Many home buyers found it easier to obtain a mortgage in the first quarter of 2015, and it looks like that lender stance will hold into the second quarter.
The report shows that access to mortgage credit is about two-thirds of the way back to 2002 levels — a time when mortgage loan approvals were relatively painless for consumers, yet lenders still meticulously underwrote a fully documented borrower profile.
In 2003, loan approval standards deteriorated quickly, becoming so loose that almost anyone could get a loan with no documentation. This was the case until the second quarter of 2007, when plummeting home prices and a deep recession forced lenders to become extremely stringent for many years.
Recently, lenders have started to return to a meticulous-but-flexible approach to loan approvals. Housing and economic trends indicate this could continue in the second quarter.
Spring is traditionally busier than winter for home sales, and the Fed just announced it won’t raise rates until inflation moves up near 2 percent. Right now, inflation is well below this target, so low rates should also hold in the near-term.
With an economic and housing outlook that makes lenders want to lend again, here are the primary considerations for mortgage shoppers.
Are you refinancing from an adjustable-rate mortgage (ARM) to a fixed-rate loan now that your home value has come back up? Or are you buying your first home and think you’ll only own the property for a few years? The loan you need depends on your time in the home.
Are you a salaried marketing manager who has been saving money since you got your job in 2007? Or are you a self-employed attorney who got hit hard during the recession, and 2014 was your first decent earning year since 2007?
If you’re the former, you should be open to most loan options, and may get a loan without a lot of trouble. If you’re the latter, you’ll need to identify a lender who can exercise more underwriting flexibility. For example, they may be able to approve your loan using only your strong 2014 tax returns, instead of using the traditional approval approach of averaging 2013 and 2104, where 2013 drags your average below the qualifying threshold.
Each of the three kinds of lenders has advantages that will be useful to you based on the loan you’re seeking and your profile.
If you’re the self-employed attorney in the example above, you may need a lender who makes loans using its own balance sheet, and doesn’t intend to sell your loan to Fannie Mae/Freddie Mac or some other future investor. These lenders are also sometimes called portfolio lenders. If they choose to keep a loan on their balance sheet rather than sell that loan, it gives them some extra flexibility in approving loans for specific cases like yours.
But you’ll also need to consider the fact that many portfolio lenders may not be willing to do a 30-year fixed loan with custom underwriting to accommodate your weaker income up until 2014. They may instead require you to do a 5-year ARM because it’s less risky for them to keep shorter-term loans on their balance sheet.
These tips should help you navigate the marketplace in the second quarter, during which it appears approvals will remain flexible. But don’t count on loan approvals getting significantly more flexible. High credit standards are critical to avoid another financial crisis, so you can expect to provide full documentation — and always give your lender whatever documentation they require.
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