For all the complaining about a "tight" mortgage market new evidence shows that mortgage requirements have actually eased during the past year.
Because all borrowers are unique, it's tough to compare lender requirements on the basis of paperwork -- a borrower with employment income will need fewer documents then a business owner or landlord.
But one way you can measure mortgage standards and whether they are tight or not is to look at credit scores.
Mortgages and Credit Scores
The latest figures from Ellie Mae, a major supplier of mortgage application software and systems, show that lower credit scores have become more acceptable during the past year.
"The average closed loan FICO score," says Ellie Mae, "fell to 727 in December 2013, down 21 points from December 2012."
Closed loans are mortgage applications that went to settlement, but what about the credit scores for applications that were declined? According to Ellie Mae those loans had typical credit scores of 698.
"In December 2013, 31 percent of closed loans had an average FICO score of under 700 compared to 21 percent of loans from December 2012," said the company. In other words, you can still get financing with credit scores below 700, but the odds favor those with better credit.
All things being equal, the credit score numbers also tell us that borrowers who might have had a tough time with financing a year ago can qualify more readily today. The catch is that all things are not equal. Mortgage rates have increased since 2012, a year which saw the lowest interest levels in 65 years and the result is a balance of sorts: while interest rates have increased, credit score requirements have substantially eased.
Of course, when we say that mortgage rates have increased it's important to explain that while rates today are higher than in 2012 -- the year of record lows -- they are sharply lower than the typical rates seen during the past 40 years. For example, rates at this time are roughly around 4.5%. That compares with an average of 8.6% over the last four decades according to Standard & Poor's.
Mortgages and Debt Ratios
Another interesting finding from the Ellie Mae report is that lenders are willing to accept more debt.
Lenders measure to forms of debt. First, they look at monthly housing costs and compare them with monthly income. This is called the "front end" ratio. Second, they look at recurring debt, including housing costs, that borrowers must pay each month. This is called the "back end" ratio. Its easier for applicants to get loan approval when lenders allow higher debt–to–income (DTI) ratios.
Figures from Ellie Mae show quite a change in 2013. In January the typical back-end ratio was 34 percent whereas in December the ratio had risen to 39 percent. This means that a borrower with a household income of $6,000 per month could have devoted $2,040 to debts in January while by December a debt level of $2,340 would have been acceptable. Translation: you could get a loan in December with more debts than you could in January.
The Ellie Mae figures reflect statistics drawn from roughly 3.5 million loan applications. That's a big percentage of the marketplace, more than enough to show that mortgage standards during the past year have actually been easing. All in all, the numbers should help borrowers who have been worried about changing lender standards.