Is it hard to qualify for a mortgage? A lot of people think so but increasingly that's not the case. New standards have made mortgage approval much more likely for many.
Mortgage approval: don't be scared
This misconception hurts consumers in two ways.
First, loan requirements are widely misunderstood. They have become much easier in recent years, something that will be explained below.
Second, many potential homebuyers don't even speak with loan officers. These borrowers assume they don't qualify for financing because they're unfamiliar with the many mortgage options available to them and with new standards. The result is lost opportunities to finance and refinance. Or to buy a home.
Related: 10 Best Ways to Improve Your Mortgage Experience
Most mortgage applications are approved
A just-released study from the National Association of Realtors (NAR) found that "among those who do not currently own a home, 29 percent believe it would be very difficult and 31 percent believe it would be somewhat difficult to qualify for a mortgage given their current financial situation."
In fact, most mortgage applications close with few problems. Ellie Mae reports that as of September 78.1% of all loan applications closed within a 90-day cycle. The actual closing percentage is higher because many loans were started late in the cycle. Also, some loan applications "failed" because borrowers switched to other lenders.
This summer, Fannie Mae surveyed more than 3,000 consumers to better understand their mortgage financing knowledge. The results showed a huge gap between actual lending requirements and perceived lender standards.
Debt-to-income ratios: up!
Lenders want to assure consumers that borrowing is affordable. One way they do this is by measuring a borrower's debt-to-income ratio (DTI). They look at a borrower's gross monthly income and compare it with ongoing monthly bills such as payments for housing costs, student debt, auto loans, and credit cards.
If two borrowers have a combined gross monthly income of $11,000 and recurring bills $4,730 their DTI is 43%. That's a debt level that works for most mortgage financing programs.
Unfortunately, the Fannie Mae survey found that most potential borrowers - 61% - think lenders want a 40% DTI. That's pretty tough. Many programs allow far higher DTI levels. FHA-backed mortgages, for example, generally allow a 43% DTI but can go higher. More than a quarter of all FHA forward mortgages in January actually had a DTI of at least 50%.
Related: Preparing to Buy a Home: How Much Does it Cost?
Down payments: down!
About 40% of those surveyed think you need at least 10% down to buy a home, according to the Fannie Mae study. Nope. Not even close. Minimum down payments include nothing down with the VA and USDA programs, 3.5% up front with FHA mortgages, 3% down with the Fannie Mae HomeReady and Freddie Mac Home Possible programs, and 5% down with conforming mortgage loans.
No less important, there are thousands of down payment assistance programs available which can reduce the need for up-front cash.
Minimum credit scores: low!
More than half of those surveyed - 53% - think you need a 650 credit score to get a mortgage. There are programs that will approve applications with lower scores. The FHA program, for example, will allow those with scores of 580 and above to borrow with 3.5% down.
Related: What Is Mortgage Preapproval?
Why it's easier to get a mortgage
There are a number of reasons to believe that it's easier to qualify for a mortgage than in the recent past.
First, mortgage rates are lower. According to Freddie Mac, the average weekly mortgage rate in early November was 3.69% versus 4.94% a year ago. That a drop of 1.25%. Lower mortgage rates mean your payments and DTI ratios are lower. Lower monthly costs make a loan approval easier to get.
Second, the average FICO credit score is higher. A record-setting 706. You may well be among those with a higher score, and better credit scores help borrowers qualify for a mortgage.
Third, credit scoring models have changed. Lenders look at student debt differently. The result is smaller reported costs for many mortgage applicants and fewer DTI problems. Unpaid medical debts don't show up on credit reports for at least six months. And once paid, the credit bureaus must remove medical collections.
Fourth, the application process has become easier. Instead of tax returns, many lenders now get tax information directly from the IRS. Bank statements can be obtained directly from banks. Such electronic processing can greatly speed applications and ease paperwork burdens.
Related: An Alternate Route to Mortgage Approval
Mortgage lenders don't bite: talk to them
For most borrowers the message is this: Speak with mortgage loan officers. Get pre-approved for financing so that your credit standing can be reviewed. Ask about down payment assistance programs. You might be surprised by the results - and you might find that the path to a loan approval is easier than it seems.
