Summary: Right after the housing crisis over a decade ago mortgage underwriting tightened a great deal. But 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.
According to reports, mortgage underwriting guidelines for conventional home loans have eased in recent years. This is something we have reported on in the past.
This article provides ongoing coverage of a topic that’s important to home buyers in Washington State (where we are based) and elsewhere across the nation.
Mortgage Underwriting Requirements Easing: 2019/2020 Update
According to Housing Wire, the Mortgage Bankers Association’s Mortgage Credit Availability Index (MCAI) increased by 0.9% to 183.4 in September. 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.
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.
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.
More Loans for Borrowers With Higher Debt Levels
These underwriting changes have already made an impact. This is especially true for the debt-to-income ratio increase that occurred last year.
According to Housing Wire, credit availability increased slightly in September, triggered by a 5% uptick in the supply of jumbo loans. In fact, the jumbo index is now at a record high since the start of such tracking in 2011. At the same time, the trend of tightening credit availability with both conforming and government loan programs has continued over recent months.
According to a recent article published in the Washington Post, the federal government has significantly increased its exposure to risky home loans. These days, Fannie Mae, Freddie Mac and the FHA guarantee nearly $7 trillion in mortgage-related debt, which is a 33% increase compared to before the housing crisis.
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.
Underwriting continues to be cautious but loosening slightly for conventional conforming home-purchase loans today compared to years earlier.
Have questions? 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. Please contact us if you have mortgage-related questions. Last Updated: