Most real estate agents are eternal optimists – or at least, eternal salespeople. They will almost always tell you "now is a great time to buy." Right now though, this may actually be the truth.
Recent numbers from the New York Federal Reserve suggest that this might be the best time to get a mortgage in recent years. The reason is simple: mortgage applications are now being approved at a much greater rate. So, even if you have been turned down for a mortgage in the past or have been hesitant to even apply, this may be your best shot of finally getting approved for a home loan.
Rejection Rates Ease Up
The New York Federal Reserve surveys consumers and tracks a variety of their financial experiences. One of the things they track is the percentage of people who have applied for a mortgage over the past year but have been turned down. This is known as the "rejection rate."
Early last year, the February 2015 survey showed that the rejection rate for mortgage applications was 24.5 percent. This meant that nearly one out of every four mortgage applications was being turned down. Over the past year though, there has been a radical change for the better. By February of 2016, the survey showed that the rejection rate was down to just 5.7 percent. Suddenly, mortgage applicants have a much greater chance of approval.
The Trade-off Between Rejections and Mortgage Rates
The reason this might be the best time to get a mortgage approved is not just that the rejection rate is so low. It is the combination of that low rejection rate with low mortgage rates.
Normally, credit conditions ease up when the economy is getting stronger, and the only negative trade-off is that this often sends interest rates higher. For example, when the housing boom was nearing its peak about a decade ago, 30-year mortgage rates rose by more than a full percentage point. Now though, lenders have been approving a greater percentage of loans without raising mortgage rates. 30-year rates remain firmly below 4 percent.
Giving It Your Best Shot
If you would like to benefit from the improved odds of getting a mortgage application approved, here are four ways to give it your best shot:
- Check your credit report. Credit standards may be easing, but your history still matters. Check your credit report to see if there are any errors you need to clear up, or any problems you can address to bump up your credit score before you apply.
- Save up a healthy down payment. Lenders are very focused on the relationship between the size of the mortgage and the value of the home, known as the loan-to-value ratio, or LTV ratio. The lower the LTV ratio, the more comfortable lenders are making the loan. A bigger down payment will push down your LTV ratio, so your mortgage will represent less of a risk to a lender.
- Don't make a job change just yet. Career stability is important to lenders, so if you have been considering a job change, hold off until after your mortgage has been approved.
- Don't push the limits of affordability. It is tempting to stretch your budget to afford a more expensive home, but this can raise doubts about your ability to repay the mortgage. Be conservative about what is affordable given your circumstances. Targeting a price range that you can easily afford will not only make lenders more confident, but it will also improve your chances of having a successful home ownership experience.
Lending conditions have made it much easier to get a mortgage application approved. By making some of the right moves before you apply, you can stack the odds even more in your favor.