Home loans are becoming easier to get – for some

Terence Loose
Is it easier to get a mortgage?
Is it easier to get a mortgage?

Do you want to buy a home, or refinance the one you own, but are worried that you don't have the financial status to qualify for a mortgage?

Well, here's some news that might raise your spirits: Mortgages might be easier to get now, according to a report from Ellie Mae, a national mortgage tracking firm.

Specifically, Ellie Mae's September 2013 "Origin Insight Report" found that for closed loans, average credit scores and down payments are coming down, while at the same time, allowable debt limits are rising.

"Although it's not loosening rapidly, we are seeing a consistent loosening that has happened over the last 12 months and in particular since the beginning of the year, in underwriting criteria," says Jonathan Corr, Ellie Mae's president.

Wondering why mortgages might be just a little easier to get? Keep reading to see what we found out.

Credit Score Standards Have Loosened

You might be more than just a number in a computer somewhere, but one number - your credit score - is massively important to lenders when it comes time to throw the thumbs up - or down - on your mortgage application.

So if you're planning to refinance or buy a home anytime soon, it may come as good news that according to Ellie Mae, the average FICO credit score for closed loans came in at 732, down from 750 the year before. The FICO score, which ranges from 300 to 850, is the one mortgage lenders use most, says Corr.

And while the lower average qualifying score is good news, another stat excites Corr even more. According to the study, the percentage of folks with credit scores under 700 who qualified for loans jumped from 17 percent in 2012, to 32 percent in September of 2013.

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Why is that significant? "People see a 732 average score and they get worried that they can't qualify if they don't have it. But actually, what we're seeing is the number of folks who have [a credit score of] under 700 and have closed loans jumped quite a bit. That shows a loosening of qualifying standards and gives more people a chance," says Corr.

Higher Debt-to-Income Ratios Are Allowed by Lenders

It may come as no surprise that lenders who are about to loan you a large sum of money worry about whether you have, or are taking on, too much debt to be able to make your monthly mortgage payment.

So, one of the key things they calculate is your debt-to-income ratios (DTI), says Corr. There are two. The first ratio, says Corr, is your "front-end" DTI. This is the percentage of your gross monthly income your mortgage will take up. The second ratio is your "back-end" DTI, or the percentage of your gross monthly income that your mortgage, plus other debt obligations such as credit card payments, car loan payments, personal loans, and other such debts, will claim.

As an example, say your household gross monthly income was $6,000, your mortgage was $1,500, and all your credit card and auto loan monthly payments came to $600. In that case, your front-end DTI would be 25 percent, and your back-end DTI would be 35 percent.

Now here's the good news: The average percent of DTI is going up, says Corr. That is, for a variety of reasons - such as a strengthening economy and housing market - Corr says lenders are becoming more lenient about how much debt they see as acceptable for borrowers to take on.

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"[The average DTIs] were about 23 percent and 34 percent, and we've seen them come up a bit to 25 percent and 37 percent. So while it's not massive, you are seeing some loosening, which is a positive sign for borrowers," says Corr.

It's also important to remember that these are averages, not limits. So if your DTI is a bit higher, Corr says that doesn't necessarily mean you can't qualify for a mortgage.

Loan-to-Value Requirements Are Lower

In case you aren't sure what exactly a loan-to-value is, think in terms of your down payment. The loan-to-value simply refers to the amount you are borrowing (your mortgage) compared to the appraised value of the home you are buying or refinancing. The remainder is the down payment.

As an example, if the home is $300,000 and you pony up a 20 percent down payment of $60,000, the loan-to-value would be 80 percent.

"Not long ago, many lenders weren't even doing loans with less than a 20 percent down payment [80 percent loan-to-value] because they were taking a risk-adverse approach," says Corr. "Now, we're seeing the average come down, from 22 percent to 19 percent."

On a $300,000 home, that's a $9,000 difference in the amount you have to come up with. And again, remember that these are averages, says Corr. So if you don't have 19 percent to put down on your home, that doesn't mean you can't qualify. Lenders take many other factors into consideration.

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There Are More Competitive Insurance Options

When buying a home, if your down payment is less than 20 percent of the appraised value of the home, you'll most likely have to get private mortgage insurance (PMI), says Corr. The same goes for people who refinance, but don't have 20 percent equity in their home.

PMI is insurance that covers the lender against any losses in case your home declines in value and you default on your mortgage. In that case, the lender might not be able to sell the house for an amount that would recoup their mortgage principal. If you can't get insurance, you won't get the mortgage, says Corr.

And when home values were declining, mainly from 2008 to 2010, PMI was hard to get in many places, says Corr. It got so bad, he says, that many insurers went bankrupt, and many borrowers were turned away because of a lack of ability to get PMI.

"Now we're seeing that the insurers who are still here have strength again, and we've also seen new [insurers] enter the market, so you have a greater supply of insurers. That combination has made it more competitive and made it more likely for folks to get mortgage insurance," he says.

The bottom line, says Corr, is that across the spectrum, the strict requirements for qualifying for a mortgage have loosened as the housing market has strengthened. And that's good for everyone.