Are Mortgages Becoming Easier to Obtain?
Lenders are reportedly easing credit standards. Wells Fargo, the nation’s largest mortgage lender, recently announced it has cut its minimum credit score for borrowers of Fannie Mae and Freddie-backed loans from 660 to 620.
Borrowers with lower credit scores must prove their ability to sustain home ownership, however, says Frank Codel, head of production for Wells Fargo. Wells Fargo is looking for “compensating factors” to close the loan, such as requesting an explanation of a credit history event, reviewing the strength of income and stability of employment. But some borrowers are also have an easier time including gifts from relatives as part of a down payment. And in January, the bank began accepting borrowers with credit scores of 600—down from 640—for FHA loans.
Other smaller lenders have also cut some of their requirements recently too. For example, the U.S. unit of Toronto-Dominion Bank has lowered down payments to 3 percent without, in some cases, borrowers having to pay mortgage insurance, Bloomberg News reports.
Following the housing crisis, banks tightened up credit standards. The Urban Institute estimates that up to 1.2 million loans were prevented from being made in 2012 due to the tightening of credit. Lenders mostly concentrated on the refinancing business, but as rates have risen in the past year, refinancing has fallen drastically. Lenders are now looking to the purchase market to ramp up their business.
Credit standards are at the loosest point in at least two years, according to the Mortgage Bankers Association index, reflecting March data.
What’s more, Morgan Stanley data shows that nearly 16 percent of the mortgages for home purchases in March were issued to borrowers who had monthly debt obligations exceeding 43 percent of their pay—up from 13.4 percent in mid-2012.