Are banks loosening their credit rules and allowing those with borderline credit greater access to mortgage loans? That depends on whose information you believe.
According to the Federal Reserve's most recent Senior Loan Officer Survey, standards for mortgage loans are loosening and more borrowers are being approved. Ellie Mae, a provider of mortgage loan software, also shows that 77% of mortgage applications are reaching the closing stage – the highest percentage in Ellie Mae's history of tracking such data. FHA loans that are typical targets of borrowers with lower credit scores were considered "easy to get" by the survey respondents.
Taking a different approach, the Urban Institute finds that mortgage denial rates are decreasing simply because fewer people with borderline or poor credit are applying for loans at all. Their research breaks down further into racial categories, but for all groups, the conclusion was the same: the share of lower-credit applicants was significantly below the levels prior to the housing crisis. Another telling trend is that loan denial rates were greater for government loans catering to lower-income families than for conventional loans.
Are you in that borderline credit group, faced with conflicting information and unsure if you should apply for a mortgage loan? Your best bet is to take as many pre-emptive steps as possible to improve your chances of approval – and some of those steps may take time.
Start by checking your credit score and your corresponding credit report using Credit Manager by MoneyTips. Make sure that there are no errors in your credit report that are needlessly dragging down your score. Consider the words of Matt Schulz, Senior Industry Analyst at CreditCards.com: "The thing about a credit score is that it's not really important every single day, but when it's important, it's really important ... a crummy credit score costs you a lot of money over the years in terms of the interest you'll pay because of the rates that you'll get."
If your credit score is legitimately poor, look at ways to improve it. What does Rod Griffin, Director of Public Education at Experian, suggest? "Reduce your credit balances, catch up on any late payments, and practice that habit over time." With some discipline and budgeting help, you can make tangible differences that can show up in an improved credit score within a few months. Keep in mind that it will take some time for your changes to be reported to the credit bureaus and reflected in your score.
A larger down payment can help your chances of mortgage approval. You may not have the traditional 20% down payment money available, but the closer you are to that value, the better your chances of acceptance. Moreover, if you put down more than 20%, you may be able to negate a poorer credit score. Consider taking the time to build up your funds, or scaling back the dollar value of the home that you wish to buy.
Loans such as FHA and VA loans may be available with down payments as low as 3.5%, but they also come with required mortgage insurance and perhaps a higher interest rate. Personal Finance Expert and Author Jordan Goodman recognizes that these loans are available but cautions, "In many cases, it makes sense to wait to get a better credit score ... when you are getting a mortgage, it's a long-term commitment, thirty years, so it may make sense to wait a year or so. Get a better credit score and then get the best long-term rate."
If you simply can't wait and you can qualify for a loan with poor credit, be prepared to pay more in interest – but by taking the long view, you can still save money. Use the same budgeting and credit repair steps outlined above, and with diligence (and some luck), you will qualify for future refinancing at a more favorable interest rate.
There's nothing wrong with waiting to apply for a mortgage, but if you do, make your wait a strategic one to better your chances of approval. Don't be afraid to apply just because of nationwide statistics. Start by talking to your local lenders. You may find that your chances are not as poor as you thought they were.
Check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.