Summary: Recent data suggests that mortgage underwriting criteria in Washington State and nationwide have eased in recent years. This was true up until very recently. But the coronavirus pandemic may be putting a damper on mortgage eligibility. This article will get into more detail about mortgage criteria and debt levels of buyers in 2020.
Household debt is higher today than it was over a decade ago. Debt-to-income ratios are higher among buyers, as are loan-to-value ratios. The conclusion is that it may be easier to qualify for a mortgage loan, but there may be a shift happening as a result of the health crisis.
Mortgage Underwriting Standards Eased in the Recent Past, But Things May Be Changing
According to CoreLogic, mortgage criteria have “eased for both conventional and Federal Housing Administration (FHA) home-purchase loans.”
FHA mortgage underwriting standards were typically “more relaxed than” conventional loan programs, in terms of their credit requirements. Over the past few years, Freddie Mac and Fannie Mae have expanded their “credit box” to make conventional loans available to more borrowers. Specifically, these two organizations have increased their maximum debt-to-income (DTI) and loan-to-value (LTV) ratios.
The average DTI ratio for home buyers using a conventional mortgage loan has risen steadily since mid-2013.
Having said that, recent news is emerging that it may actually be tougher to get approved for a mortgage today, and that’s largely a result of the COVID-19 pandemic. Many lenders are making their FHA requirements more stringent, which can make it harder for some borrowers to get an FHA mortgage.
Jumbo lending may also be affected as investors retreat. More and more lenders are tightening their lending criteria as a result of job loss among Americans. The ongoing uncertainty in the market is certainly having an effect on the mortgage industry, especially for borrowers with a less-than-perfect credit profile.
Growth in Household Debt
According to the Federal Reserve, total household debt increased by $601 billion last year and has now reached $14 trillion for the first time. The rise in household debt in 2019 was the biggest annual jump since right before the financial crisis a decade earlier. This increase was predominantly driven by a big increase in mortgage debt balances.
Average Debt-to-Income Ratio for Home Buyers Higher Today
Until recently, home buyers across Washington State and nationwide were able to qualify for mortgage loans with higher debt levels today than in the past.
Specifically, home buyers with debt-to-income ratios in the 45% – 50% range were having an easier time qualifying for loans. This is the result of policy changes made by Freddie Mac and Fannie Mae, among other factors.
But there is so much uncertainty in the real estate market and the economy as a whole these days that there may be a shift happening in terms of lending criteria and borrowing power.
Definition: The debt-to-income ratio is a comparison between the amount of money a person earns, and the amount he or she spends on recurring monthly debts. It’s usually expressed as a percentage. The DTI is one of the most important factors for home buyers seeking a mortgage loan.
Higher LTV Ratios
Another noteworthy trend has to do with the loan-to-value ratio, or LTV. According to this report, the average LTV for conventional (non-government-backed) home loans have risen steadily over the past decade. This indicates that, on average, home buyers were making smaller down payments than they did in the past.
This was partly the result of policy changes made by Freddie Mac and Fannie Mae. Both of these government-sponsored enterprises increased their maximum allowable LTV to 97%. In turn, this means qualified home buyers in Washington and nationwide could obtain a conventional loan with as little as 3% down.
But according to the Mortgage Bankers Association (MBA), mortgage credit availability dropped in March 2020 to its lowest level in five years. Borrowers with a low credit score and high LTV are having a more difficult time securing a home loan because of a reduction in loan availability for this demographic.
Borrowers Encouraged to Work With a Reputable Lender
During these times of economic uncertainty and the effect it’s having on the housing and mortgage markets, borrowers are encouraged to work with a reputable and seasoned lender that can help provide them with a mortgage with flexible qualification criteria. This is especially true for borrowers who may not have the highest credit sore or lowest LTV.
Need a home loan in Washington?
Are you looking to buy a home in Washington and need a home loan to finance it? We can help. Sammamish Mortgage has been serving borrowers across Washington, Oregon, Idaho, and Colorado since 1992. We have a number of mortgage programs to choose from. Please contact us if you have financing-related questions, or if you’d like to receive a mortgage quote.