Finance Blog
Are Lenders Loosening Up on Those Buying a House?
If you’re thinking about buying a house and you haven’t applied for a mortgage since 2006, you’re in for an unpleasant surprise. The lax standards of the real estate boom era—like “no doc” loans, approved without supporting documentation, and “stated income” mortgages, where no proof of income was required—are history. If you want a mortgage today, get your credit score up, pay off debt, put some cash in the bank, and get your paperwork in order because you’re going to be asked to prove your income, assets, debts, and other financial commitments.
Today’s tighter standards have resulted in a greater percentage of loan denials and higher FICO scores. In 2010, for example, the nation’s 10 largest mortgage lenders denied 26.8 percent of loan applications, an increase from 23.5 percent in 2009, according to an analysis by The Wall Street Journal.
The leading reason a lender will deny your loan is because it has concerns that you can repay the loan. You’ll need to prove your ability to pay the loan before you receive any money from the bank by doing the following:
- Prove you have steady employment or a reliable income stream. A new job or self-employment raises red flags.
- Pay down your debt and don’t accrue new debt. A high debt–to-income ratio is a warning sign to lenders.
- Show you have enough cash saved up for the down payment, closing costs, and cash reserves in case of an emergency.
- Allow your lender to verify the source of the funds for your down payment.
- Make sure your credit reports show no recent late payments or “charge-offs” to creditors who have not been paid according to the terms of their financing agreements.
- Check your credit score; having a higher credit score is crucial.
Average FICO credit scores for loans approved by Freddie Mac and Fannie Mae today run in the 760s compared to 620 to 640 during the housing boom. Ellie Mae, a company whose software processes 20 percent of all U.S. mortgages, reports the average FICO score among denied applications has risen to 750 from 741 since August 2011. Even the FHA is requiring a minimum FICO score of 580 to qualify for a loan with a 3.5 percent down payment.
Some, notably the National Association of Realtors and the National Association of Home Builders, claim that these tough new hurdles are impeding the housing recovery by making it extremely difficult for qualified borrowers to get mortgages. A white paper issued by the Federal Reserve in January agreed, noting that mortgage lending has significantly declined among potential first-time homebuyers—an important source of incremental housing demand.
In February, Federal Reserve Chairman Ben Bernanke called for increased lending to creditworthy homebuyers and more loan modifications and mortgage refinancing to help revitalize the housing industry and economy. The NAR reported Bernanke said in a speech to home builders that tightened borrowing was necessary to protect banks, investors and borrowers during the housing crisis, but now the pendulum may have swung too far.
Is this pressure sending a signal to lenders that their tight lending policies may be doing more harm than good? As the spring home-buying season gets underway in earnest, can homebuyers look forward to more moderate lending practices and underwriting policies? Unfortunately, the answer so far seems to be no.
6 comments
Leave a Comment
We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.
Some other factors to consider when commenting:
- Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
- All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
- We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
- Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
- Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
- Stay on topic. Your comment should be concise and pertain to the specific post in question.
- Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
- Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.
RSS Feeds
Articles like this discourage people from even applying for a mortgage. When people see that the average credit score that is denied is 750 they figure, “Why bother?” We are helping a lot of people with credit acores a lot lower than 750.
These statistics paint a bleak picture for most borrowers but do not tell the entire story – not even close.
If you are looking to buy or refinance, please contact me or another lender – even if you think you cannot qualify. There may be opportunites for you. Or, a professional mortgage professional may be able to help you put yourself into a position where you can get a mortgage in the near future.
John:
There’s no question that folks with lower credit scores are getting mortgages – but there are a lot more obstacles for borrowers with lower stores than higher scores. And, folks with lower scores don’t get the same interest rates as those with higher scores.
I’m sure you’ll agree that mortgage lenders are pickier these days and every little item is questions to the nth degree.
You’re right that there are lending opportunities, but you have to search to find one that works for you.
Thanks for your comment.
John you are completely wrong. I am an investor who was hit very hard in the Atlanta market crash and have just obtained a Fannie Mae loan to finance one of their foreclosures with a 565 tri-merged score and only 10% down. And with a much lower income than before.
Beth
What bank did you use if you do not mind me asking?
I was denied with a 640 credit score & very little debt, for a government foreclosed property less than $16,000. The underwriting did not approved because of my self employed income was too low ($18,000 p/yr); but if I was working for someone else other than for myself at minimun wage but “secured job”-Mcdonals, I would hav been approved. It was not easy to find a lender to pre approve this amount for mortgage loan.
So I would have to go with Mr. Cook. On the other hand they would lend you on an automobile for $600 a month (dealership) with no problem at all.
I am going through the mortgage income process, and may be denied according to my agent. Credit score is 760, my W-2 income is 38k a year for a 219,990 with 30% down. The problem is my investment income of 2,880/month was disqualified because my S Corp pays out distributions from cash, not monthly dividends. Bottom line, I make over 5,200 a month and am having a problem qualifying for mortgage + taxes of 1,700 a month. The pendulum has swung too far and something is majorly wrong with the banks. I really think they don’t want to lend anything…