Everything is coming up roses for homebuyers this season. Mortgage rates are falling, home prices are stagnant, and the nation's biggest banks have stopped tightening mortgage guidelines.
Mortgage guidelines (finally!) loosening
Each quarter the Federal Reserve issues a comprehensive survey to its member banks regarding market conditions and current bank lending practices. The survey specifically addresses residential mortgage lending.
Last quarter, for the second straight quarter, just two "big banks" reported a tightening of their respective prime mortgage lending standards. Every other bank either left guidelines unchanged, or loosened them a bit.
This is a major reversal from just three years ago when nearly all banks were tightening lending standards.
Keys to mortgage approval: The big three
It is important that you do not confuse "loosening" lending standards for "easy mortgage money." Banks are still careful about what they lend and who they lend to.
Today's mortgage approvals carry three basic requirements:
1. You must have equity
2. You must have income
3. You must have credit
You must put money down
Granted, there are specific loan programs through the VA and the USDA for which no-equity mortgages (no money down) are still available, but 100 percent mortgage loans are in the extreme minority. Most loans today require some equity, and the minimum equity standards are higher today than at any time in recent history.
That income better be documented
As compared to five years ago, income hurdles are higher, too.
Mortgage applicants must now meet strict debt-to-income limits, often set to 45 percent. This means that your monthly debts--housing costs, bills, etc.--may not exceed 45 percent of your documented monthly income. Lenders will verify this income via your federal tax returns.
A crafty accountant may help you at tax time, but he will not be doing you any favors with respect to your next loan application. No documented income, no approval.
Stellar credit could save you thousands
Lastly, there is the issue of credit.
Mortgages are readily available today with credit scores as low as 600, but the available interest rates are awful as compared to an applicant with credit scores in the low 700s. Banks give the best rates to applicants with credit scores over 740.
Want the best mortgage rates? You need all three
You will not get great mortgage rates simply by putting a lot of money down, or earning more than 99 percent of the U.S. population. The best mortgage rates are reserved for applicants that show strength across all three categories--not just one.
You will need sizable equity, strong income, and high credit scores to be considered a "prime" applicant. This will get you access to a bank's lowest mortgage rates, and make your underwriting as quick and simple as possible.
Going forward, expect mortgage guidelines to loosen even more around the edges, opening doors to more homes for more applicants nationwide. For now, though, take what the market gives you.
Mortgage rates are great, homes are affordable, and approvals are (more) plentiful.
Dan Green is a loan officer with Waterstone Mortgage in Cincinnati, Ohio, and the author of the nationally recognized mortgage blog, TheMortgageReports.com. Dan serves the purchase and refinance mortgage needs of his clients and speaks to national audiences about mortgage rates and the mortgage market. Follow him on Twitter at @mortgagereports.