Alex Fine for The Washington Post
Will I or won’t I? An essential concern shared by prospective home buyers who need to finance their purchase is whether they will qualify for a mortgage for the amount and terms they require.
Pushback against overly tight credit after the housing crisis, a shrunken proportion of first-time buyers and worry about affordability as home values rose led to some tweaks to guidelines that could ease financing pressures for home buyers this year. Unlike the too-loose standards during the housing bubble, today’s borrowers still need to prove they can handle the loan.
“We are seeing thoughtful underwriting of loans and a greater understanding that younger first-time buyers are in a growth phase of their careers,” said John Pataky, executive vice president of the consumer division of EverBank in Jacksonville, Fla. “The approach is measured and guided, so we know that people becoming homeowners have the wherewithal to repay the loan as their income and career grow.”
Among the main changes to mortgage loans in the past year or two are the availability of low down-payment loans, a loosening of the debt-to-income ratio requirements and easing of rules about how student loan payments are calculated.
“Our challenge is always to increase access to sustainable credit,” said Jonathan Lawless, vice president of customer solutions for the Federal National Mortgage Association (Fannie Mae) in Washington.
Since mid-2016, there has been marginal easing in every aspect of mortgage loans, said Jonathan Corr, chief executive of Ellie Mae in Pleasanton, Calif.
“We’ve seen a very slight drop in the credit scores of approved loans, a slight increase in the debt-to-income ratios and an increase in loan-to-value, which means people are taking advantage of low down-payment loan programs,” Corr said.
Still, borrowers with shaky finances should not expect a loan approval like the old days. People who are weak in some areas would need to compensate with stronger finances in other areas.
Borrower confusion over loan rules
In spite of the existence of low down-payment loans and down-payment assistance programs, a NeighborWorks America survey in 2017 found that, on average, consumers think that 17 percent is the minimum required down payment to own a home. Yet loans with zero, 3 or 3.5 percent minimum down payments are readily available now.
[Survey: many first-time home buyers lack basic knowledge about mortgages]
In some cases, unsubstantiated concern might be stopping people from even applying for a loan. According to the recent Ellie Mae Borrower Insights Survey, 29 percent of renters think a 700 to 749 credit score is needed to qualify for a loan. But lender guidelines say a minimum credit score of just 620 is required for many loan programs. Some lenders will approve loans with a lower credit score if the borrower has substantial resources or other compensating factors.
Low down payments and assistance programs make getting mortgage loan approvals easier. (Illustration Dwuan D. June and istockphoto/TWP)
The average credit score of a closed loan was 722 in the Ellie Mae Originations Insight Report in December. Although 82 percent of conventional loans had credit scores of 700 or higher, 13.6 percent had credit scores between 650 and 699, and 4.7 percent had scores below 650. Federal Housing Administration (FHA) loans were almost evenly split among borrowers with a credit score of 700 or above (34 percent), between 650 and 700 (35 percent) and under 650 (31 percent).
“There are lots of programs available to serve different needs, but, typically, if a loan requires a higher credit score, it’s because the lender is taking a chance on you in some other way, such as allowing a lower down payment or a higher debt-to-income ratio,” Pataky said.
Prospective home buyers might be concerned about a predicted increase in mortgage rates; the Mortgage Bankers Association predicts they could rise to 4.8 percent by the end of the year. Anticipated higher mortgage rates could actually benefit some borrowers, said Jeff Taylor, co-founder and managing director of Digital Risk, a provider of mortgage processing services and risk analytics in Maitland, Fla.
“The credit box is likely to expand a little bit because lenders will want to approve more loans when they can get a better yield from higher rates,” Taylor said. “We expect more purchase loans and fewer refinances this year, so lenders will be competing for borrowers.”
Loan applications are increasingly handled digitally, which can make the loan process itself less painful, Taylor said.
“Lenders can use digital tools to upload materials and provide loan approvals more quickly,” Taylor said.
A secondary benefit, according to Lawless, is that lenders can have more certainty over the validity of information, and therefore less concern about the consequences of potential errors.
“Making the loan application process simpler and more efficient makes it less costly, so consumers should anticipate a better and cheaper experience,” Lawless said.
Corr said greater clarity over regulations about the potential punishment for lender errors could lead to additional changes in loan programs.
Lower down-payment loans
FHA loans are popular with first-time buyers because they require a down payment of just 3.5 percent of the purchase price of a home. Now, conventional loans are also available with as little as 3 percent required for the down payment.
[The mortgage market is now dominated by non-bank lenders]
“Awareness of the availability of low down-payment loans and first-time buyer programs is essential, because many people don’t know about the opportunities for homeownership,” Pataky said. “Many of these borrowers have good jobs and can afford the mortgage payments, but they are not cash rich.”
Borrowers can search for down payment assistance programs at downpaymentresource.com.
Fannie Mae’s Home Ready mortgage program, which allows for a 3 percent down payment, is available to both repeat buyers and first-time buyers.
“We’ve found that some homeowners who bought their first home and then lost equity during the housing crisis haven’t recovered enough to rebuild their wealth, so they need low down payment loans, too,” Lawless said.
Guidelines from Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac) previously required borrowers to have a maximum debt-to-income ratio of 45 percent, but last year, that ratio was increased to 50 percent. Your debt-to-income ratio compares the minimum monthly payment on all recurring debt, including your housing payment, with your gross monthly income.
“Debt-to-income ratios are important to understand a borrower’s ability to repay the loan,” Lawless said. “But not everyone reports all of their income. For instance, people may be getting help from other family members for some expenses, or they are applying for the loan without their spouse’s income. As long as we see another good compensating factor that shows us they will be able to sustain the payment, we think the higher ratio is justified.”
The lower debt-to-income ratio required in the past used to disqualify a lot of borrowers, especially if they had student loan debt, said Carolyn Sullivan, a senior mortgage consultant with American Financing in Aurora, Colo.
“A 50 percent debt-to-income ratio is the new high-water mark,” Pataky said. “But with each loan request, we look at factors and eligibility requirements on an individual basis. Not everyone can qualify at that 50 percent level, in which case a maximum of 45 percent or less is necessary. We just have to make sure all the components of the loan fit.”
FHA loans allow for debt-to-income ratios as high as 55 percent, provided the rest of your loan application demonstrates your ability to repay the loan.
“The looser debt-to-income ratio is a big deal, because it’s easy for a couple with two cars, a couple of credit cards and student loans to have a lot of debt,” Sullivan said. “But what’s important is that we still verify all income and assets, and look closely at all factors to make sure the borrowers can repay the loan.”
Student loan debt
Changes to the way lenders regard student loan debt is simply a common-sense revision, Lawless said.
In the past, lenders had to qualify borrowers based on a monthly payment of 1 percent of the balance, even if a different amount appeared on their credit report.
“Now we allow lenders to use the actual amount being paid on an income-based student loan repayment plan,” Lawless said. “And if a parent or an employer is making the student loan payments, we can even exclude that debt from the loan application, as long as we can see 12 months of documentation of those payments.”
Rising home values across the nation led to an increase in maximum loan amounts for conforming loans, which could make it easier for some borrowers to qualify for a loan this year.
[Looking to buy a home in 2018? New move by federal agency means you may be able to borrow more.]
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, and the Federal Housing Administration both raised conforming loan limits for 2018 to a maximum of $453,100 in most counties, and up to $679,650 in high-cost housing markets. Borrowers who need to finance more than the conforming loan limit need a jumbo loan, which has different guidelines.
An estimated 2.8 million homes in the United States will now be eligible for a conforming loan instead of a jumbo loan, according to analysis by Zillow.
“A conforming loan can save borrowers money compared to a jumbo loan, because jumbo loans typically require a down payment of at least 10 percent and as much as 25 percent in some cases,” Taylor said.
Jumbo loans also can be harder to qualify for, requiring a higher credit score, a lower debt-to-income ratio and more cash reserves, Taylor said.
While tweaks to loan guidelines by the FHA, Fannie Mae and Freddie Mac offer opportunities to more borrowers, consumers with more complex financial circumstances or simply a lack of credit history can turn to “nonprime” lenders. “Subprime” loans, considered to be significant contributor to the foreclosure crisis, are now referred to as “nonprime” or “alternative” loans by some lenders to remove the stigma.
“Unlike the subprime loans of the past, we offer loan products not typically offered by banks but with reasonable mortgage rates and fees,” said Raymond Eshaghian, president and founder of GreenBox Loans in Los Angeles. “We offer special programs for people with lots of equity and high credit scores who can’t qualify for a traditional loan because they are self-employed and their accountants have used creative accounting that doesn’t show enough income.”