NEW YORK (MainStreet) — Hey, don't give up so easy!
In a nutshell, the mortgage industry wants potential homebuyers to know that getting a loan isn't as difficult as many people think. Yes, federal regulations are tougher than they used to be, and lenders are more cautious. But lenders don't make money if they don't approve loans.
Because higher interest rates have undermined demand for refinancing existing mortgages, lenders need to boost loans to homebuyers. But a survey shows that many potential borrowers are so discouraged by tales of tight lending standards that they give up before they've started.
The survey by loanDepot, an online mortgage lender, found that 46% of potential homebuyers did not bother to investigate the possibility of getting a loan. At the same time, it found that high demand for homes, with 29% of Americans saying they'd like to buy within the next two years.
Among those who didn't already own a home, 56% said they were not in the market because they feared they could not qualify for a mortgage. Among those who did own a home but wanted to buy another, 30% weren't looking for fear of loan rejection. Of those who want to buy but fear rejection, 74% said they had taken no steps to see if they'd qualify.
"We're well into this year's homebuying season and too many potential buyers and sellers are sitting on the sidelines because they're afraid they can't qualify for a home loan before they've looked into it," says loanDepot President and COO Dave Norris. "While market and regulatory conditions have made it harder for many borrowers to secure a loan, consumer lending is beginning to loosen up for mortgage borrowers, including those with less than perfect credit. Potential buyers are forfeiting their dreams of homeownership before they find out what financing options are available to them."
Though standards are tougher than they were a year ago, about 55% of loan applications were approved in February, up from 49% in 2012, loanDepot says. Of the loans that closed in February, 33% had FICO scores below 700, compared with 24% a year earlier. The minimum FICO score permitted for most loans is now below 680.
While many of those polled feared they would not qualify because their debts were too high relative to their incomes, lenders have relaxed this debt-to-income limit as well, loanDepot says. The average ratio on approved loans is now 39%, versus 34% a year ago. Those figures include mortgage costs and other debts, such as auto loans and credit card balances.
So if you want to buy a house, do some investigating. Start with the Mortgage Qualifier Calculator, which will provide a good sense of your chances. Then, because each lender's rules are a bit different, look for a good deal with the search tool.
After you find a few appealing loans, go to the lenders' websites and look for a free tool for pre-qualifying. That will show whether you generally fit the lender's requirements, assuming you provide accurate information on your credit score, debts and income.
If the results look promising, take the next step by applying for a pre-approval. There will be a nominal cost, perhaps $30 or less, because the lender will actually check your credit report. A pre-approval is not a promise to give you a mortgage, because that decision will depend on information that's not yet available, including the appraisal of the home you choose, but it is a strong indication of your ability to borrow up to a given limit.
If you want to buy a home, now's a good time. Prices are still well below their peaks of a few years ago, and loan rates are still quite reasonable. Investigating the mortgage market is worth some trouble and expense, because if mortgage rates and home prices rise, qualifying for a loan could become even harder in a year or two.
--Written by Jeff Brown for MainStreet