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Lenders Are Tightening Up on Mortgage Loans

MBA: Mortgage credit availability has hit its lowest level since 2014. In 4Q 2020, the median credit score for approved mortgages was 786.

NEW YORK – Beware: Your buyers could struggle to be approved for a home loan. As lenders tighten standards, home loan approval is becoming more difficult, The Wall Street Journal reports.

The Mortgage Bankers Association reports that mortgage credit availability, which measures lenders’ willingness to approve mortgages, is at its lowest level since 2014.

“Because mortgage credit is more difficult to obtain, it is a more competitive environment overall,” says Lawrence Yun, chief economist at the National Association of Realtors®.

Mortgage lenders are issuing more home loans at record levels, but those mortgages most often go to those with stellar credit histories and borrowers willing to make large down payments. About 70% of mortgages granted in 2020 went to borrowers with credit scores of at least 760. That’s up from 61% in 2019, according to data from the Federal Reserve Bank of New York. Among borrowers with approved mortgages, the median credit score was 786 in the fourth quarter of 2020.

Lenders are being cautious issuing loans as the housing market surges from strong homebuyer demand and higher home prices. Mortgage loan availability plunged about 35% annually in 2020. Lenders hope to protect themselves from making loans to borrowers who might lose their jobs amid the pandemic.

Forbearance is another fear of lenders. To receive approval for a mortgage, some borrowers are reportedly asked to sign statements saying they have no intention of requesting forbearance after they’re approved for a mortgage.

As The Wall Street Journal reports: “The meteoric growth of home prices has made some lenders reluctant to take on first-time home buyers or others they view as slightly risky. Lenders who were comfortable offering mortgages of $300,000 or $320,000 to borrowers with good-but-not-great credit histories might not be willing to lend the $350,000 or more now required to buy the same property.”

Mortgage lenders weigh multiple variables in approving applications, including the borrower’s employment history, income, credit score and debt level.

Rejected mortgage applicants may find better luck soon, however. Credit requirements likely will loosen slightly this year as mortgage rates rise and prompt a decline in lenders’ bustling refinance business, Mike Fratantoni, the MBA’s chief economist, says. “Since lenders aren’t being flooded with calls to refinance, more of their resources can be used to reach out to first-time buyers for purchases.”

Source: “Need a Mortgage Loan? Good Luck. Lenders Are Tightening Standards,” The Wall Street Journal (April 2, 2021)

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