recent rise in rates, lenders are eager for purchase business and lowering qualification standards to realistic levels.
Use this calculator to determine which loan type is best for you based on your down payment, then keep reading about more qualification issues, and how they’re getting easier.
Don’t have a lot saved for a down payment? That might be less of a problem than you think
Consumers Worry Less About Low Credit Scores
Back in 2012, credit scores were a sticking point for many would-be mortgage applicants.
Between 2008 and 2010, over 8 million Americans lost their jobs, according to the Bureau of Labor Statistics. That led to missed mortgage payments, late auto loans, and other credit accounts in default.
Consumers with nearly perfect credit suddenly had basement-level scores in the 500s.
Mercifully, many people have worked their way out of severe credit issues. Also helping: lenders are relaxing credit score standards.
Not many consumers know that the official minimum credit score for an FHA loan is 500 (if you put 10% down). But not many lenders will go that low. Still, some lenders in the marketplace today will consider and approve scores down to 580 and only require 3.5% down at that credit level.
VA home loans, reserved for current and past military service persons, have no published minimum score at all.
Following are minimum credit scores for each type of loan.
- FHA: 580 for 3.5% down
- VA: no published minimum
- USDA: typically 640
- Conventional loans: 620
- Jumbo loans: usually 660-700
Now, more lenders have the freedom to issue loans to applicants with banged up credit.
But it wasn’t always this way. According to data from Ellie Mae, one of the nation’s largest loan software providers, lenders are “easing up” significantly.
At the start of 2012 the average credit score of a closed loan nationwide was 750. The average “denied” loan was around 700.
Yes: people with 700 and higher credit scores were being denied. That is considered a “good” credit score.
Fast forward to 2017. The average FICO score is now around 720 — a thirty-point improvement from five years ago. That’s very close to the former average FICO score for denied loans.
Prospective mortgage applicants aren’t aware of this, though. Many have been turned down, and assume nothing has changed. Well, a lot has changed. Unless they go and apply for a mortgage, they might never know that they are now perfectly qualified for a mortgage.
Money In The Bank: Optional
For instance, lenders might need you to prove you have two months’ worth of principal, interest, taxes, and insurance for the property saved in reserve.
But many home purchase and refinance programs require $0 saved to qualify.
- FHA home purchase: no personal assets required if you receive a gift
- VA home purchase: zero down payment required. No reserves required
- Conventional loans: 100% of the down payment and closing costs can come from a gift
- USDA loans: no down payment or extra funds needed; closing costs can be paid by the seller or via a gift
Similarly, many refinance options require no extra funds in the bank, unless you have closing costs that you didn’t roll into the new loan.
- FHA streamline refinance: cash needed for closing costs; no additional funds needed in reserve
- VA streamline refinance: no reserve funds required
- HARP refinance: small amount of reserves may be required according to the lender’s computerized loan assessment
- Conventional refinance loan: minimal reserves required if no other properties owned
For most loan programs today, having spare cash in savings is optional. It’s no longer the barrier to home financing that it once was.
Income: Sometimes, It Doesn’t Matter
Ten years ago, you could buy a home with no income.
“Stated income loans” were all the rage. For those loans, you merely stated your income, and the lender took you at your word.
New regulation made those programs mostly a thing of the past for home purchases. But, refinancing — well, that’s a different story.
Many refi programs today simply don’t ask you to verify income. Programs in which you are replacing an existing loan with the same type of loan often require reduced documentation.
- FHA streamline refinance: no income verified
- VA streamline refinance: no income verified
- HARP mortgage: no income verified if you have 12 months of the new full home payment in savings.
- USDA streamlined-assist refinance: no income verified
If you are planning to refinance, and have an FHA, VA, conventional, or USDA loan, check the streamlined options above.
For home buyers, you will likely have to verify your income. But, lenders will not be as nit-picky as they were five years ago.
Self-employed borrowers may only need one year of tax returns instead of two, for instance. And, salaried borrowers may not need tax returns at all.
In short, you no longer need to bring a mountain of documentation when you apply for a loan. This is resulting in an attitude shift among consumers: mortgages are no longer “difficult” to get.
Relief For Applicants With High Student Debt
One of the most significant developments of 2017 is the easing of standards for those holding student debt.
No doubt this is affecting how easily consumers think they can get a mortgage.
Earlier this year, Fannie Mae rolled out Student Loan Solutions — a loan program that looks at student loan payments differently compared to other debt.
In the past, the lender would “hit” the borrower with the full payment for the student loans, regardless of whether the student was paying that amount.
For instance, students on income-driven repayment (IDR) programs might pay $250 per month in “real life”, but would owe $750 per month if on a full repayment plan.
Lenders will now accept the lower payment for qualification.
Additionally, student loan debt — or any debt — paid by others over the past 12 months doesn’t need to be factored in at all.
These changes make it easier for graduates who are close to the typical 43% debt-to-income ratio limit (debt payments equal to $430 per month for every $1,000 in income).
It’s no wonder that today’s younger home buyers are saying it’s much easier to get qualified now than it was just a few years ago.
How Do I Check My Eligibility To Buy Or Refi A Home?
Qualifying for a mortgage has never been easier during this decade.
Eligibility checks are readily available and come with a personalized rate quote. You could be surprised at what you qualify for.