So you can’t get a mortgage. Well, whose fault is that? A lot of people blame it on bankers and lenders, saying they’re overly strict and fussy.
Lenders don’t deny they’re extremely careful. But they blame the federal government: New lending regulations and overzealous prosecution of mortgage violations make them apprehensive about taking even normal risks on home loans.
Borrowers themselves also seem to be at fault for at least some of the problem: They don’t understand credit scores and have an exaggerated fear of rejection, say surveys by Wells Fargo and by loanDepot, two big mortgage lenders.
Borrowers are shut out
Mortgage lending is so tight that some worry it is stifling the economy. The Washington Post says: “Just as the housing recovery should be taking off, lenders are turning away potential homebuyers by demanding unusually high credit scores and other tough standards on government-backed loans – exceeding the government’s own criteria in a bid to insulate themselves from financial penalties and lawsuits.”
The economy has been short about 1.2 million mortgage loans a year since 2012 compared with pre-housing bubble times, says the nonpartisan Urban Institute.
“[D]espite the confluence of promising signs, little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market,” says The New York Times.
The reason behind this home loan trouble varies, depending on whom you talk to:
The problem: Government interference
The federal government laid down new mortgage rules for lenders at the first of the year in reaction to overly loose lending practices during the housing boom. “The new rules by the Consumer Financial Protection Bureau … require lenders to verify that a borrower can afford to repay a loan before approving it,” explains RealtorMag, a National Association of Realtors publication. That sounds reasonable enough.
But critics say those rules go too far, making qualifying hard for middle-class borrowers, people who would have gotten home loans before the bubble.
Another factor: After the mortgage crash, the federal and state governments have attacked bad lending practices in another way. Banks have agreed to $142 billion in fines so far for financial wrongdoing, much of it tied to risky mortgage lending, as MarketWatch reports. Banks also have been forced to buy back billions of dollars worth of loans from investors for allegedly failing to adequately screen the borrowers.
The problem: Nervous lenders
As a result of the lawsuits and tighter rules, lenders have grown distrustful of the mortgage regulatory system, one lender told the Post.
Lenders admit they’re being ultra careful. But they’ve got to protect themselves, they say. Many agree that changes in lending practices or regulations were needed but say that regulators
The graph in this Reuters blog post shows the vast gap between the number of mortgage loans made during the bubble and today. The correct number presumably lies somewhere in the middle.
Even Federal Reserve Chairwoman Janet Yellen said at a press conference in June: “It is difficult for any homeowner who doesn’t have pristine credit these days to get a mortgage.”
The problem: Scared consumers
Is it possible the problem is at least partly in borrowers’ heads? Wells Fargo’s survey found that consumers have an exaggerated idea of the difficulties of mortgage borrowing.
“While more than two-thirds of Americans (68 percent) feel that now is a good time to buy a home, many may be reluctant to do so because of uncertainty about qualifying for a mortgage or navigating the home buying process,” Wells Fargo said of its poll of 2,017 Americans. It added:
Although 74 percent of those surveyed said they understood home loan financing:
- 30 percent of respondents believe that only individuals with high incomes can obtain a mortgage.
- 64 percent of respondents believe they must have a “very good” credit score to buy a home.
- While 64 percent of respondents said that they are knowledgeable about how much of a down payment is needed to buy a home, nearly half (44 percent) also believe that a 20 percent down payment is required. In reality, a 20 percent down payment is not a requirement on many loan programs.
LoanDepot, a large independent mortgage company, surveyed 1,005 people in March and, like Wells, it concluded that one reason consumers aren’t getting mortgages may be that they’re afraid to apply. The survey found:
- Half of consumers surveyed said it’s harder to get a mortgage today than last year. (They were wrong. “The reality however is that more applications are being approved today compared to a year ago,” loanDepot says.)
- About a third of people surveyed wanted to buy a home.
- Fear they wouldn’t qualify kept 46 percent of potential homebuyers from applying for a mortgage.
LoanDepot says consumers’ ignorance about credit scores contributes to their fear:
Half (50 percent) of all Americans don’t know what minimum FICO score is required to qualify for most loans, while 18 percent think they need a minimum FICO score of 680 to 770-plus to qualify. In reality, 33 percent of all closed loans in February 2014 had an average FICO score of less than 700 compared to 24 percent one year ago.
The median FICO score for all approved borrowers in the United States has fallen from 750 in October 2012 to 724 in January 2014.
Some hope on the horizon
Consumer fears are just part of the problem. Mortgage lending is truly tight, and no one is predicting an immediate credit thaw.
In theory, you should be able to get a government-backed FHA mortgage with a down payment as low as 3.5 percent and a FICO score as low as 600. (The very best interest rates go to borrowers with scores of 720 and higher.)
But lenders add additional hurdles, so even if you meet those standards it can be hard to find a loan.
Still, it’s easier to get a home loan now than in the first few years after the recession, and there are a few signs of improvement.
The White House recently hosted a meeting with heads of big banks to try to persuade them to loosen their lending, according to the Post.
Wells Fargo has eased its lending restrictions. Wells is by far the largest mortgage lender in the U.S., according to Mortgage Daily. The bank’s head of mortgage production, Franklin Codel, told Reuters his bank is opening up more to eligible homebuyers. Reuters wrote:
Earlier this year it lowered the minimum credit scores, or FICO scores, for loans that are backed by … the Federal Housing Administration, Fannie Mae, or Freddie Mac.
“When we expanded FICO ranges, we saw not only an increase in applications but we also saw an increase in approval rates,” Codel said, without providing specifics on application volume or approval rates.
If you want to own a home
If you have the necessary down payment but worry you may be rejected, visit a mortgage broker and a couple of lenders, including a credit union, to have no-commitment discussions about whether you’d be eligible. (Don’t let them pull your credit score yet; wait until you are ready to apply because credit inquiries can lower your score.)
Banks and mortgage companies can’t commit to loaning you money until they see your application and credit score, know the amount you need to borrow and review the property you intend to buy. However, if you know roughly what your credit score is (here’s how to find out), they can give you a good idea if you’d be eligible and how much you could borrow.