The answer is important, because the housing inventory won’t shrink until more people are able to qualify for loans. Here are 3 reasons for optimism.
After more than two years of misery in the housing market, the worst may finally be over.
Private lenders and the federal government have reinvigorated the jumbo mortgage market, making bigger loans more available to more borrowers. And in general, a would-be homeowner can now qualify for a loan with lower credit scores and make a smaller down payment — in some cases, as low as 5%. Those moves, taken together, mean that more borrowers have access to mortgages, a necessary precondition for housing to rebound.
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“When you see those moves on the upswing, it gives you a hint of what’s coming later on,” says Chip Cummings, the president of Northwind Financial in Grand Rapids, Mich., a consulting firm for mortgage and real-estate companies.
Of course, these are only the first signs of what could be a very long recovery. So far, the changes in the private lending market are aimed strictly at the best loan applicants, those with credit scores of 700 or higher. Riskier borrowers are still undesirable in the eyes of the banks — even the Federal Housing Administration has raised the floor on credit scores for prospective applicants.
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And without a drop in unemployment and other economic improvements, demand for the new mortgages may not keep pace with supply. But the moves do suggest that lenders, at least, are more willing — and the easier it is to get a loan, the easier it is to get a house.
Here’s a closer look at the three changes:
More jumbo mortgages
Before 2007, jumbo mortgages — any loan over $417,000 in average markets — made up 22% of the mortgage market. Today, they’re about a 6% sliver. But private lenders are getting back into the jumbo market. These supersize loans were up 3% from January to May, according to the most recent data available from CoreLogic, a mortgage data company. Wells Fargo almost doubled its jumbo lending, to $3.7 billion, in the second quarter, compared with a year ago, and Chase was up 16% for the same period with plans to keep growing.
The sheer size of these loans suggests more risk for the lender. (If the borrower defaults, the lender could take a bigger hit.) But for the high-quality borrower, it is a risk the banks now seem willing to take, says Keith Gumbinger, a vice president at HSH Associates, a mortgage data tracking company. If foreclosures are low, private lenders are likely to extend jumbo mortgages to a broader group of borrowers in the next year or so. Meanwhile, smaller local lenders have also gotten into the market, Cummings says.
For better borrowers, this means more options. A Fannie- or Freddie-backed mortgage can go up to $729,750, but private lenders can go higher when they keep the loan on their books — an advantage for someone house hunting in expensive cities such as New York, Boston or Washington (and a potential boon for those housing markets overall). Interest rates on jumbo mortgages backed by private lenders are about 1 percentage point higher than those backed by the government.
Smaller down payments
As a consequence of the mortgage meltdown, even qualified borrowers found themselves scrambling to make hefty down payments — commonly 20% or more. But over the past year, that threshold has dropped, making mortgages more available to people with less available cash.
For new mortgages, the average loan-to-value ratio — how much people borrow relative to the appraised value of their house — has been slowly increasing, a sign that buyers are financing bigger proportions of the purchase prices.
Of course, the no-money-down days are unlikely to return anytime soon. As of May, borrowers were still putting down 28% of the purchase price on average — still substantial but also significantly less than the 34% down payment they made the year before, according to CoreLogic. And that’s going to continue to drop, says Scott Stern, the CEO of Lenders One, a mortgage banker cooperative, as more 10%-down loans become available.
“They’ve been increasing in availability within the past six months, and we expect continued loosening,” he says.
Lower credit scores
Similarly, a borrower’s credit no longer needs to be spotless in order to get a loan. The requirements are still high but seem to be creeping down: In May, the average borrower’s credit score stood at 757, 8 points lower than the year before. But even borrowers with scores in the mid- to high 600s can qualify for a mortgage these days, Stern says. “As recently as a year ago, that credit was almost unavailable.”
All these changes, small as they may be, indicate that mortgage lenders are willing to take on more risk and test the boundaries of what makes a high-quality borrower. And as the appetite for lending increases, more applicants could qualify — a good sign the housing market is moving in the right direction.
This article was reported by AnnaMaria Andriotis for SmartMoney.