It’s getting harder and harder to qualify for a mortgage

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As if rising home prices and fierce competition weren’t enough, homebuyers now face another challenge: stricter mortgage standards.

According to the Mortgage Bankers Association, mortgages have become more difficult to obtain in the past month (falling about 8.5% from May, in fact). The overall availability of mortgage credit is now at its lowest level since September 2020, which “indicates that standards are tightening”.

“When the availability of mortgages decreases, it is more difficult to get a mortgage,” says Joey Abdullah, Managing Director of Bellco Home Loans. “Typically, you need to have a higher credit score, sometimes larger down payments, or, if you’re refinancing, a higher equity position in the house. “

Conventional loans are the hardest to get

MBA data suggests that standards have tightened most on conventional and compliant loans – those eligible for purchase by Fannie Mae and Freddie Mac. These became 23.5% less available in June.

According to Abdullah, refinancers, investors, independent buyers and second home buyers have the most to worry about when it comes to qualifying.

“We’re seeing that particularly on the home refinancing side,” he says. “Credit availability has also declined for unoccupied homes. “

The stricter standards stem from pandemic-triggered policy changes implemented by Fannie and Freddie, which made it more difficult for those with high loan balances to refinance their mortgages. The two government-sponsored agencies also cut back on the number of investment and second home loans they would buy, so those lending options declined as well.

Fortunately, the difficulties are not expected to last long, at least for refinancers. On the one hand, there is a bit of a lag between the data and the MBA reports. For example, Brian Koss, executive vice president of Mortgage Network, says he’s already seen things improve in recent weeks.

“It’s actually a little slack because you see the economy improving,” Koss said.

Additionally, Fannie Mae and Freddie Mac launched new refinancing programs this month, which should make it easier to refinance low-income borrowers with high loan value.

The Federal Housing Finance Administration also recently removed the unfavorable market fees it imposed on refinance loans last year. This should lower the interest rates that conventional borrowers see when refinancing.

“Your interest rates are more attractive than they were at this time last week,” says Koss. “That works out to about an eighth of a percent. “

Government loans are not that difficult

The problem appears to be isolated from conventional loans, so for borrowers who opt for government guaranteed mortgages – FHA loans, VA loans, and USDA loans, there shouldn’t be any new challenges. According to MBA, lending standards have remained fairly stable on these products since the start of last year.

“The government’s mortgage credit availability index has changed little,” said Mike Tassone, CEO of Own Up Mortgage Market. “This indicates that the most at-risk borrowers – those with low down payments, below average credit, and / or higher income / debt / income ratios – have not experienced a significant loss in credit availability.” . “

According to Tassone, Own Up Market lenders currently require a minimum credit score of 600 on FHA loans. While this is up slightly from pre-pandemic levels when lows were as low as 500 to 580 in some cases, it is “definitely an improvement” from a few months ago, he says. .

Another advantage of these loans? The FHA recently relaxed the way it treats student loan debt for borrowers. Tassone says it “should significantly improve access to credit for borrowers with student loans looking for a mortgage.”

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How to improve your chances

If you’re having trouble qualifying for a mortgage, there are several ways you can improve your odds. According to Emanuel Santa-Donato, vice president of capital markets at mortgage lender Better, raising your credit score is one of the best strategies.

“Stricter lending standards mean the higher your credit score, the better,” says Donato. “The higher your credit rating, the more financing options and better rates you can get, which can save you big money over the life of your mortgage.

You can also work on reducing your debt-to-income ratio – or how much of your monthly income is spent on debt.

If you’re not able to improve your credit score or DTI fast enough to make an impact, Abdullah says it’s still possible to buy or refinance a home, but expect more scrutiny. thorough when you do.

“Don’t be put off by this data point or this month,” says Abdullah. “Just be prepared for a more detailed loan process in the future. “

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