Senior Loan Officer Survey Shows Mortgage Standards Loosening
It’s an excellent time to be buying a home or refinancing one — current mortgage rates are still low and U.S. lenders are making it easier to get mortgage-approved.
Between July-September 2016, for the ninth straight quarter, a greater number of mortgage lenders reduced their loan approval standards than those which increased them.
It points to why more mortgage loans are being approved than during any period in recent history. If you’ve been recently turned down for a mortgage, it’s time to re-apply.
Lenders have armed themselves with better lending models and feel buoyed by the rising U.S. housing market. Banks are now making new concessions for borrowers with less-than-perfect credit; and for those with little or no home equity.
If you’re worried about getting turned down for a mortgage, it can’t hurt you to apply. You may be surprised at what you find out.
Banks Issuing More Mortgage Approvals
Once per quarter, the Federal Reserve conducts a survey in which it asks its member banks about the current lending environment. The survey covers a wide range of loan types, both commercial and residential.
The purpose of the Fed’s survey is to discover what the consumer and business demand is for bank loans, and what’s the banks’ willingness to make such loans to those who apply.
As part of its survey, the Fed inquires on banks’ mortgage lending guidelines — specifically, those for prime residential mortgages.
A “prime residential mortgage”, according to the Federal Reserve, is a mortgage for a borrower whose credit scores are 740 or higher; whose debt-to-income ratios are lower than average; and, whose mortgage features the standard amortization schedule common to a fixed-rate or an adjustable-rate mortgage.
The Fed’s most recent Senior Loan Officer Survey shows prime mortgage borrowers are having an easier time getting mortgage-approved.
11% of banks reported an easing of mortgage loan standards last quarter. No banks declared a tightening. It’s clearly getting easier to get mortgage-approved.
Ellie Mae statistics back this up.
According to the mortgage processing software provider Ellie Mae, whose software handles more than 3.7 million mortgage transactions annually, 77% of purchase mortgage applications are making it to closing.
This is the highest percentage since Ellie Mae began tracking such data.
If you’ve been turned down for a loan in the past, consider re-submitting your application to a lender. Your loan which was declined yesterday may yet get approved today.
FHA Loans And VA Loans Also Getting “Easier”
The third-quarter Federal Reserve Senior Loan Officer survey also showed a loosening in government-backed loans — a category which includes FHA, VA, and USDA loans.
FHA loans are loans insured by the Federal Housing Administration. They are sometimes referred to as 203(b) loans after the section of the FHA code in which they’re described.
FHA loans are popular among first-time home buyers because they allow for low downpayments of 3.5% and because credit score requirements are often lower as compared to other loan programs.
FHA loans are available to all mortgage applicants.
By contrast, VA loans and USDA loans require borrowers to meet special qualification.
VA loans, for example, are available to members and veterans of the U.S. military, and surviving spouses. VA loans allow for 100% financing and never require mortgage insurance.
USDA loans are limited by geography.
Available in less-densely populated areas, including many rural parts of the country and many U.S. suburbs, USDA loans also offer no-money-down options.
Lenders Removing Investor Overlays
Few banks “make their own loans” anymore. Most prefer to lend again the guidelines set forth by Fannie Mae and Freddie Mac; and, the FHA, VA, and USDA.
However, the “official” guidelines of a government-backed loan program can look a bit aggressive to banks — especially conservative ones.
This is why investor overlays exist.
An “investor overlay” is a mortgage approval standard enforced by a bank, but which is not listed in the program’s official mortgage guidelines.
For example, official FHA mortgage guidelines state that borrower’s minimum credit score must be 500 in order to get FHA home loan-approved. Lenders, however, implement an investor overlay, and set their minimum credit score requirement to be 580.
When a bank says it’s loosening its mortgage guidelines, then, this generally means that its investor overlays are being softened and, for the last several years, there’s been a lot of loosening industry-wide.
Minimum credit scores have dropped. Self-employment documentation has reduced. Maximum loan-to-values have been increased.
If you’ve been turned down for a mortgage within the last two years, it may be worthwhile to re-apply. The reasons for which your application was denied may no longer matter.