According to a recent report, the Consumer Finance Protection Bureau, or CFPB, is proposing changes intended to increase access to mortgages for borrowers in rural and underserved areas. If successful, it would be yet another way that mortgage financing is becoming much easier to afford and obtain in 2015, and could give the U.S. housing market a nice boost.
What changes are being proposed?
The proposed CFPB changes would make it easier for banks to qualify for "small creditor" status by raising the maximum number of mortgage loans they can make, and would expand the definition of "rural" areas for mortgage purposes. Banks and credit unions that qualify for small creditor status would be able to provide more flexible financing options, including lending to somewhat riskier borrowers and borrowers with a higher debt-to-income ratios than would normally be acceptable.
As it stands now, rural and small creditors have expanded guidelines for what can be considered a "qualified mortgage". For example, borrowers are normally restricted by the ability-to-repay rule to a maximum debt-to-income ratio of 43%, but small creditors can exceed this limit and still have the loans fall within the realm of qualified mortgages. Mortgages with balloon payments (such as interest-only loans) are also allowed, while they are normally not authorized under qualified mortgage standards. Finally, small creditors are not required to establish escrow accounts as part of qualified mortgage lending, which could save borrowers thousands in closing costs.
Rural homebuyers already qualify for a special type of financing through the U.S. Agriculture Department, which allows for up to 100% financing to borrowers who purchase in a USDA-defined rural area and meet certain income requirements. However, the proposed changes will create more competition for flexible mortgage options that don't have a similar income restriction. The proposed changes are open for public comment until March 30, at which time the CFPB will move ahead with the approval process.
Still, although some riskier mortgage products (such as balloon payments) are allowed for rural homebuyers, credit standards remain relatively high, especially compared to pre-crisis standards. Don't confuse the expanded definition of "qualified" with the lending free-for-all that was going on before the financial crisis.
This is just the latest way mortgages are getting easier
Expanding the definition of "rural" and loosening guidelines for banks are not the only ways that mortgages have become easier to obtain.
For starters, Fannie Mae and Freddie Mac both took steps to clarify their lending standards, and also lowered their down payment requirements. Qualified buyers can now obtain a conventional loan guaranteed by Fannie Mae for just 3% down if they're a first-time buyer, and Freddie Mac's 3% down payment program has no such restriction.
Those cash-strapped buyers who might not have sufficient credit to qualify for a conventional loan can obtain a Federal Housing Administration-backed loan more cheaply than in recent years. A 30-year FHA loan with just 3.5% down can be obtained with a FICO score as low as 580, and the annual mortgage insurance premium was recently reduced to 0.85% from 1.35%. This saves a borrower with a $250,000 loan balance $1,250 per year.
Finally, while the official credit score requirements for a conventional loan haven't changed for some time (a minimum 620 is required for a Fannie- or Freddie-backed loan), lenders are loosening their own credit standards. Consider the average credit score for an approved mortgage over the last few years:
|Year||Average FICO Score of Approved Mortgage|
What it could mean for you
In a nutshell, any form of easier access to affordable mortgage financing means that homeownership will be available to more borrowers. Thus, demand will increase, and, as we all know, increased demand means prices could rise.
As long as lending remains responsible -- that is, only given to borrowers who can reasonably be expected to pay the loans back -- any changes that make mortgages easier to obtain could go a long way toward returning the U.S. housing market to health and stability.