Borrowers with pristine credit are finding it difficult to obtain a new home loan. Many borrowers with good credit are looking to take advantage of the record low mortgage rates and low home prices, however, strict lending standards implemented by mortgage lenders are making it difficult to get a home loan.
Initially, this tightening of credit standards was a necessary by product of the mortgage crisis. The crisis was brought on because of lax credit standards, where borrowers with less than perfect credit and unsubstantiated incomes were given home loans that they could not afford once home prices started to fall. This of course led to a large number of mortgage delinquencies and defaults.
To shed some light on just how much these credit standards have tightened in 2007, 45% of the mortgages purchased by Fannie Mae and Freddie Mac were from borrowers with credit scores less than 720. In 2008 it showed 32% purchased from borrowers under 720 and 2009 showed 15% purchased from borrowers under 720. This housing data obtained by the Federal Housing Finance Agency (FHFA) shows how much Fannie and Freddie tightened their lending standards over three years. Fannie and Freddie have tightened standards so much that 85% of all home loans purchased by the mortgage giants last year were from borrowers with credit scores of 720 or higher.
Many housing market analysts expected lenders to loosen standards by now; instead, they continue to tighten credit standards. This is mainly because they don’t want to be forced to buy back loans that were underwritten improperly. It is now common for banks to require seven years worth of tax returns, pay stubs and other documentation regarding finances before they will consider a loan.
This caution taken by the lenders is definitely keeping lending down. We have the lowest interest rates seen in recent history and still, it’s more difficult than ever to get a new home loan.
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Paul this is very true. Recently here in Atlanta I had two clients with credit scores of 795 and 741. They were both self employed and could only prove 55k of income. Obviously there debt to income ratios were excellent, but they could not get approved to buy a 240k home. 5 years ago they would have qualified for a No Doc Stated Income loan up to 500k. My how times have changed. Great article!
Great article. It is very much true. I know of a friend that was going through the process of buying a second house and watching the headache of this process was cringe worthy. When he bought his first house, he was 21, and it was literally a breeze for him. Now that it’s almost a decade later, he is more established, has better credit and more money, yet he went through a nightmare home buying experience.
Times sure have changed. It used to be anyone with a pulse could get a mortgage. Ultimately it is a good thing that people now have to prove they can really afford the home they want to buy. I know it is aggravating and a lot more work to get a mortgage, but it will help our country prevent another mortgage crisis in the future.
Why is it that some lending company try to point out who is who. They should have revise their terms when it comes to lending policies. There are people out there who are qualified enough to avail such mortgage but they still insist for some deep requirements.