The easy credit that crashed the housing market led to lending standards so strict that Federal Reserve Board Chairman Ben Bernanke blamed them for hurting the recovery.
In recent months, however, lenders have relaxed their grip somewhat as the market has rebounded and home prices have soared.
More ways to get a mortgage are in the offing, mostly for borrowers with solid incomes and strong track records. Real estate analysts also say rising rates could spur renewed competition among lenders.
“They are considerably more flexible than they were two years ago. It’s gaining steam,” said Guy Cecala, publisher of Inside Mortgage Finance, a company that tracks and analyzes the mortgage market. “If you didn’t qualify a year ago, it wouldn’t hurt to go back and find out if you can qualify now.”
Bankers remain cautious but are becoming more accommodating, agreed Erin Lantz, director of Zillow Mortgage Marketplace: “The pendulum is swinging back to more normal, but still prudent, lending guidelines. Loans are becoming a bit more accessible.”
The Mortgage Bankers Association has come up with a tool, the Mortgage Credit Availability Index, to help measure trends in mortgage availability. The index rose 7.2 percent in May from May 2012, meaning it has become “somewhat easier” to obtain a loan, said Rick Allen, chief operating officer of MortgageMarvel.com, a mortgage shopping website.
Here are five ways that mortgage experts say the market is becoming more flexible:
1. Some lenders are easing payment and credit score requirements. Having a modest down payment or a lower than stellar credit score won’t necessarily keep you from buying a home. Between March 2011 and March 2013, Zillow Mortgage Marketplace saw a 570 percent increase in the number of lenders offering conforming loan quotes with down payments between 3.5 percent and 5 percent, Lantz said. That does not include the Federal Housing Administration, which allows down payments of 3.5 percent.
If a borrower can provide a bigger down payment, a bank may dial back on a high credit score requirement. Cecala said lenders have wiggle room because of overlays, standards they impose above those required by mortgage giants Fannie Mae and Freddie Mac.
2. Piggyback loans are popping up. The term describes two mortgages taken out at the same time for one property, so a borrower can avoid paying for private mortgage insurance on a traditional loan representing more than 80 percent of a home’s value. Piggybacks also help borrowers avoid higher interest rates on jumbo mortgages.
Jeff Lazerson, who runs Mortgage Grader, an online brokerage in Laguna Niguel, Calif., said he began offering piggyback loans again this year, allowing borrowers to refinance up to 90 percent of the value of their homes. But unlike piggyback loans in the past, he said, “With these, you have to income-qualify for it and have some skin in the game.”
He said the loans are conservatively underwritten, requiring at least a 700 credit score even if the borrower has put down more than 10 percent on the mortgage.
3. Stated income loans are back. These don’t require tax-returns to prove income, but they’re also tougher to get than in the boom days, when they were given to people with no or few financial resources and dubbed “liar loans.”
“I am starting to see lenders advertising stated income loans, which will be helpful to so many self-employed borrowers,” said Christine Donovan, a real estate broker at DonovanBlatt Realty in Costa Mesa, Calif. “The rates are not great, and it requires higher down payments, though it seems like a step in the right direction.”
Stated income loans are important to self-employed homebuyers because they tend to have fluctuating income and frequently write off expenses, she noted, which can make it more difficult for them to qualify for a mortgage when tax returns are required.
4. Subprime loans are emerging again, but with a change. Before the housing crash, some lenders provided interest-only loans to people with bad credit and no collateral. Lenders entering the subprime market now, however, tend to require hefty down payments from borrowers, who may have healthy incomes but went through a short sale or took another credit hit before rebounding.
“We are getting more calls and solicitations from newer lenders that are pushing subprime-type products,” said Dennis C. Smith, co-owner of Stratis Financial Corp., a Huntington Beach, Calif., mortgage firm that does not offer them.
The loans are in limited supply but are likely to be a growing part of the mortgage market, serving mostly untapped and underserved borrowers desperate for credit access, said Keith T. Gumbinger, vice president of HSH.com, a mortgage information website.
But, he added, “Any new entrants into this space will likely learn the recent (housing crash) lessons and return to the more traditional underwriting standards.” The loans also are expected to be heavily regulated.
5. Rising interest rates could encourage competition. Lantz predicted rising rates could soften consumer demand and increase the supply of available loans. Lazerson said he sees mortgage brokers and banks imposing fewer overlays in the future.
Interest rates are expected to continue increasing, with some analysts saying 30-year fixed-rate mortgages could hit 5 percent in the next 12 months. (They reached 4.51 percent last week.)
“As there are fewer borrowers and they (lenders) are trying to figure out ways to get loans in the door and fund loans, they’re going to be less restrictive,” Lazerson said.
Jay Brinkmann, chief economist at the Mortgage Bankers Association, said in Investor’s Business Daily recently that rising rates alone won’t drive down home sales in the long run. “Some people might decide to buy a smaller house in a different area, but you won’t see a big decline based just on interest rates,” he said.
Competition has been missing from the market since 2008, Cecala said.
“What will be interesting is to see how far it will go,” he said. “It’s getting more flexible by the day, but it’s still not opening the door to what you’d expect.”
So far, real estate and mortgage brokers say, the average buyer seeking a home loan or trying to refinance has not seen much in the way of relaxed underwriting criteria.
Those benefiting from the recent easing, they said, tend to be strong borrowers or those who never deserved to be cut out of the housing market.
“It’s not a sea change that’s allowing a whole bunch of new people in to the market,” Cecala cautioned.
Allen said MortgageMarvel.com’s benchmark data from last year, drawn from more than 650,000 mortgage applications across the nation, shows online borrowers had a median credit score of 755, a median household income of $90,000 and a 79 percent loan-to-value ratio on mortgages they sought.
“For now, there are reasons for bankers to be cautiously optimistic, but there remains a wait-and-see attitude before any widespread moves to ease standards will be made,” he said.
Smith said the FHA will accept FICO scores as low as 580, though many lenders require 620 or higher, and most have floors of 660 for Fannie Mae and Freddie Mac loans.
“I don’t see these guidelines changing for the lower, and personally don’t feel they should,” he said.
Although it’s a bit easier to get a home loan now than it was a year ago, Donovan said, “I am still seeing numerous people who are having trouble qualifying for a loan when make-sense, common-sense lending would say they should be able to get a loan.”
©2013 The Orange County Register (Santa Ana, Calif.)
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