Mortgage lenders say we're still in a tight lending environment following the recession, although a few factors are loosening some access to credit. Buyers can put less money down and secure loans with lower credit scores, but they're also working harder to prove their creditworthiness.
"It's not the way it used to be," said Chuck Meier, vice president and Minnesota mortgage market manager for BMO Harris Bank. "It's a lot of paper trail."
He said underwriting has returned to former days of dotting i's and crossing t's. For example, any non-payroll deposits on bank statements must be scrutinized to understand the source of funds, he said.
New lending rules took effect in January requiring loans to meet federal standards or face greater liability from lawsuits. Shawn Ryan, spokesman for the Mortgage Bankers Association in Washington, D.C., said banks started accounting for those changes last summer, causing credit to tighten through the fall of 2013.
"Borrowers need to know that they will have to demonstrate that they have sufficient income and assets that can be used to repay their loan," said Wells Fargo Spokesman Peggy Gunn. "Consumers will be asked to provide ample financial documentation of their ability to afford a loan and lenders are required to verify that information."
When viewed in the context of the real estate boom prior to the recession, the mortgage market has hardly loosened in recent years, said Ryan. Since the fall of 2010, the MBA's "mortgage credit availability index" has hovered around 100-113. That's a stark contrast to the beginning of 2007, when the index was projected at 800.
"It is eight times tighter than it was seven years ago," Ryan said. "We are very much in a tight credit environment."
States with the tightest mortgage markets include Maryland, New Jersey and New York, which Ryan said still struggle with foreclosures. Minnesota appears to be emerging from the foreclosure crisis, however. MBA ranks Minnesota 44th in mortgage delinquency rates among the 50 states and the District of Columbia, with a 4.5 percent delinquency rate in late 2013. The national delinquency rate is 6.4 percent, seasonally adjusted. That's the lowest level since early 2008.
Some factors are improving access to home loans. Private mortgage insurance protects lenders if buyers stop making mortgage payments. Private mortgage insurance was pulled back drastically, Meier said, but now it's become easier for buyers to obtain it, therefore allowing banks to issue loans for riskier loan-to-value ratios.
"You're able to buy a house with 5 percent down," Meier said. "We weren't there four or five years ago. That opens the door for us. Banks are all about risk."
Mortgages have also become a little easier to obtain for low- and moderate-income buyers. Banks are getting better at working with "rebound" buyers who were foreclosed on in the past, said Ed Nelson, marketing and communications manager for the Minnesota Homeownership Center. Cities including Minneapolis also have money available for down payment assistance.
"There was a lot of fear over the past several years," said Nelson, mentioning regulatory changes that generated concern about access to credit."Now they've worked it out and things have settled back down."
According to Ellie Mae, a company that provides mortgage software and creates monthly insight reports, 33 percent of closed loans in February had an average FICO credit score of less than 700, a stat that stood at 24 percent a year ago.
Wells Fargo recently reduced its minimum credit score for Federal Housing Administration (FHA) purchase loans from 640 to 600.
"It will increase access to credit — especially for first-time and low- to moderate-income home buyers — consistent with FHA program guidelines, regulatory standards and our own responsible lending principles," said Gunn.
Joe Witt, president of the Minnesota Bankers Association, said another positive sign is the turnaround in Fannie Mae and Freddie Mac. He explained that banks sell a large percentage of loans to Fannie Mae and Freddie Mac.
"Whatever they're doing has a major impact on the housing market," Witt said.
Taxpayers stepped in to bail out Fannie and Freddie after the subprime mortgage crisis, he said, and the organizations were forced to scale back on the types of loans they could purchase.
Over time, the economy improved, and mortgage foreclosures declined significantly.
"Fannie and Freddie are doing a lot better now," Witt said, noting that Fannie Mae is making money again and evenreimbursing taxpayer bailout money. "We're back to a more normal situation."