A few years ago, everyone went to "the bank" for mortgages. Or at least 70 percent of home buyers did, according to a new study by the Urban Institute. But today, non-bank institutions have the majority of the mortgage market.
More importantly, they don't lend the same way banks do, so if "the bank" says no to you, a non-bank lender might say yes.Click to see today's rates (Sep 23rd, 2017)
The study, Five things every policymaker should know about nonbanks and the evolving mortgage industry, found that the emergence of non-bank mortgage lenders has changed the industry in several important ways.
First, most homebuyers have traditionally obtained mortgages from a regulated bank. But today, non-bank lenders have been a big factor in making more credit available for home purchases.
While median credit scores have declined 23 points for all loans since 2013, for non-banks, the decline was 30 points (from 745 to 715), but just 7 points for banks.
Non-banks have really stepped into the gap created by reluctant banks in the government-backed loan sector.
That is because, while FHA guidelines are extremely flexible, allowing FICO scores as low as 500 and debt-to-income ratios as high as 50, most lenders impose stricter guidelines, called overlays.
Non-banks are less likely to apply strict overlays than banks are, and this has cause their market share to spike. While non-banks originated about a third of government mortgages four years ago, today, they have nearly 80 percent of the market.
It's not just lower FICO scores that make a difference for non-banks. They also let applicants stretch their incomes a little further.
While many programs, including FHA and Fannie Mae, allow borrowers to spend as much as 50 percent of their income on housing and their other account payments, it's the non-banks that seem more likely to actually approve loans that push the envelope.
The Urban Institute's researchers concluded that non-banks did not create some magical surge of business. Instead, mortgage banks pulled back from lending to riskier applicants and allowed non-banks to take that business.
Banks, say the study's authors, have pulled back from Fannie Mae, Freddie Mac and FHA lending for three main reasons:
Non-banks, being less regulated than banks, have less to fear from the enforcement of recent mortgage reforms than banks do. But what's bad for banks might be good for you.
What this means for you, the mortgage consumer, is that you have options if a bank (or any institution) turns down your mortgage application.
Here's your course of action:
If even the non-bank lenders won't approve you, your next step is to improve your credit, pay off debt, shop for a less-expensive house or look for non-prime financing.
Current mortgage rates for banks and non-banks are extremely low. Political and economic uncertainty has kept investors in bonds and mortgage-backed securities, causing interest rates to stay down.
To find your best deal, contact several competing mortgage lenders and compare their offers before applying.Click to see today's rates (Sep 23rd, 2017)
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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2017 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)