In a recent blog post, we provided an overview of the mortgage underwriting process in New Jersey. Today we have some good news on this subject for borrowers who are seeking a home loan.
A recent report provided more evidence of a trend we’ve been watching for some time. It showed that mortgage underwriting criteria in New Jersey and nationwide have eased over the past few years.
Mortgage Underwriting Criteria Easing in New Jersey, Nationwide
This report was published in June 2018 by CoreLogic, a property and financial data company based in Irvine, California. They analyzed mortgage loan data for the last few years, with a particular focus on qualification and underwriting requirements such as:
- Debt-to-income (DTI) ratios
- Loan-to-value (LTV) ratios
- Credit scores among borrowers
Their in-depth analysis focused on conventional conforming loans in particular. In a mortgage context, the term “conventional” refers to a loan that is not insured or guaranteed by the government. The “term” conforming refers to home loans that meet or conform to the standards used by Freddie Mac and Fannie Mae. So this study pertains to “regular” mortgage products that fall within conforming loan limits.
Here’s a summary of their findings:
“Mortgage underwriting guidelines have loosened in the last couple of years. To expand the credit box to creditworthy borrowers, Fannie Mae began accepting mortgages with loan-to-value (LTV) ratios up to 97 percent in December 2014 and Freddie Mac in March 2015. To further expand access to credit, Fannie Mae raised its DTI ratio level from 45 to 50 percent in July 2017.”
Fannie and Freddie are the two government-sponsored enterprises (GSEs) that operate within the secondary mortgage market, buying and selling home loans. They have strict requirements for the kinds of loans they can purchase, requirements that are handed down from the Federal Housing Finance Agency.
This ongoing “easing” of borrower criteria is noteworthy for a couple of reasons. For one thing, the conventional conforming mortgage loan is the most popular financing option in use today. It accounts for the most volume, when compared to non-conventional and non-conforming mortgage products (like jumbo, FHA and VA loans). So the relaxed guidelines mentioned above affect a lot of home buyers in New Jersey and nationwide.
Here are some key highlights from the CoreLogic report:
- The easing of credit requirements and underwriting criteria began a few years back. In 2014, Fannie Mae began accepting mortgages with loan-to-value ratios up to 97%. The LTV is essentially the inverse of the down payment amount. This change meant that borrowers could make a down payment as low as 3% of the home’s value in many cases. Freddie Mac followed suit in 2015.
- More recently, during the summer of 2017, Fannie Mae increased the maximum debt-to-income (DTI) ratio allowable for the home loans it purchases. It raised the max DTI from 45% to 50%. This change gives borrowers who already carry substantial debt a bit more leeway when it comes to qualifying for a mortgage loan.
A Measurable Impact for Borrowers
These changes to mortgage underwriting criteria and requirements have already had a measurable impact in New Jersey and across the nation.
According to CoreLogic’s analysis, the share of conventional conforming purchase loans with debt ratios above 45% rose steadily after Fannie Mae’s initial policy change. Previously hovering around 5% – 7%, that share rose to 20% by the first quarter of 2018.
Likewise, there has been a notable increase in the number of home loans going to borrowers with loan-to-value ratios above 95%. The overall market share of mortgage products in this category rose from 2% in 2014 to 9% during Q1 2018.
The take-home message for home buyers and homeowners is that today’s mortgage industry is more diverse and flexible than in previous years. And that’s good news.
Have questions? Please contact us if you have questions about mortgage loan criteria in New Jersey, or any other financing-related questions.