Homeownership in America has historically been the single best way to build wealth. New work-from-home policies mean buyers have more flexibility to choose where they want to live. And with mortgage rates at near record lows, it would seem like an ideal time to consider a home purchase. However, while it may be more affordable to get a mortgage now, it’s also become increasingly more difficult to actually get approved for one.
2020 brought us the year of the pandemic and along with that a dramatic tightening of mortgage lending standards. The Mortgage Credit Availability Index (MCAI) dipped to its lowest point since 1999. And the median FICO score for purchase loans went up 40 points higher than the pre-pandemic level of around 700. In fact, 70 percent of mortgages issued in 2020 went to borrowers with FICOs of at least 760. Although that number was probably an anomaly due to the higher than normal percentage of refinance borrowers.
In order for mortgage lenders to be able to sustain a viable business they must be able to adequately assess risk. Unfortunately, as a result of the economic uncertainty caused by COVID-19, the normal risk assessment model used by lenders had to be adjusted. Many lenders were restricted access to some forms of credit, meaning borrowers who had credit scores on the lower end of the scale weren’t able to benefit from the historically low mortgage rates.
Caren Becker, senior mortgage loan officer at All Western Mortgage, saw lenders tightening their guidelines by placing “overlays” on their acceptable loan purchases. Becker said, “the COVID-19 pandemic really affected Las Vegas, as we all know, due to the scaling back or closing of many industries, particularly in the hospitality and leisure markets. In the past, I have regularly used an average of tip or commission income to qualify my borrowers, but with little or no activity on the Strip, we weren’t even able to use that income at all in many cases last year.”
Self-employed borrowers faced the daunting task of having to provide mounds of documentation to show that their business income was stable and not adversely affected or declining because of the pandemic. Profit and loss statements got down to month-by-month statements with business bank statements being required to back up the income shown on the P&L. No one knew the length or depth of this recession.
Loan forbearance, as mandated by the U.S. Congress, also threw a heavy tilt on the loan risk analysis. The CARES Act passed last year made it possible for borrowers to pause or reduce their mortgage payments for anywhere from three to 18 months. But while you could pause your payments to your loan servicer, that servicer was still on the hook for timely payments to the end bond holder of your loan. Strange times indeed.
Fortunately, there is now “light at the end of the tunnel” for would-be buyers or borrowers. Last year, the high demand for loan products drove many lenders to increase their minimum required credit scores both as a means of slowing down the massive flood of applications, but also as a way to mitigate their risk. But the uptick in interest rates this year combined with the limited amount of housing inventory has slowed down the new application levels dramatically. Thus opening back up the credit markets to those marginal borrowers. Supply and demand economics will always prevail.
Three out of the last four months the Mortgage Credit Availability Index (MCAI) has improved. While still hovering at less than desirable levels, the improving numbers mean that credit availability has picked up. An increase in the MCAI is indicative of loosening credit.
If you are considering a purchase or refinance, what things can you do to help yourself get a mortgage? Some things that you can control are your credit: Make sure to make on-time payments on all accounts. Do not let small unpaid medical bills, or other small creditors, place you into a collection account. Your FICO score is “dramatically” affected by recent derogatory credit.
Save as much money as possible toward your down payment. Even a small little bit extra can make the difference between an approval or denial. Try not to run up too much additional debt. A lower debt-to-income ratio (DTI) could also help you get that approval. Remember that lenders “ideally” like to see no more than 28 percent to 33 percent of your gross monthly income going toward your housing expense (PITI) payment, and the total of “all debts,” PITI + all other monthly payments, not exceeding 43 percent of your gross monthly income.
Chances are that interest rates won’t stay at multidecade lows for much longer. That’s why, if you are considering a home purchase or refinance, sit down with an experienced professional loan officer who can help you get pre-qualified. Then, when you are ready to pull the trigger on a home purchase loan, your loan application will come back approved.
Rick Piette is the regional sales manager for All Western Mortgage, Rickp@AllWestern.com.