Friday, December 12, 2014

Federal Reserve Says Lending is Getting Easier

By Toni Ryan, Princeton Capital

Yahoo News recently reported that buying a home is actually getting easier. According to Ellie Mae research, in July 2014, out of all mortgages that were applied for - 67% actually closed. This is a major increase from the last year when the rate of mortgages that closed was at 53%. According to the president of Ellie Mae, Jonathan Corr, this is due, in part, to lenders easing their qualifying standards.
Does this mean that if you were turned down for a home mortgage in the last few years that you should reapply? Corr says, “Yes - depending on your circumstances, your chances of approval may have increased.”
Yahoo attributes this increased flexibility in the lending industry to 3 key factors:

1. Lower Credit Score Requirements - Many lenders have lowered the required credit scores to qualify for a mortgage. In July 2014, the average score for qualification was 727 - which may still seem high however in the past few years, that number has hovered around 750. The study also found that 32% of closed loans had an average FICO score of less than 700 which is 25% more loans than previous years.

2. Higher Debt-to-Income Allowances - Lenders assess your risk by considering your debt and income ratio. For example, if your gross income was $5,000 and all of your debt payments came to $1,500 - your DTI would be 30%. According to the study, as of July 2014, the average DTI for closed mortgages stood at 37% - up from last year. This means lenders are more confident in the economic recovery and people’s ability to stay solvent to allow for little more debt. Corr adds that, like credit scores, this is an average and should not worry those with slightly higher DTIs. He believes that borrowers with a DTI of 40% or even 43% can qualify.

3. Fewer Investor Overlays - An investor overlay is essentially a stricter standard imposed by a lender or bank even though it’s not required by the government. For example, FHA mortgages are insured by the government and might have guidelines that require 3.5% down and a minimum credit  score of 580. However a lender offering an FHA loan might have an overlay that requires a minimum score of 620. This doesn’t contradict the FHA guidelines, but traditionally these overlays are added due to economic fears & defaulted loans. Thanks to the strengthening housing market, lenders are imposing less stricter overlays which allow more options for borrowers.
As you can see - 2015 is looking to be a great time to apply for a home mortgage. Keep in mind that everyone’s financial picture is different which is why it is essential to work closely with your mortgage professional to develop a strategy and identify all of your options.

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