We’ve been hearing for years how mortgage lenders have tightened their credit standards for borrowers. We’ve heard about new government lending rules that were supposed to increase mortgage standards even more, “squeezing out” many well-qualified borrowers as one analyst put it. We’ve heard that it would become increasingly difficult to qualify for a home loan in 2015.
As it turns out, things aren’t so bad after all.
In fact, 2015 mortgage standards are more relaxed in several key areas, compared to what we saw in the wake of the housing crisis. Industry-wide data support this notion. Lenders are now offering mortgage loans with lower down payments. They’re also lending to borrowers with lower-than-average credit scores (borrowers who may have been shut out in the past).
So the sky is not falling after all.
Much-Feared ‘QM’ Rule Has Had Minimal Impact
In January 2014, the Consumer Financial Protection Bureau (CFPB) finalized and enacted a new lending standard known as the Qualified Mortgage, or QM. On paper, this rule is designed to encourage “safer” lending practices by prohibiting certain “risky” loan features. Interest-only payments, balloon loans, and negative amortization are all discouraged under this new mortgage standard.
When QM was still being formed, mortgage lenders and their lobby groups griped up a storm. They practically threatened to choke off lending to all but the most well-qualified borrowers, in response to what they viewed as government overreach.
But the melodrama was pointless, because QM didn’t really change much. On top of that, lenders can still make “non-QM” loans — they just won’t reap the rewards of QM compliance, such as legal protection.
Bottom line: This lending “rule” isn’t really a rule at all. Not in the legal sense of the word. It doesn’t force lenders to do anything. It’s a recommendation tied to an incentive. And it hasn’t significantly altered mortgage standards in 2015.
According to a detailed analysis of the Federal Reserve’s Senior Loan Officer Survey, conducted by the Urban Institute, QM has had “almost no impact in the government sponsored enterprise (GSE – Fannie Mae and Freddie Mac) or government agency (Ginnie Mae) market…”
Counterpoint: Mortgage Standards in 2015 May Be More Relaxed
Over the last year or so, there were several signs of easing within the mortgage lending industry. We’ve covered them before. They range from government policy changes to new programs offered by lenders, both of which lead to broader access to credit.
Granted, 2015 mortgage standards will not be as lax as they were during the housing boom — nor should we hope for that. But conditions will likely be more “borrower-friendly” than what we saw in the wake of the housing collapse.
Call it the Goldilocks syndrome. Lending standards used to be too lax. Then they became too strict. Now they’re just right — government rules and all.
Lower Down Payments, Credit Scores in 2015
Down payments are one area where 2015 mortgage standards could be more relaxed, when compared to previous years.
Last month, the Federal Housing Finance Agency (FHFA) announced that Freddie Mac and Fannie Mae, the government-controlled mortgage buyers, would begin accepting loans with a loan-to-value ratio of 97%. Conversely, this means borrowers could put down as little as 3% and still qualify for a conventional home loan.
Fannie Mae has already started accepting such mortgage products. Freddie Mac’s program, which is known as “Home Possible Advantage,” will be available for home loans with settlement dates on or after March 23, 2015.
This trend could increase homeownership in 2015, by bringing borrowers with limited funds into the mix.
Credit scores are another mortgage standard that appears to be easing in 2015. According to Ellie Mae, a company that provides software to the lending industry, the average credit score for closed (successful) home loans has dropped slightly over the last couple of years.
This is true for both conventional and FHA loan. For instance, the average credit score for a successful FHA purchase loan dropped from around 700 in early 2013, to 683 at the end of 2014.
One area where we haven’t seen much easing is the debt-to-income ratio, or DTI. This will remain an important mortgage standard in 2015, and lenders may even be more strict with DTI ratios due to government rules. These days, most lenders want to see a total debt-to-income ratio no higher than 43%, though that number is not set in stone. Learn more about income standards for mortgages.
Message to Borrowers: Don’t Make Assumptions
It’s a common pattern. People are in the market to buy a home, so they start researching mortgage lending standards. They read an article about how lenders are tightening their standards in 2015 — higher credit scores, larger down payments, [fill in the blank].
So the mortgage shoppers get discouraged and don’t even bother applying for a loan. Maybe they have low credit scores or a large debt load. Maybe they can’t afford a 5% down payment. Whatever the reason, they stop in their tracks and never even bother to submit an application.
Our advice: Borrowers should not assume they are unqualified for a home loan. Current mortgage standards in 2015 are actually more reasonable than they’ve been for several years. So a reasonably qualified borrower should be able to find a willing lender.