Department of Veterans Affairs

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Mortgage volumes fell for a third straight week after interest rates surged to their highest level since November, the Mortgage Bankers Association said.

The MBA’s Market Composite Index, a measure of weekly loan application activity based on surveys of the trade group’s members, dropped a seasonally adjusted 3.7% for the seven-day period ending May 26. Compared to the same week last year, volumes were 36% lower, with economic pressure continuing to weigh on both consumers and lenders.

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“Mortgage rates for conforming-balance 30-year loans were being quoted above 7% by some lenders last week, and the weekly average at 6.9% reached the highest level since last November,” said Mike Fratantoni, MBA’s senior vice president and chief economist, in a press release. 

“Application volumes for both purchase and refinance loans decreased last week due to these higher rates,” he said.

The 30-year rate for loans under the conforming balance of $726,200 finished 22 basis points higher than the prior week’s average of 6.69%. Meanwhile, borrowers typically used 0.83 points, up from 0.66, for 80% loan-to-value ratio loans.

The 30-year fixed-contract jumbo rate made a similar large upward leap to an average of 6.78% compared to 6.57% a week earlier, Points also increased to 0.76 from 0.57. 

Businesses and potential borrowers hoping for relief from high interest rates, which have remained above 6% for most of the last eight months, won’t likely find it in the foreseeable future, according to Fratantoni. While debt-ceiling worries applied upward pressure in May, other factors are playing a large role in keeping them elevated.

“Inflation is still running too high, and recent economic data is beginning to convince investors that the Federal Reserve will not be cutting rates anytime soon,” Fratantoni said. After the May meeting of the Federal Open Market Committee, Chair Jerome Powell suggested the central bank could pause federal rate hikes in future meetings to assess the results of its policies, leading some in the mortgage industry to hope that cuts would occur later in 2023. But some analysts are already warning the economy is running hot enough that additional economic tightening should be in the cards instead.

The uncertainty surrounding rates has contributed to the slow pace of the housing market this year. The MBA’s seasonally adjusted Purchase Index fell for a third straight week, down 2.5% from volumes reported seven days earlier. On a year-over-year basis, purchase applications finished 31.1% lower, as a lack of available inventory also continues to limit activity. 

The Refinance Index took an even larger drop of 6.9% from the previous survey. With most eligible homeowners already sitting on interest rates below current levels, refinance volumes came in 45.1% below their level during the same week in 2022. The share of refinances in relation to total mortgage activity also shrank to 26.7% from 27.4% seven days earlier.

Meanwhile, average loan sizes decreased across the board, with the overall mean application amount landing at an average of $391,000, down 0.7% from the prior week’s $393,600. Average purchase sizes inched down 0.6% to $439,400 from $442,000, while the typical refinance amount was $258,400, sliding down 2.5% from the previous week’s $265,100.

The seasonally adjusted Government Index came in 4.4% lower from the prior week’s survey, while federally backed loans accounted for a smaller portion of applications relative to total activity. Federal Housing Administration-guaranteed loans managed to increase to a 12.7% share, edging up from 12.5% seven days earlier. Their small rise was offset by the shrinking slice of applications backed by the Department of Veterans Affairs, which made up 12.1% of all new activity, compared to 12.5% the previous week. The share of mortgages sponsored by the U.S. Department of Agriculture remained unchanged at 0.5%.

As it did for conforming and jumbo loans, the average contract rate of the 30-year FHA-backed mortgage also shot up to its highest level in months, finishing 29 basis points higher last week at 6.85%, compared to 6.56% seven days earlier. The use of borrower points for 80% LTV loans inched up to 1.26 from 1.24.  

Meanwhile, the contract average rate of the 15-year fixed mortgage came in at 6.41%, up from 6.15% the previous week. Points increased to 0.84 from 0.72.

As fixed interest rates headed higher across categories tracked by the MBA last week, ARMs went in the other direction. The contract average of the 5/1 adjustable-rate mortgage fell 34 basis points to 5.39% from 5.73%, while points decreased to 0.46 from 1.19.

The decrease helped lift the share of adjustable-rate mortgage applications up to 6.8% from 6.7% of loan activity a week earlier. The mortgages remain at a fixed rate for a five-year term before adjusting to market levels. 

Source: nationalmortgagenews.com

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A less-than-stellar credit score doesn’t automatically disqualify you from refinancing your mortgage. Fortunately, there are several options to refinance your mortgage with a bad credit score. 

Here’s what you need to know about lender credit standards and the steps you can take to refinance with a lower credit score.

What Credit Score Is Needed to Refinance?

Every lender has a different set of criteria for credit scores and refinancing. To refinance a conventional mortgage, most lenders look for a credit score of at least 620. 

Some government programs may require a credit score of at least 580 and some may have no minimum at all. 

For example, most Federal Housing Administration (FHA) loans require a credit score of at least 580. The Department of Veterans Affairs (VA) doesn’t set a minimum credit score.

As a general rule of thumb, the higher your credit score, the more likely you are to qualify for a mortgage refinance. 

However, your credit score isn’t the only determining factor. If you have a higher debt-to-income (DTI) ratio and loan-to-value (LTV) ratio and minimal cash on hand, the credit score requirement may increase. 

How to Refinance a Mortgage with a Bad Credit Score

It may be possible to refinance your mortgage with a bad credit score, without needing to improve your credit profile first. You should explore all of your refinancing options to find the one that makes the most sense for your situation. 

1. Chat with Your Existing Mortgage Lender

Talk with your lender about your refinance options with a bad credit score. If you’ve made timely mortgage payments, your lender may be able to work with you even with a bad credit score.

Your lender could offer you a portfolio refinance, which is originated and kept by the lender rather than being sold on the secondary market. Because of this, portfolio refinance loans oftentimes have relaxed qualification standards. 

It’s still a good idea to speak with multiple lenders, apply and compare quotes, even if your current mortgage lender says you’re eligible to refinance. 

2. Use a Cosigner

Another option is to use a friend or family member as a cosigner on your mortgage refinance loan. Your cosigner must be at least 18 years old, have a valid Social Security number, and meet all minimum requirements for the loan.

Keep in mind that the cosigner is taking a major risk and is legally responsible for your debt if you stop making payments. This could also hurt your cosigner’s credit score. 

3. FHA Refinance Programs

The FHA offers several refinance options for homeowners with bad credit. An FHA loan is a mortgage that is backed by the U.S. government and issued by a bank or other approved lender. 

Here are some options:

  • FHA rate-and-term refinance: The FHA rate-and-term refinance requires a credit check and a minimum credit score between 500 and 580, depending on your LTV ratio. You also need to prove that you’ve made 12 consecutive monthly mortgage payments on time.
  • FHA streamline refinance: An FHA streamline refinance has two options: credit qualifying and non-credit qualifying. A non-credit qualifying streamline refinance doesn’t have a minimum credit score but you may pay a higher interest rate. With a credit qualifying streamline refinance, the lender will run a credit check and verify your DTI ratio.
  • FHA cash-out refinance: You can borrow up to 80% of your home’s value with a credit score as low as 500, but some lenders may require a higher score.
  • FHA 203(k) refinance: This is a type of refinancing that enables homeowners to combine renovation expenses into the total amount of the new mortgage. The FHA accepts credit scores as low as 580, although some lenders might require a score of 620 or higher to qualify for a 203(k) refinance loan.

4. VA Refinance

Servicemembers, veterans, or qualifying spouses may qualify for a VA loan backed by the federal government and issued by private lenders. The VA has no minimum credit score requirement, but the lender may require a credit score of 620 or higher. 

There are two VA refinance options:

  • VA streamline refinance: If you’re eligible, you can refinance with bad credit with an Interest Rate Reduction Refinance Loan (IRRRL). The IRRRL must be used to refinance your existing VA-backed home loan and while the VA doesn’t require a new credit check, the lender may be different.
  • VA cash-out refinance: You can use the VA cash-out refinance to tap your home’s equity, but you must meet the VA’s — and the lender’s — credit and income requirements.

5.  USDA Streamlined Assist Refinance

The USDA’s Streamlined Assist program gives current USDA direct and guaranteed home loan borrowers with low or no equity the ability to refinance for a lower interest rate and lower monthly payments. No credit review is required, but you must have made at least 12 consecutive mortgage payments and meet income eligibility standards. 

How to Improve Your Credit Score to Refinance a Mortgage

There are several things you can do to improve your credit score before refinancing your mortgage. 

Raising your credit score by just 20 points can potentially lower your monthly mortgage payments and save you thousands on interest. 

Here are a few options:

  • Check your credit report: You can check your credit report for free once per year with the three major credit bureaus — Experian, Equifax, and TransUnion — to see what’s keeping your credit score so low. You can also check for errors, unauthorized charges, and fraud, which could be lowering your credit score. If you find any issues, you can dispute them with the credit bureau.
  • Pay down debt: Your DTI is another factor that lenders will consider. Try to keep your DTI under 43%.
  • Make payments on time: Your credit score is heavily influenced by your payment history. A single missed payment can significantly lower your credit score. Payment history accounts for 35% of your FICO credit score.
  • Save money: Build your savings to make a larger down payment or keep the extra cash reserves to potentially lower your level of risk to lenders.  

Explore Your Refinance Options with Total Mortgage

Even if you have a low credit score, this doesn’t mean that you are disqualified from refinancing your loan. Consult with a Total Mortgage advisor to explore all your mortgage refinance options. 

Find an expert near you or apply for a refinance loan online!

Source: totalmortgage.com

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Borrowers seeking mortgage financing to purchase a home could find themselves saving $100 a month or more by shopping around, and locating cheaper lenders with which to do business. This is according to a new blog post published this week by the Consumer Financial Protection Bureau (CFPB).

By analyzing Home Mortgage Disclosure Act (HMDA) data from 2021, the CFPB determined that mortgage rates paid by consumers vary across a wide variety of lenders, including for mortgages backed by Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and jumbo loans through “price dispersion.”

“We found that price dispersion for mortgages is often around 50 basis points of the annual percentage rate,” the CFPB notes in its blog. “To put this number in context, the median loan amount in 2021 was close to $300,000 and the median interest rate was 3%. The monthly payment for such a 30-year fixed loan is $1,265. The monthly payment for a 3.5% interest rate loan on a loan of the same amount is $1,347 – a difference of $82 a month (a 6.5% higher payment).”

Interest rates since the 2021 HMDA data was gathered have obviously increased significantly, but the CFPB found that much of the price difference between lenders — and consequently, the underlying math — remains the same.

“In a higher interest-rate environment, with monthly payments being much higher overall, this $100 a month difference might matter even more as borrowers potentially are more stretched to make ends meet,” the Bureau said.

The analysis of HMDA data only took data from the 20-largest volume lenders for each of the reported market segments. While other studies have documented the price dispersion phenomenon, this is the first instance that has used new HMDA data with multiple variables necessary for this kind of analysis, according to the CFPB.

“Our results are largely consistent with previous studies, despite previous studies often using either rate sheet data and/or selected data on originations from private providers without coverage comparable to [HMDA],” CFPB said. “It is particularly notable that earlier studies considered pre-pandemic data, which does not have the same historic volume of refinance loans.”

There are a number of attributable causes of price dispersion. These include differences between lenders (some include servicing, others market their closing speed); competition in the mortgage market not always being channeled into lower prices; some lenders may engage in demand rationing through pricing changes; and lenders with “less restrictive overlays” may charge higher prices to compensate for additional risk.

Earlier this year, the CFPB issued guidance in an effort to protect mortgage borrowers from pay-to-play digital comparison shopping platforms. Agency Director Rohit Chopra reiterated the importance of shopping around for a mortgage at the time.

“Given the rise in mortgage interest rates, it is even more important for homebuyers to shop and compare loan offers,” Chopra said in February. “We are working to ensure that online platforms are not manipulating their search results in order to coerce kickbacks from lenders.”

Source: housingwire.com

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The Department of Veterans Affairs is preparing a new program to extend the loss mitigation waterfall for its borrowers, one of a slew of initiatives the government agencies are readying for the industry.

Leaders for the Federal Housing Administration, Department of Veterans Affairs and the U.S. Department of Agriculture described their efforts Tuesday at the Mortgage Bankers Association’s Secondary and Capital Markets Expo in New York City. The plans are geared toward keeping both borrowers and servicers engaged in a market that is down by 35% from the same time last year.

The VA will introduce a new Servicing Purchase Program in July. It’s a new way of making a “last-ditch effort” in the waterfall to keep veterans in homes, said John Bell III, executive director of the agency. Through the initiative, the VA will take a loan back, pay and make the servicer whole, and put the borrower on an interest rate that’s not available in the marketplace, he explained. 

“We’ll have our regular refund, we’ll have our regular loss mitigation waterfall efforts,” said Bell. “But we know with rates where they are, versus borrowers where their interest rates are, that the waterfall isn’t as helpful as it should be. So we need to relook at what we can do from that waterfall perspective as well.”

Meanwhile, the director stated that 55% of VA borrowers are exempt from paying a funding fee, a rate that has nearly doubled in the past 8 years. Two health benefit acts passed in 2019 and 2022 have boosted the exemption rate, Bell said. The agency also dropped the interest rate for the Native American Direct Loan program to 2.5% in an effort to draw interest in the underutilized initiative.

The USDA is leading two pilot programs, expected to begin in October, to serve borrowers on tribal lands. The agency will allow desktop appraisals for homes on tribal lands and for its own internal appraisers to work with tribal leaders to do a cost analysis. The move both addresses the lack of appraisers in the workforce and a common grievance from lenders, said Ingrid Ripley, executive director of the Single Family Home Guarantee program. 

“Their complaint was that as lenders you would have to get, if you were doing a loan in South Dakota, you would have to get an appraiser from Texas who really didn’t understand the tribe and the tribal land and how the value is,” she said. 

The other pilot will allow tribal homeowners to use one of the agency’s purchase programs to get cash out of their property to make improvements to their domiciles. Tribal homes are inherited, giving residents no other way to get cash out of them, Ripley said. 

The agency is also extending its loss mitigation efforts to tribal lands borrowers with a memorandum of understanding with tribal housing authorities, to smooth over servicing for those loans which head into foreclosure. 

“Their biggest concern is that we get the loan and then you can put someone else that is not a tribe member in the house,” said Ripley. “They want it to be maintained for the tribe because they have a list of people that are in line to be able to get some of these homes.”

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From left: Sarah Edelman, deputy assistant secretary for Single Family Housing at the U.S. Department of Housing and Urban Development; John Bell III, executive director at the Department of Veterans Affairs; Ingrid Ripley, executive director of Single Family Housing for the Guaranteed Loan Program at the U.S. Department of Agriculture; and David Sheeler, senior executive vice president at Freedom Mortgage, speaking Tuesday, May 24, 2023 at the Mortgage Bankers Association’s Secondary and Capital Markets Expo in New York City.

The Federal Housing Administration meanwhile is mulling several updates, none of which however have a set deadline for action. It’s currently reviewing the 234 comments it received since February regarding modernization of the 203(k) renovation program, said Sarah Edelman, deputy assistant secretary for single-family housing at the Department of Housing and Urban Development. The program has been beset by several hurdles, which has cut down originations significantly in the past decade.

The FHA also continues to weigh a policy that would allow borrowers to count rental income for accessory dwelling units in mortgage applications, she said. It floated a draft mortgagee letter on the idea earlier this year.

Edelman highlighted some of the agency’s victories this year, including the 30 basis point mortgage insurance premium cut in February. 

Source: nationalmortgagenews.com

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Planning to purchase a home or refinance an existing one? If you served in the military or you’re a surviving spouse, then a VA home loan may be an option worth considering.

However, you must meet requirements set by the U.S. Department of Veterans Affairs (VA) as well as lender credit and income conditions to be eligible for a VA loan.

Here’s what you need to know about VA home loans.

What Is a VA Home Loan and Who Can Get It?

A VA home loan is a $0 down loan backed by the VA and issued by private mortgage lenders. The VA loan is available to veterans, service members, and select surviving military spouses. 

Since 1944, the program has backed more than 25 million loans including more than 1.2 million mortgages.

If you qualify, you can purchase, build, or refinance a home with little to no down payment, have access to competitive interest rates, and have no private mortgage insurance (PMI).

What Are the Requirements for a VA Home Loan?

To be eligible for the VA home loan program, you must meet military service and discharge conditions and satisfy the lender’s income and credit requirements.

You must meet one or more of the following criteria to qualify for a VA home loan:

  • Served 90 consecutive days of active service during wartime.
  • Served 181 days of active service during peacetime.
  • Served 6 years in the National Guard or Reserves.
  • You are the surviving spouse of a veteran who died in the line of duty or as a result of a service-related disability. You also didn’t remarry before you were 57 years old or before December 16, 2003.

In some cases, you may still qualify for a VA loan even if you don’t meet the service length requirements. For example, you were discharged for a service-related disability.

You must also meet the lender’s minimum underwriting criteria:

  • Credit: While the VA doesn’t require a certain credit score to qualify for a VA loan, most lenders want to see a score of 620 or higher. 
  • Debt-to-income ratio: A DTI of 41% or lower is generally preferred. Anything above that may require additional financial review.
  • Down payment: Nearly 90% of VA home loans are made with no down payment. But, if the purchase price of the home is greater than its appraised value, you may need to pay the difference.
  • Property requirements: According to the VA, properties must meet minimum requirements to make sure that it is safe, structurally sound, and sanitary before the loan is guaranteed. A VA appraisal may also be required.

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Find a Total Mortgage loan expert near you to discuss your options if you qualify for a VA loan. 

What Is the VA Loan Process? 6 Simple Steps Explained

Even though it’s a specialized loan product, the VA loan process isn’t more difficult than any other type of loan. 

Here are 6 simple steps to getting a VA home loan.

1. Apply for your Certificate of Eligibility (COE)

A COE is a form from the Department of Veterans Affairs showing the lender that you’re eligible for a VA loan. To receive a COE, you must meet the service history and duty status requirements from the VA.

You can request a COE online, by mail, or through your lender.

2. Find a VA-approved lender

Not all banks, mortgage companies, or credit unions offer VA loan products. You must find a lender approved by the U.S. Department of Veterans Affairs. 

Lenders also offer different interest rates and fees, so make sure to shop around for the best loan for your situation.

3. Get pre-approved

Getting pre-approved for a VA home loan can help you better understand what you can afford and make your offers more attractive to sellers. 

To get pre-approved, the lender will verify your financial information and provide a loan estimate. Once pre-approved, the lender will give you a pre-approval letter.

4. Go house hunting

Find an agent that’s knowledgeable of the VA loan process. An agent who has helped VA loan borrowers in the past may be able to offer better insight on what to expect. 

Once you’ve found a home and signed a purchase agreement, the next step is the VA home loan mortgage process.

5. VA appraisal and home inspection

The lender will process your loan application and order a VA appraisal. The VA will estimate the market value of the property and make sure it meets minimum property requirements. 

You will also need to schedule a home inspection. The inspector will conduct a comprehensive overview of the structure and components of the home. Afterward, the inspector will give you an objective assessment of the condition of the home.

6. Closing

At closing, you’ll sign documents and pay any required closing costs, including the VA funding fee. The funding fee is a one-time payment to the VA ranging from 0.5% to 3.6% of the loan amount. This fee helps support the VA loan program.

Once everything is signed and paid, you will officially be the owner of a new home.

How Are VA Home Loan Interest Rates Set?

The VA doesn’t set interest rates for loans. Instead, the lender will set your interest rate depending on what’s going on in the market and your financial situation. This is why it’s important to shop for the best interest rates. 

There are several factors that go into determining VA home loan interest rates. These include:

  • Credit score
  • Payment history
  • Loan type
  • Loan term

Interest rates constantly change, so if you’re happy with the rate you’re quoted, you can lock in your rate with your lender.

Can You Get a VA Loan for a Multifamily Home?

According to the Department of Veterans Affairs, VA loans can be used to purchase a 4-unit house. You’re also required to occupy the property as a primary residence but the other units can be rented out. This isn’t a special type of VA loan. All VA loans are single-family home loans.

Does a VA Loan Cover the Cost of New Construction?

Veterans and active military can also use a short-term VA construction loan to build a single-family home on purchased land. 

The VA construction loan covers the cost of purchasing a lot, building the home, and financing the mortgage once it’s finished.

Apply for a VA Home Loan With Total Mortgage

VA home loans are usually easier to qualify for, can have lower interest rates than conventional loan products, and have additional benefits not available to the average borrower. However, you need to meet certain requirements to be eligible for this type of loan product.

Total Mortgage is committed to helping veterans, active military, and surviving spouses get a mortgage for as little as 0% down. We offer VA 15-year fixed, 30-year fixed, and streamline refinance.

Find a Total Mortgage branch or apply online and get a free rate quote.

Source: totalmortgage.com

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Mortgage activity slowed last week, as higher interest rates left buyers sidelined, according to the Mortgage Bankers Association. 

The MBA’s seasonally adjusted Market Composite Index, a weekly measure of loan application volumes based on surveys of association members fell 5.7% from the prior seven-day survey period. The decline continues a spring trend of regular fluctuations in the number of incoming applications. One week earlier, the index had climbed up by 6.3%. On a year-over-basis last week’s activity fell 32.8%.

“Mortgage application activity slowed, as most mortgage rates in the survey increased, with the 30-year fixed rate jumping 9 basis points to its highest level in two months at 6.57%,” said Joel Kan, MBA vice president and deputy chief economist, in a press release. 

One week prior, the average 30-year conforming rate came in at 6.48%. Meanwhile, points used for the 30-year conforming mortgage with balances below $726,200 remained at 0.61 for 80% loan-to-value transactions. 

The average contract rate of the 30-year jumbo mortgage with balances exceeding the conforming amount also headed up 13 basis points, rising to 6.46% from 6.33% seven days earlier. Points decreased to 0.38 from 0.51 for 80% LTV loans.

“Mortgage rates increased last week even as Treasury yields were essentially flat, with the spread between the two rates widening to 310 basis points,” he said. A wider spread may point to broad concerns among investors regarding future volatility, possibly related to a potential government debt default. 

Kan recently pointed out the highly rate-sensitive nature of mortgage borrowers today, particularly among consumers looking to purchase. Rate increases helped drive the Purchase Index down 4.8% on a seasonally adjusted basis from the last survey to its lowest level in a month, Kan said. Compared to the same week in 2022, purchases came in 26.5% lower. 

“Buyers remain wary of this rate volatility,” he said, but also added that “for-sale inventory in many parts of the country remains scarce,” leaving them with fewer purchase opportunities. Researchers across the housing industry are similarly noting the impact of short supply on business volume, as well as the availability of mortgage credit.

The Refinance Index, meanwhile, fell even more sharply, coming in 7.7% lower week over week. Volumes declined 43.4% from the same seven-day period a year ago, when interest rates were still well under 6%. 

“Most borrowers have lower rates on their mortgages, and those who are in the market are extremely rate sensitive,” Kan said.

Refinances accounted for 27.4% of total volume, slipping from 28% a week earlier. Adjustable-rate mortgages, which typically see greater uptake as rates head higher, bucked the trend, with a 6.5% share compared to 6.8% in the prior weekly survey.

As refinance activity shrunk, so did the average amount reported on new applications. The mean size of refinances fell almost 6% to $261,300 from $277,900. But the average purchase-loan amount was virtually unchanged, coming in at $440,400 compared to $440,700 the previous week. 

Across all applications, the average amount applied for was $391,300, a 0.9% decrease from one week earlier. 

Federally backed loans took a larger step back than the composite market, with the seasonally adjusted Government Index falling by 8.9% from the previous survey period. The share of government-sponsored activity, likewise, dipped relative to overall activity. 

While Federal Housing Administration-guaranteed applications slipped back to a 12% slice of activity from 12.1% a week earlier, loans backed by the Department of Veterans Affairs took a bigger tumble, landing at a 12.2% share from 12.9%. Mortgage applications coming from U.S. Department of Agriculture programs took the same 0.4% piece week over week.

FHA-backed mortgages saw the only decrease in home loan rates tracked by the MBA. The average contract rate inched down 2 basis points to 6.39% from 6.41% a week earlier among MBA lenders. Points used by borrowers also decreased to an average of 0.97 from 1.01 for 80% loan-to-value ratio loans.

The average 15-year contract rate managed to stay under the 6% mark, but still rose 5 basis points from the prior survey to 5.96% from 5.91%. Points increased to 0.68 from 0.58. 

Meanwhile, the 5/1 ARM saw its average rate leap 36 basis points to 5.71% from 5.35% seven days earlier. Borrowers drove points used up to 1.1 from 0.79. This particular type of adjustable-rate mortgage stays fixed for half a decade before becoming variable based on market conditions.

Source: nationalmortgagenews.com

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Newly built homes with attached garages and driveways

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As economic clouds loom, mortgage lenders are making it harder for some borrowers to get some types of home loans. Along with that not-so-great news, however, comes a silver lining: There’s still plenty of opportunity for borrowers to qualify for mortgages.

Why mortgage lenders are extending less credit

Mortgage credit availability declined in April to its lowest level since January 2013, according to the Mortgage Bankers Association (MBA).

“The contraction was driven by reduced demand for loan programs such as certain adjustable-rate [mortgage] loans, cash-out and streamline refinances and those with lower credit score requirements,” says Joel Kan, MBA deputy chief economist.

Back in 2013, the U.S. housing market was emerging from the Great Recession, and lenders were still wary of handing out too many loans. They gradually loosened standards in the years that followed, then tightened up at the beginning of the pandemic. Notably, MBA’s index shows credit availability is even tighter now than it was during the uncertain time at the beginning of the pandemic.

There are a few reasons lenders have become less eager to extend credit:

  • The banking sector has hit a rough patch. Three of the largest bank failures in U.S. history took place this spring — Silicon Valley Bank and Signature Bank in March and First Republic Bank in May. None of the three were major players in the mortgage industry, but the headline-grabbing turmoil roiled lending markets all the same.
  • The economic outlook is uncertain. Hoping to cool inflation, the Federal Reserve has raised interest rates at 10 consecutive meetings. While the labor market’s still cruising along — employment growth surpassed expectations in April — the Fed’s tightening will eventually result in a slowdown. That typically means an increase in unemployment rates, and more defaults by borrowers, giving lenders reason to exercise caution.
  • The boom went bust. As mortgage rates plunged to all-time lows during the pandemic, Americans rushed to refinance and buy homes. When rates started rising in 2022, that activity slowed — and lenders that were hiring during the boom turned to layoffs during the bust. As a result, lenders now have less capacity to handle loan applications than before.

Niche loans are most affected

While this all sounds like a problem for mortgage borrowers, it’s possible many might not even notice the pullback.

An April survey by the Federal Reserve found the stricter standards don’t affect conventional conforming loans bought by Fannie Mae and Freddie Mac — the majority of mortgages originated in the U.S. —  or loans issued through the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) programs.

Instead, lenders are holding back on niche products such as subprime mortgages, home equity lines of credit (HELOCs) and non-qualified, or “non-QM” jumbo mortgages.

What tighter mortgage credit means for you

Rest assured, you still can qualify for a mortgage if you meet the lender’s credit and other approval criteria, including having sufficient employment history and income.

If you’re looking for a loan type affected by tighter availability, however, there are a few ways to boost your chances of getting what you need:

  • Boost that credit score as high as you can. “People with lower credit scores are having a harder time today,” says Melissa Cohn, regional vice president of William Raveis Mortgage in Delray Beach, Florida. Your credit score remains the single most important factor in determining your mortgage rate. While 740 used to be the goal to strive for, new rules from Fannie Mae and Freddie Mac have made 780 the threshold at which borrowers get the best rates. You can still get a mortgage with a credit score in the 600s, but it’ll cost you more — or might be harder to find altogether.
  • Make as much of a down payment as possible. More cash down translates to a lower loan-to-value (LTV) ratio — and a lower LTV means more lenders willing to extend you credit. You can still qualify with 3 percent down for a conventional loan or 3.5 percent down for an FHA loan, but you’ll pay higher fees, and mortgage insurance, to compensate for your lower upfront investment.
  • Don’t stretch your budget too far. If the loan you want means your mortgage payment would eat up a significant chunk of your monthly budget, a lender might reject your application, even if all your other financials check out. That’s not to say you absolutely won’t qualify — but you’ll help your case by keeping the mortgage payment in the range of 30 percent of your income. Keep in mind, too: If you want an adjustable-rate loan, many lenders only qualify borrowers based on a higher payment, rather than the initial low payment.
  • Build up your cash reserves well in advance. Lenders are getting stricter about the sources of your down payment and cash reserves. If you expect to use a gift from family to buy a home, put the money in the bank now, says Cohn. That “seasoning” time will make your loans look better to lenders.

Source: bankrate.com