Summary: Right after the housing crisis over a decade ago, mortgage underwriting tightened a great deal. They they have loosened a great deal since then, making it somewhat easier for buyers to secure mortgages to buy a home in Washington and nationwide, but recently, they have started to tighten again. This article will help give you an idea of how easy or difficult it may be to secure a mortgage in Washington.
According to reports, mortgage underwriting guidelines for conventional home loans have eased in recent years but have tightened slightly over recent months. This is something we have reported on in the past. This a topic that’s important to home buyers in Washington State (where we are based) and elsewhere across the nation. How will the current mortgage underwriting criteria affect you?
Mortgage Underwriting Requirements Tightening: 2020 Update
According to Housing Wire, the Mortgage Bankers Association’s Mortgage Credit Availability Index (MCAI) decreased by 0.3% to 181.3 in February, January, and December. A decrease in the MCAI means that lending standards are tightening, while an increase means credit is loosening credit. Various entities have reported that mortgage underwriting guidelines have loosened in the last couple of years, but recent data shows they have tightened over the past few months.
Yet rejection rates for mortgages refinance, and credit cards decreased throughout 2019 compared to the year before, according to the Federal Reserve Bank of New York.
This information is focused on conventional conforming loans, in particular. Here’s what those two terms mean:
Conventional: This is a mortgage loan that’s originated (and sometimes insured) within the private sector, without government backing. This distinguishes it from FHA, VA, and other government-backed mortgage programs.
Conforming: This is a home loan that meets or “conforms” to the underwriting guidelines and parameters used by Fannie Mae and Freddie Mac. A conforming loan can be sold to Fannie and Freddie via the secondary mortgage market.
Conventional conforming loans account for the majority of overall loan volume in Washington State and nationwide. They’ve also become easier to obtain over the last few years, due to the continued easing of mortgage underwriting guidelines and requirements. But perhaps over the last few months, they may be showing signs of tightening in an effort to maintain creditworthiness among borrowers and reduce risk.
Here are some key points in regards to the mortgage underwriting standards:
- The ongoing relaxation of mortgage underwriting guidelines started a few years ago. In 2014, Fannie Mae began accepting mortgages with loan-to-value ratios up to 97%. That means borrowers could make a down payment as low as 3.5% for a conventional conforming loan. Freddie Mac followed suit in 2015.
- In July 2017, Fannie Mae increased its maximum debt-to-income (DTI) ratio from 45% to 50%. This underwriting change meant that borrowers could qualify for a conventional mortgage loan with a higher level of household debt.
- These changes are significant because DTI and LTV ratios are two of the most important parts of the mortgage underwriting and approval process. By making these changes over the last few years, Fannie and Freddie have essentially broadened access to mortgage credit and made home loans available to a larger segment of home buyers.
But Freddie Mac recently tightened its requirements surrounding the backing of mortgages, and the Treasury Department warned lenders against loosening their mortgage underwriting standards.
More Loans for Borrowers With Higher Debt Levels
Despite the data showing a potential tightening of underwriting standards, debt levels are still high among many borrowers.
While lenders prefer that borrowers have a debt-to-income ratio (DTI) of no more than 43%, the number can be as high as 50% in some cases. This will depend on the creditworthiness of the buyer and the specific lender’s guidelines and practices. But accepting a 50% DTI is still risky practice. But it gives some borrowers the chance to secure a mortgage despite already-high debt loads.
Jumbo loans have increased quite a bit over recent months, as investors have been more willing to buy loans with lower credit scores and higher loan-to-value (LTV) ratios.
According to a recent article published in the Washington Post, the federal government has significantly increased its exposure to risky home loans.
So there has been a clearly documented increase in mortgage credit to borrowers with DTI ratios between 45% and 50%, as a result.
Maximum LTV Ratio Is Up as Well
There has been a similar increase in the number of home loans going to borrowers with loan-to-value ratios above 95%. (Inversely, this means borrowers made down payments of less than 5%.) The share of home loans with an LTV ratio above 95% has grown steadily over the last few years.
Despite all this data – which some might say is somewhat conflicting – it’s up to the individual borrower and lender in terms of whether or not a mortgage application will be accepted, and what terms will be provided if the mortgage is approved.
Have Questions About Mortgages in Washington?
Are you curious about home loans in Washington or are ready to apply for one? We can help. Sammamish Mortgage is a local, family-owned company based in Bellevue, Washington. We serve the entire state, as well as the broader Pacific Northwest region that includes Idaho, Colorado, and Oregon. We offer a wide variety of mortgage programs and products with flexible qualification criteria and have been doing so since 1992. Please contact us if you have mortgage-related questions.