Mortgages May Be Cheap, But They’re Not Easy

For many Americans, one of the frustrations of the recent mortgage market is that while mortgage rates are tantalizingly low, tighter underwriting standards have enabled fewer people to qualify for a home loan. It’s a bit like seeing a great bargain in a display window, only to find yourself barred from entering the store.

What people may find doubly frustrating is that besides being shut out of an opportunity to obtain historically low interest rates, the situation doesn’t seem to make any sense. Why are mortgage companies seemingly making loans cheaper yet harder to obtain at the same time? Well, there’s an answer to that, and more importantly, there are steps you can take to try to qualify for a home loan if you’ve been shut out so far.

How mortgage rates are defying normal market forces

According to Elizabeth A. Duke, who is a member of the Board of Governors of the Federal Reserve, tighter underwriting standards have made it considerably more difficult to qualify for home loans with anything but stellar credit. This tightness has slowed the volume of mortgages back to 1990s levels. In a recent speech, Duke cited some statistics that illustrate how tighter underwriting standards have affected the mortgage industry. From 2007 to 2012, purchase mortgage originations declined by 30 percent for borrowers with credit scores above 780, but they declined by 90 percent for borrowers with credit scores in the range from 620 to 680.

The median credit score on mortgage originations was 730 in 2007, and this year it is 770. Clearly, mortgage lenders are demanding higher credit scores, and loan volume has slowed as a result. It is confusing to some people to see that underwriting standards should be so tight at a time when mortgage rates are so low – lower rates, after all, make it easier to get loans.

The answer is that current mortgage rates are not a function of normal market forces. Instead, they’ve been driven downward by active Federal Reserve intervention, as the Fed has been buying billions of dollars’ worth of long bonds and mortgage-backed securities every month. This intervention has pushed mortgage rates artificially low. Thus, not only can low rates coexist with tight underwriting standards, but those low rates might even be making those standards tighter – if lenders are only equipped to process and fund so many applications, they’re less likely to use their limited resources on riskier applicants.

What to do if you’ve been shut out

If you are among those who have been shut out of today’s low mortgage rates by tighter underwriting standards, there are some things you should do:

  1. Study your credit history. Make sure you understand what’s hurting your credit score, and check to see that there are no mistakes on your credit history.
  2. Start compiling a better payment history. You can’t rewrite the past, but you can start on the road to a better credit record by making sure you are on time with all your payments from now on. If you can’t do that, perhaps you aren’t ready for the responsibility of owning a home.
  3. Wait for improvement. New good credit will crowd out old glitches. According to MyFico.com, all entries, good and bad, have less influence over time, and eventually they drop off your record altogether. As old stuff recedes into the past and new good credit takes center stage you should have more success with a mortgage application.
  4. Reduce debt. This can give your credit score an immediate boost.
  5. Talk to a mortgage lender about the issues. If you are turned down for a loan, make sure you understand why, so you can work on addressing the reasons.
  6. Save while you wait. If you can’t get a mortgage now, use the time till you can to build up a bigger down payment. That bigger down payment should eventually make it easier to qualify for a home loan.
  7. Try, try, and try again! It’s not just your credit history and financial condition that are changing – the underwriting standards of mortgage lenders evolve over time as well, and according to some industry trackers they’ve begun to loosen up in 2013. So, if you’ve been turned down for a mortgage, don’t give up on being able to qualify in the future.

Though they might seem contradictory, today’s low mortgage rates and tighter underwriting standards are both products of the financial crisis and the soft economy that followed. Neither one will last forever, so the key is to be able to meet those underwriting standards while historically low mortgage rates are still available.

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