An October 2018 report by the property analytics company CoreLogic revealed that mortgage underwriting criteria in Washington State and nationwide have eased in recent years.
The report looked at a variety of underwriting items, including debt-to-income and loan-to-value ratios, and compared current lending standards to those used in the past. The conclusion is that it’s easier to qualify for a mortgage loan these days, generally speaking.
Mortgage Underwriting Standards Have Eased
Among other things, CoreLogic’s analysis determined that mortgage criteria have “eased for both conventional and Federal Housing Administration (FHA) home-purchase loans during the Q2 2018 compared with a year earlier.”
Here are a few highlights from the October 2018 report:
- 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. The average debt-to-income ratio among those borrowers rose to 37% during the second quarter of 2018.
Average Debt-to-Income Ratio for Home Buyers on the Rise
This report reinforces something we’ve blogged about in the past. Home buyers across Washington State and nationwide are 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 are having an easier time qualifying for loans. This is the result of policy changes made by Freddie Mac and Fannie Mae, among other factors.
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 as Well
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 rose steadily from 76% during Q2 2010, to 82% in Q2 2018. This indicates that, on average, home buyers are making smaller down payments today than they did in the past.
This too is partly the result of policy changes made by Freddie Mac and Fannie Mae. Both of these government-sponsored enterprises have 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. So it’s only logical to see a rise in the average LTV for conventional mortgage products.
The take-home message for home buyers is that mortgage qualification standards have eased over the past few years. There’s a more diverse group of financing programs available today, some with very flexible criteria. All of this bodes well for home buyers planning to apply for a mortgage loan in the near future.