During the early 2000s, getting a mortgage was hardly difficult thanks in great part to lax lending standards. This practice eventually resulted in a bubble forming within the nation’s housing market – which, we are all aware, subsequently burst. Ever since then, the pendulum has swung the other way – to an extreme. Today, lenders require nothing short of pristine credit to obtain a mortgage. We will never return to the reckless lending policies from the past, but we believe they’ve gone too far, and it concerns us.
Do you possess ‘average’ credit? If so, finding a mortgage can be tough
What will your credit rating get you?
We took a glance at data produced by the Federal Reserve and was shocked by what we saw. Of the $426.6 billion in mortgage originations while in the second quarter of this year, almost 62% went to households having a credit rating of 760 and up.
Borrowers having a credit rating within the range of 620 to 659, which most lenders view as below-prime credit, received just 6.3 % of the dollar volume of mortgages in the second quarter.
Now, if we compare that with the same quarter of 2004, the group with 760-or-higher credit received 23.5 percent of the mortgages, and the 620-to-659 borrowers received 8%.
Although surveys say credit is loosening for some kinds of loans, standards are still far tighter than necessary.
Too risk-averse?
The data raises questions regarding whether regulators and banks have become too risk-averse. It’s also feasible that borrowers without prime credit have just abandoned buying for the moment.
Figures from property-data provider CoreLogic show that home-purchase mortgage applications from borrowers with credit scores below 640 fell to 6% in 2015, from 29% in 2005. To put it differently, lower-rated borrowers aren’t even applying.
But why?
Rising home values might simply be putting property unattainable for many lower-income people.
For example, prices in Seattle are up 55% from their 2012 post-crisis low, according to the Case-Shiller Index. Nationally, prices are up 35 % from their 2012 low.
Higher prices require larger down payments and larger payments, particularly for borrowers with lower credit ratings.
But just as culpable as rising home prices are homeowners who experienced a foreclosure between 2004 and 2015.
Of these 7 million homeowners, only 7.3 % have obtained a mortgage again, and 69% still have a foreclosure on their credit score, thus precluding them from buying again.
The market is making it remarkably hard for many families to purchase a home.
We would never suggest that we consider going back to the “old days” of sub-prime lending, but understanding that there’s a great number of families who want to buy – and who meet acceptable standards for risk – should give lenders some pause for thought.
Nick & Cindy Davis work with several lenders that are ready to assist you with your next home purchase. If you are ready to get started, you can always reach us at 813-300-7116 or simply click here and we will be in touch.