Wondering what it takes to qualify for a home loan in 2014? You’re not alone. Of all the questions we receive each week, roughly 70% of them have to do with mortgage qualifications and requirements in 2014. In short, people want to know what it takes to get a loan these days.
So we put some feelers out, to help answer this frequently asked question. Over the last few months, the Home Buying Institute has conducted a number of informal surveys of lenders across the U.S. We wanted to learn more about the mortgage qualification criteria they are using in 2014, and how things have changed over the past few years.
Looking Back: Why Mortgage Qualifications Got Tougher
The mortgage industry has changed dramatically over the last few years. It has gone from one extreme to the other, and is now somewhere in the middle.
In the early to mid 2000s, mortgage qualification criteria in the U.S. were fairly lax. Those were the days when almost anyone could qualify for a home loan. But then came the housing market collapse and economic recession. In the wake of that crisis, lenders increased their standards across the board. Suddenly, it was a lot harder to qualify for a loan. So the “pendulum” swung from one extreme to the other, an over-correction of sorts.
Today: Some Signs of Easing in 2014
Today, in 2014, we are finally seeing signs of easing within the lending industry. According to the July 2014 “Senior Loan Officer Opinion Survey” conducted by the Federal Reserve, nearly one-fourth of all banks surveyed had eased their mortgage lending standards within the previous three months.
Other signs of industry-wide easing include the following:
- Average credit scores among closed loans have dropped over the last two years.
- Average debt-to-income ratios among closed loans have increased in the last two years.
- Several big-name lenders have announced lower credit-score requirements for borrowers.
To be clear, this doesn’t mean that just anyone can land a home loan in 2014. Mortgage qualification requirements will never regress to the “anything goes” days of the housing boom (nor should we hope for that). In fact, new lending rules have been put in place to prevent such a thing. But it does seem to be getting easier for well-qualified borrowers to obtain financing.
The million-dollar question is, what is the definition of a “qualified” borrower in the current market? That’s another question we asked lenders. Here’s what they told us…
Current Mortgage Standards at a Glance
So, what are lenders looking for these days when reviewing applicants? Here’s a snapshot of a reasonably qualified borrower based on current mortgage-qualification standards and trends:
Reasonably Qualified
If you have a decent credit score (north of 620), a manageable level of household debt, steady income, and a down payment of at least 3%, you can probably qualify for a home loan in 2014. Generally speaking, the borrower’s total or back-end debt ratio should not exceed 45%. But none of this is set in stone. There are exceptions to most of these lending standards.
Well Qualified
Borrowers who are considered well-qualified will have an easier time getting approved for a loan. They’ll also qualify for lower mortgage rates, which could result in significant savings over the long term. These are borrowers with credit scores of 740 or higher, down payments of 10% or more, and very little debt in relation to their gross monthly income.
Reasons for Rejection
There are many reasons why a person could be denied financing by a mortgage lender. In 2014, some of the most common causes of mortgage “rejection” are: (1) Borrower’s credit score is too low. (2) Borrower has too much debt relative to income. (3) Borrower does not have sufficient funds to close the loan. (4) Borrower has been through a short sale, foreclosure and/or bankruptcy in the recent past. (5) Borrower lacks a down payment.
Forthcoming Book on Lending Trends
This article is the harbinger of a bigger project we are working on. Sometime within the next month, the Home Buying Institute will publish an e-book for borrowers entitled How to Qualify for a Home Loan. It will expand on all of the mortgage qualifications mentioned above, as well as other lending trends.
It is based on extensive research and numerous surveys. The e-book will be available at no cost. You can follow us on Twitter to keep up with these and other developments.
Disclaimers: This article provides an overview of mortgage-lending trends and standards in 2014. It is based on feedback from mortgage brokers and loan officers, resulting from numerous surveys and inquiries made over a three-month period. It is also the result of in-depth research involving government reports, industry news, trends and more. This article is not meant to take the place of professional mortgage advice. Every lending scenario is different, because every borrower is different. As a result, some of this information may not apply to your situation. Do not make any financial decisions based solely on the information presented above.