Credit Standards for Home Loans Expected to Ease in 2013
If you have attempted to qualify for a mortgage over the last few years, then you likely know how tough the credit standards have become. According to the Federal Housing Finance Agency, or FHFA, a potential borrower currently needs, on average, a credit score in the 760s to qualify for a mortgage loan. While some government backed mortgages may be available for borrowers with lower credit scores, the minimum score required across the board is significantly higher today than it was a few years ago; however, there may be hope on the horizon for those with less than perfect credit scores.
Real estate experts expect that lending standards will loosen up over the coming months, making homeownership a more realistic goal for many potential home buyers. "Modest fractions of domestic banks reported having eased their standards across major loan categories over the past three months on net," the Fed said. "Domestic respondents indicated that demand for business loans, prime residential mortgages, and auto loans had strengthened." What does this mean for a borrower? It means that qualifying for mortgages may be just a bit easier in the near future.
During the housing boom that was made possible by the mass "easy credit lending," a borrower with a credit score below 700 could typically qualify for a mortgage at a decent interest rate. In fact, borrowers with scores in the low 600s could frequently obtain financing through a government backed loan or even through a conventional lender but at a higher interest rate. Those days have been gone for a few years now. According to a recent survey conducted by the National Association of Realtors, or NAR, over 50 percent of all loans approved last August went to borrowers with a credit score above 740. To make matters more difficult for potential home buyers, credit scoring practices have also changed somewhat over the last few years, often resulting in a lower credit score based on the same information being reported. In other words, if you thought you had a 780 credit score, you might now have a 750 credit score without any of the information on which the score is determined changing.
The good news is that lenders are expected to loosen their standards in the upcoming months. As the country climbs out of the recession, more qualified buyers are expected to enter the housing market. This will likely have an effect on both mortgage interest rates and on credit standards. Unfortunately, more buyers tends to mean that mortgage interest rates will eventually go up; however, it also means that credit standards will go down as lenders compete for business.
For a potential buyer, it can be difficult to know just when the right time is to jump into the market. Current trends indicate the home prices are slowly inching back up again as are mortgage interest rates. On the other hand, as lending standards become more flexible, a borrower with a credit score of less than 760 may be able to qualify for a mortgage if they wait it out to later in the year. Unfortunately, while mortgage interest rates have been historically low recently, that doesn’t help a prospective buyer if the lending standards don’t allow the buyer to qualify for a loan or for the best rate.
If you are considering a home purchase in the near future, sit down with your real estate agent and discuss when the best time is to act in your particular market.