The housing crash of 2008 led to a tightening of mortgage lending standards. Now rules are loosening again. What can you expect when applying for a loan to buy a house?
Is the Water Just Right?
Mortgage lending rules are loosening slightly because of both a slowdown in the number of applicants and increased competition among lenders. Although borrowers should not expect requirements to return to pre-2008 standards, the pendulum may be swinging back to a happy medium.
Two Important Changes
Two significant steps have cleared the path for would-be borrowers. First, all three credit reporting agencies — Equifax, TransUnion, and Experian — have decided they will not post information reporting a tax lien or a civil judgment on a consumer if the person’s name, address, date of birth or Social Security number are missing from the records of such events. This policy could keep these black marks off the credit reports of more than 15,000 consumers.
The second change comes from the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, or Fannie Mae and Freddie Mac, respectively. These institutions have raised the debt-to-income ratio figure, or how much existing debt a mortgage applicant can have and still qualify for a mortgage. Both agencies now allow those with qualifying credit scores a debt-to-pretax income ratio of 50 percent, up from 45 percent.
Low- and No-Down Payment Mortgage Programs
Programs offering a low- or no-down payment have existed for many years. Branches of the U.S. government make the no-down programs possible. Private mortgage companies write the loans, but the government backs them. Unlike private mortgages that require mortgage insurance policies as a hedge against default, some of these programs instead charge an up-front fee, which can be rolled into the loan.
The Veterans Administration offers no-down payment loans for qualified veterans, active duty service members and certain members of the National Guard and Active Reserve. The U.S. Department of Agriculture offers a no-down program that is not just for farms and ranches. With the Federal Housing Administration (FHA) loan, you can put as little as 3.5 percent down, but you will be charged a monthly premium for mortgage insurance. You may qualify for an FHA loan with a credit score as low as 580.
With private mortgages, you can put less than 20 percent down, but you will be charged a monthly premium for private mortgage insurance (PMI). Unlike FHA’s insurance premium on 20- and 30-year term mortgages, which is permanent, PMI is dropped once you pay your loan down to the equivalent of 80 percent of the home’s value. A credit score of 750 gets a mortgage with a better interest rate, but borrowers with scores as low as 620 can still qualify for loans with higher rates.