After years of saying no to millions, mortgage lenders are loosening up, making it easier for people with less than perfect credit to get loans. Too bad not so many people are in the market.
The two facts are related, since lenders get hungrier when they don't have enough applicants. And both features arise from the market's changes as the financial crisis recedes into the past.
What's it add up to? Well, if you've been sitting on the sidelines reluctant to buy a home or refinance out of fear of rejection, it's time to get your loan application in. Not only are approval standards loosening, but mortgage rates could be higher in coming months.
The Mortgage Bankers Association's Mortgage Credit Availability Index, which was set at 100 in March 2012, is now 111.5, having decreased just slightly after four straight months of increases. A higher score, based on lender requirements for credit score, loan-to-value ratios and other factors, means loans are easier to get. (If it had been around in 2007, when the only real loan requirement was signing your name, it would have been set at 800.) So lenders are a little less hyper-cautious than they've been, though not throwing money to the winds.
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Why the loosening? For one thing, lenders probably realize they got more conservative than they had to, denying themselves profits from perfectly sound applicants. Also, rates have eased for loan payment delinquencies, foreclosures and other signs of trouble.
Next, home prices have been rising at robust levels in much of the country, especially in some of the markets that were hit hardest by the housing collapse. Rising prices and growing demand from buyers allow a borrower who does get into trouble to get out by selling the homes, using the proceeds to pay off the loans. So if a lender approves a mortgage for someone it shouldn't, it may all turn out OK anyway.
Finally, there's that hunger factor. Because rates are rising, the number of mortgage refinancing applications has plummeted over the past year, as many homeowners can't save enough to justify the refinancing costs. Although home sales have picked up, they haven't fully offset the decline in refinancing.
So lenders are searching for customers, and they have more time to handle trickier applications, such as those from people who are self-employed.
Applicants who have very low credit scores, have recent bankruptcies or foreclosures, or are behind on debt payments are still likely to be denied. But a few dents and scratches on your record might not be the deal killers they would have been a year or two ago.
The first step for a prospective applicant is to check the credit history and correct any mistakes. Make sure you are up to date on all bills and loan payments, and gather all materials you'll need to show your income is big enough and dependable enough to support a loan.
Also, put together some cash. With a bigger down payment, you have a better chance of being approved, since a smaller loan relative to the home's value makes it easier for the lender to come out whole in a foreclosure.
And be sure to shop around, as some lenders will be more lenient than others.