Have you heard the expression, "Nothing ventured, nothing gained"? It means that you can't achieve anything if you don't try. That’s the kind of thinking the U.S. housing market needs, according to a recent Loan Depot survey. So much information has been floating around regarding the tightening of credit and the increased difficulty of acquiring a home loan that a significant number of Americans have just given up. They have decided to sit on the sidelines and wait for the time being.
There can be good reasons for that – for example, if you are trying to save up more down-payment money to get a better rate or to purchase a larger house. You might also be having trouble finding a house due to tight inventory, or a lousy credit score. However, if you have a house in mind, along with a decent credit score and the down payment you need, it is actually a great time to see if you can qualify for a mortgage.
According to the survey, 56% of respondents did not even bother to try getting into the home market, assuming they would not qualify for a mortgage – and a whopping 74% of those who wanted to buy but were concerned about possible rejections did not take any steps at all to see if they could qualify for a mortgage.
The main issue appears to be a combination of scary stories in the media and an overall misunderstanding of the current market and its requirements.
For example, 20% of the survey respondents thought a FICO score of nearly 770 or more was required to qualify for a mortgage. An even more disturbing fact was that almost half of the respondents had no idea of what FICO score is needed.
For reference, minimum FICO scores for approval of most loans have dropped below 680, and the average FICO score for an approved mortgage has declined to 714 from an October 2012 value of 750. The overall mortgage approval rate has increased somewhat during that time, moving from 49% in 2012 to a current approval rate of 55%.
Debt-to-Income (DTI) ratio requirements have also relaxed somewhat. The back-end DTI ratio (including credit cards and other outstanding debts unrelated to housing) is averaging 39% on approved loans, compared to 34% at this same time last year. In historical context, DTI ratios tend to run around 36%-39% maximum, with even higher DTI values available for FHA and VA loans.
Perhaps we have all overestimated the impact of the Qualified Mortgage and Ability-to-Pay rules set up by the Consumer Finance Protection Bureau (CFPB). In order to prevent a repeat of the housing crisis, the emphasis shifted from allowing home affordability to greater fiscal responsibility. Banks were expected to give greater scrutiny to loans to verify that the borrower would be able to repay, and in turn, lenders received protection against lawsuits from defaulting homeowners.
These rules took effect in January 2014, but had been heavily publicized and debated for months prior to being enacted. Thus, the message from most analysts was that money would be tight – and potential homebuyers took heed.
Banks understandably had fewer mortgage applications, and are now having to loosen restrictions to attract more business. That message has been much slower in reaching potential homebuyers.
Consequently, if you are interesting in buying a home, test the waters now. Interest rates are at market-defying low levels, and credit is becoming easier to get. You may or may not decide to buy – but you should at least explore your options.