New Relaxed Mortgage Standards

Relaxed Mortgage Standards – What they mean for you.

After the mortgage crisis, lenders have gotten increasingly strict, making it hard for many people to qualify for home loans. However, new, less stringent requirements could mean that many buyers who were formerly shut out could now get the loans that will allow them to buy homes of their own.

Loans Not Available to Most Buyers

Recent figures show that almost one-third of loans went to borrowers with credit scores of 780 and above. People with scores between 700 and 790 claimed 44%. Only 23 percent of loans went to people who had scores between 640 and 699. Those with credit scores of 619 and below were completely in the cold; only 0.3% of all mortgages were granted to people in that bracket. With average FICO scores at 646 nationwide, this means that a large swath of consumers have been closed out of the housing market. This has not just been a hurdle for individuals; economists say that the tight lending market has held back a recovery in the housing market, generally dampening economic growth.

Lenders say that the tight borrowing environment is the result of deals with Freddie Mac and Fannie Mae. The organizations currently back over half of all mortgages. Lenders say that the guarantors’ policies were unclear, leading lenders to err on the side of caution. However, new standards are being released that should clarify borrowers’ circumstances and make it possible for many of those who could not borrow before to get a loan.

Easier Standards for Borrowers

The new regulations took effect on Dec. 1, so results of the new rules should be apparent soon. However, Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, says that because the changes are big, it can take some time to see their full impact. Among the changes coming to home loans:

  • Faster turnaround times. Lenders, including SunTrust Banks and Wells Fargo, say that borrowers should see their applications processed more quickly. Generally, it has taken two months or more for an application for a loan to be expected. But turnarounds should be faster within the first few weeks of the new policies.
  • Less punishment for one-time lapses. Borrowers whose credit scores have taken big hits because of one-time events like job loss, a large medical bill or other personal catastrophes will find a more forgiving environment.
  • Fewer credit overlays. Lenders have been asking for extremely high credit scores and also asking for guarantees that include high income and high balances in the bank. Fannie Mae and Freddie Mac say that those stringent restrictions are more than they require, so these could be reduced or go away completely.
  • Less rigorous documentation. Under the previous system, a borrower who had a late payment on a car loan could have been asked to write a memo that detailed what happened and why the payment was late. This could be required even when the minor negative mark was not preventing the borrower from getting a loan. Under the new system, this sort of documentation will be less common, leading to quicker processing of loans.
  • Lower credit scores okay. In the past, many lenders would not consider a borrower under a score of 660. But, mortgage company Mason-McDuffie of California said that the new rules can let them consider credit scores as low as 620, which is the limit for loans that are backed by Fannie Mae or Freddie Mac.


More Opportunity

Amid all of these changes, it is expected that hundreds of thousands of borrowers will now be eligible for home loans. The Urban Institute says that as many as 1.2 million additional mortgages would be written every year if loan availability were to go back up to what are regarded as normal levels. There is strong optimism that the new rules can speed up the economic recovery and improve the finances of millions of individuals.

If you have wanted to buy a home but strict rules were keeping you out of the game, now could be the time to start preparing. Take a look at your credit health and fix up any minor blemishes. The attention to these details can mean not just getting a loan but ensuring that you get the best possible rate available. Talk to us today about the steps necessary to improve your credit and qualify for the newly available loans that can get you into a home of your own.

Low Down-Payment Mortgages

Pros and Cons of Low Down-Payment Mortgages

Since the financial crisis, it has been difficult for many people to qualify for home loans. To help more people get mortgages, the federal government said that it plans to expand the availability of low down-payment mortgages.

Freddie Mac’s last low down-payment mortgage program was discontinued in 2011. Fannie Mae had one that it ended last year; they decided to end the program when the F.H.A. increased the fees that it charges for guarantees.

Possible Risks?

Many studies have shown that home buyers who put down at least 20 percent have a lower default rate than those who make smaller down payments. Additionally, people who put down very small down payments wind up at risk if housing prices fluctuate. If the value of their house goes down, they wind up upside down on their mortgages right away.

But, with current housing costs, a 20 percent down payment is outside of many borrowers’ means. Take Boston, where the median home value is $439,000. A buyer putting down 20 percent would have to come up with almost $88,000. It’d take someone who earns $50,000 a year and saves 10 percent of income 17 and a half years to save that much.

And, there are other groups’ analyses that suggest that lower down payments are not as risky as you might think. The Urban Institute did a comparison between borrowers who had down payments between 3 and 5 percent and borrowers whose down payment was between 5 and 10 percent of the loan. Those who put in the lower down payments had lower rates of default when their credit ratings were high. Fannie Mae will consider factors such as borrowers’ annual income and the amount that they have in the bank when approving low down-payment loans.

The borrowers will have to carry private mortgage insurance to qualify for low down-payment loans. Fannie Mae’s charter prevents the organization from granting mortgages for more than 80 percent of the cost of a house.

Raising Your Credit Score

If you are cash-poor but feel that you have the financial skills and commitment to make housing payments on time, increasing your credit score can make it easier for you to qualify for a low down-payment mortgage. Many people who have had issues such as medical bills or divorce can have credit scores that wind up lower through no fault of their own. And, many younger adults or people who have always chosen to use cash will find that their credit history is considered thin. In each of these circumstances, there is a lot that can be done to increase your credit score and make it more likely that you will qualify for a loan. A few steps that can help to quickly increase your credit score include:

  • Check your credit reports for errors. Last year, the FTC performed a study that showed that 5 percent of consumers have errors on their credit report that can result in problems getting a loan. One in 10 consumers saw their credit scores change after correcting errors. Make sure you get all three reports, since they might contain different information from one another.
  • Pay off debts in collections. Unpaid collections can significantly harm your credit score. Contact creditors to make arrangements to pay off debts. In some cases, you may be able to settle for less than the total of the debt. In others, you may be able to make arrangements to pay in installments.
  • Consider consolidating loans. Having too many installment loans can drag your credit score down. Consolidating loans reduces the number of open loans you have, which can improve your credit score.
  • Pay down your credit cards. Another factor that creditors look for is the relationship of your current debt to your available credit. If too many of your cards are near the limit and you have a balance on all of them, it can look to creditors like you are overextended. Many financial experts recommend that you never use more than 30% of your available credit. Some are even more conservative and recommend keeping 10% or less of your credit utilized at all times.

It remains to be seen how the new low down-payment loans will play out. With luck, these new loans will open up home ownership opportunities to a larger pool of borrowers who have good credit but less available cash. By working on erasing any issues that tarnish your credit score now, you can better ensure that you are in a good place to qualify for the loans when you have the chance.


FICO Score 9 – Why Fannie/Freddie Aren’t Using It

As of August 2014, the ever popular FICO score co. announced that it had undergone a change in the formula that calculates the score. The change specifically no longer penalizes consumers who have a payment history detailing collection of medical debt. The score is dubbed “FICO Score 9” and, at least on the surface, looks to improve the credit scores of millions of consumers.

Now, consumers with outstanding medical debt will be more likely to get approved for car loans, credit cards and other types of new credit. In fact, the new formula is expected to raise scores by an average of 25 points for those who qualify – and even an increase of as little as 25 points can make a big difference.
But there’s one very notable thing about this new formula to take note of…
Consider the fact that the two mortgage financing juggernauts, Fannie Mae and Freddie Mac, won’t be using the new FICO Score 9 to evaluate loan applicants – a fact that greatly impacts the qualifications of potential homeowners when it comes to credit score.

Why Not Fannie/Freddie?

Since Fannie Mae and Freddie Mac are government-sponsored, they dictate the type of scoring software versions that can be used for underwriting purposes. In fact, it’s estimated that they both currently use a FICO score that’s two versions behind Score 9. What’s more is that there’s no telling when – or if – Fannie Mae and Freddie Mac will ever use Score 9.

What Can You Do?

So what can you do if you have outstanding medical debt and would like to – but currently don’t – qualify for a mortgage loan? Call it unfair, based on the new formula in FICO Score 9, but the only way is to repair credit via debt management and other strategies to get your score into a position that qualifies for such a loan.

Credit repair can be difficult – especially if there are medical debts involved – potentially putting a great hamper on consumer finances. But until Fannie Mae and Freddie Mac start using the latest formula, it’s the only way to improve your score to qualify for a mortgage loan.

So follow the standard credit tips (i.e. on-time payments, keeping debt within 30 percent of your total credit allotment and limiting irresponsible spending, among others) in the meantime. Sooner or later, either Fannie Mae or Freddie Mac will catch up to modern times or your score will be good enough on its own to qualify for low-interest loans.

For more information on how to repair your credit scores fill out the form below or call our office at 617-265-7900.