As current mortgage rates fall, it’s becoming easier for borrowers refinancing households and get mortgages approved. For the fourth straight quarter, U.S. lenders have eased their loan approval standards as compared to the number of banks tightening up. Interest rates have been dropping, making it more affordable than ever during any period over the past two years. Right now is an optimal time to refinance or buy a new home.
One time per quarter, the Federal Reserve conducts a survey in which it asks its member banks to provide their current lending environment. This survey covers a wide-range of loan types that consist of residential and commercial loans. The reason behind this survey is to uncover business and consumer demand for bank loans, and in return to find out the banks’ willingness to provide such loans to its customers. A key question that the Fed, Federal Reserve, inquires about is the mortgage lending guidelines related to prime residential mortgages. Prime residential mortgages are defined as the mortgages for borrowers whose credit scores are 740 or higher. They also must have a debt-to-income ratio lower than average and a mortgage that features the standard amortization schedule common to a fixed-rate or adjustable-rate mortgage. The survey, known as the Fed Senior Loan Officer Survey shows that prime mortgage borrowers have an easier time getting mortgage-approval than the average attempting borrower. This first quarter showed big movements for 66 of 68 member banks. 20.6% of banks reported easing of mortgage loan standards. This represents the second-fastest pace over the past 10 years. Only 2 out of the 68 member banks reported requirements getting tougher. More loans have been making it to closing this year due to banks reducing FICO requirements and lowering hurdles of qualifications. In March of 2015 over 67.5% of purchase loans were approved and closed, comparing that to last years 60% approval rate.
The Federal Reserve Senior Loan Officer survey also provided information showing banks making it easier to get an approved government-back loan. These loans consist of FHA, VA, and USDA loans. Only one surveyed bank reported it becoming more challenging to get FHA and VA loans. FHA loans are popular among first-time homebuyers. They allow down payments as low as 3.5%, as well as lower credit score requirements. FHA loans are also common with repeat and move-up buyers. The FHA recently lowered its required mortgage insurance premiums (MIP) to an all time low on 30-year loans; making it the cheapest to use FHA financing over the 80-plus year existence. FHA loans are available to all mortgage applicants.
VA loans and USDA loans require special qualifications compared to FHA loans. The Department of Veterans Affairs and the U.S. Department of Agriculture guarantee these loans. They aim at specific groups of buyers and homeowners. VA loans are available to members and veterans of the U.S. military, and their spouses. VA loans are 100% financing and never require mortgage insurance, which is a large advantage compared to other loans. Lastly, there is no explicit loan limit for a VA loan.
In contrast, the USDA loans are limited to geography. They are available in less-densely populated areas, including many rural parts of the country and U.S. suburbs. USDA loans offer a no-money-down option. They are typically very low rates with low insurance payments as well. Over 97% of surveyed banks confirmed it was easier to get government backed loans over the first quarter of 2015. Out of these, an investor overlay was the most apparent to easing. Investor overlays are mortgage approval standards which are enforced by a bank, but not required by the government. As an example, the government allows FICO scores as low as 500 for FHA mortgage programs. Some lenders though, by using an investor overlay, require a FICO score of 580 to protect themselves.
If you have been turned down for a mortgage in the past two years, now may be the time for you to reapply. Mortgage rates have been on a steady decline of late. Since January of last year, the average 30-year fixed rate mortgage is down nearly 75 basis points. It has settled in at a 3.75% rate. A 15-year mortgage rate is even lower. With rates this low, the math of “Should I rent or should I buy?” is changing. At today’s rates, it’s less expensive to pay for a mortgage than during any point in history, excepting for a brief window two years ago.
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