Banks Are Making It Easier To Get A Mortgage
NEW YORK ( MainStreet) As the economic recovery continues to materialize, banks are loosening the credit spigots, making it easier for consumers to obtain mortgages.
Lenders typically look for mortgage applicants with enough income to cover monthly payments, a substantial down payment and a FICO score above a certain threshold, among other factors.
Now some banks are becoming more lenient with these standards.
TD Bank revamped its "Right Step" program in late April, allowing some first-time home buyers to make a 3% down payment, instead of 5%. The program also includes the prospect of bypassing private mortgage insurance, which is charged when an applicant makes a down payment less than 20%. Private mortgage insurance ranges from 0.3% to 1.15% of the mortgage and compensates the lender for taking on additional risk.
Wells-Fargo, the largest mortgage originator, allows applicants to make a 5% down payment , which can also come as a gift from relatives, if the applicant can't cover the entire down payment.
In February, Wells-Fargo announced it would lower the FICO score requirements for its loans backed by the Federal Housing Authority (FHA) from 640 to 600. Consumers with low FICO score tend to have more debt and a poor history of managing money, which makes them a riskier customer from the bank's perspective.
While some may view these measures as a return to the pre-recession era of obtaining a mortgage without any income and rock bottom FICO scores, which contributed to the collapse of banks and the economy, analysts aren't as cynical.
"This is a function of the business cycle," said ITG chief economist Steve Blitz. "You enter the recession with very easy credit standards, tighten during a recession and loosen up after a recession."
Lowering FICO score standards indicates the bank's interest in appealing to a wider customer base, even if that means taking on additional risk.
The banks are becoming more aggressive with mortgage originations on the heels of a slowdown in the refinance market and are trying to recoup lost revenues.
Refinances now account for 51% of total mortgage applications, according to the Mortgage Bankers Association, compared to 75% at this time last year.
Homeowners refinance to take advantage of low interest rates, which result in lower monthly payments. Refinancing isn't as attractive for homeowners as it used to be, as the economy is in an environment where interest rates are rising.
According to Freddie Mac, average rates on a 30-year fixed mortgage currently stand at 4.33%, compared to 3.40% last year.
The Federal Reserve is winding down its bond stimulus program , which has kept interest rates at record lows.