Now is likely a good time to apply for a mortgage

August 18th, 2014

Mortgage credit is expanding, giving more consumers access to financing for a home purchase.

Consumers who apply for a home loan now may have a better chance of getting approved compared to a few months ago.

Numerous reports cite a loosening of lending standards. Citing data from an SNL Financial report, CNN Money reported bank lending recently hit its fastest pace since the recession. When the economy declined, many lenders had a tight-fisted approach to home loans. Although there were promising returns, the risk of a borrower defaulting appeared too great for some executives. However, this trend is starting to change.

The transition is indicated by a growth in mortgage credit availability, as revealed by a Mortgage Bankers Association index, which showed lending standards became less strict between June and July. This positive news was due to a rise in the number of jumbo adjustable rate mortgage programs as well as the availability of Department of Veteran Affairs and Federal Housing Administration high-balance loan programs.

Increased lending is expected to rise further as the economy continues to improve. Also, lenders are anticipating less borrower risk and stand to expand their profits as interest rates go up.

Lending standards to gradually unwind
While consumers can have an easier time getting approved for a mortgage, an abrupt change to precrisis lending standards is not expected. Citing data from the Federal Reserve, Bloomberg reported many senior loan officers said they are making it easier for borrowers to get approved for a mortgage. However, it will take some time before the market recovers from the severe clampdown on loose lending that occurred during the housing downturn.

“The magnitude of tightening during the crisis was so extreme that it dwarfs recent changes,” JPMorgan Chase & Co. mortgage-bond analysts led by Matt Jozoff and Brian Ye wrote, according to the source.

They also noted there is no indication of the degree to which loan officers are easing their standards. MarketWatch provided a more definitive description of how the mortgage market is favoring borrowers, citing lower credit scores for home loans originated by Freddie Mac and Fannie Mae. Both government-sponsored enterprises reported year-over-year declines for average scores in the second quarter of 2014.

During the housing recovery, tight lending was one of the factors slowing the U.S. real estate industry’s return to normalcy, especially as the Qualified Mortgage rule placed large constraints on debt-to-income ratios. More credit availability could eventually lead to expanded sales activity and more housing growth overall as a wider number of consumers can achieve their homebuying dreams.