Why buying a home is getting easier

It’s getting easier to buy a home

(Photo: iStock)

If you’ve gotten turned down for a mortgage in the past few years, now might be a good time to re-apply.

That’s because, according to Ellie Mae research, in July 2014, 67 percent of all mortgages applied for closed. That’s way up from six months before in January 2014 and also in July 2013, when the rate of mortgages that closed were at just 53 percent at both times.

And in part this is due to lenders easing qualifying standards, says Jonathan Corr, president of Ellie Mae, a mortgage tracker through which 20 percent of all mortgages pass.

So if you thought you didn’t have a high enough credit score or that you had too much debt to qualify for a mortgage, read on. You may be pleasantly surprised.

Reason #1: Lower Credit Score Requirements

Your credit score is one of the first things that lenders consider when deciding whether to lend you the money for a home. It not only influences what interest rate they’re willing to offer you, but also whether or not you qualify for a mortgage in the first place.

So you'll be happy to know that the required credit scores to qualify for a mortgage have come down. In fact, in July of 2014, the average score for qualification hit 727. And although that might still seem high, consider that it has been as high as 750 in the past few years, according to Corr.

“People get worried when they see the 727 average, but they should remember that that’s just an average. You can have a lower score and still qualify,” he says. In fact, they are seeing many more people qualifying with credit scores below 700, he says.

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That fact is reflected in the finding that 32 percent of closed loans had an average FICO score of under 700, up from 25 percent in July 2013.  As for denied mortgage applications, the average credit came in at 689, down from 702 in July, 2013.

Reason #2: Higher Debt-to-Income Allowances

We Americans love credit. Unfortunately, we sometimes love it a bit too much, leading to too much debt. That’s something American lenders don’t like to see when deciding whether or not to hand out mortgages. But there are indications that lenders are loosening the screws when it comes to the amount of debt you can carry and still qualify for a mortgage, says Corr.

First, it’s important to understand that lenders assess your debt through what is known as your debt-to-income ratio. Simply put, this is the percentage of your gross monthly income that your total monthly debt obligations take up.

Debt obligations are such things as credit card payments, car and personal loan payments, and the proposed mortgage payments and taxes on the house you want to buy, says Corr. Things like food, electric bills, and school tuition don’t count (student loan payments do, however).

So, if your gross monthly income was $5,000 and all your debt payments came to $1,500 per month, you’re DTI would be 30 percent. You would also be in really good shape to qualify for a mortgage, by the way, according to Ellie Mae’s data.

That’s because, as of July, 2014, the average DTI for closed mortgages stood at 37 percent, up from 36 percent in 2013. “But we’ve seen them as low as 34 percent so this is a good sign,” says Corr. He explains it’s a good sign because the higher DTI means lenders are more confident in the economic recovery and people’s ability to stay solvent - and pay their mortgage - with a little more debt.

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He 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 percent can qualify. Case in point, the average DTI for denied mortgages was 45 percent.

Reason #3: Fewer Investor Overlays

Right about now, you are probably saying, “What the heck is an investor overlay?”

Investor overlay is a fancy term for stricter standards imposed by the lender, or bank, but not required by the government.

They come into play a lot with government products such as FHA mortgages, which are loans that are insured by the Federal Housing Administration and made available to consumers by banks and other mortgage lenders.

For instance, FHA guidelines allow for as little as a 3.5 percent down payment and a minimum 580 FICO credit score, according to a press release published by the U.S. Department of Housing and Urban Development.

But that’s not exactly how it has worked. Lenders that handle FHA mortgages are allowed to set their own investor overlays - as long as they don’t contradict FHA guidelines - and traditionally, they have, says Duffy. For example, due to fears of making bad loans, lenders have made the cutoff for FHA mortgages as 620 to 640 for many years, he says.

Lenders do this because if too many borrowers default on the loans they make - forcing the government to bail them out - the lender cannot only lose a lot of money, but get fined or worse, says Duffy.

But the good news for you is that thanks to the strengthening housing market and economy, lenders are imposing less restrictive overlays, says Duffy. In fact, recently, Duffy says most major lenders have lowered that score minimum to 600. Still not the FHA floor of 580, but a good sign for borrowers.