From the early 2000s through the housing bubble's burst in 2006, mortgages were extremely easy to get for anyone with even decent credit.
Back in those days, legitimate banks and lenders offered no-documentation loans -- mortgages where the consumer tells the bank how much he or she makes, which is then not verified -- and low-documentation loans, where some checking (maybe looking at pay stubs) was done, but not much. Less-scrupulous lenders even offered something known as a "NINJA" loan, or a "no income, no job, no assets" mortgage.
It's easy to see why standards needed to be tightened up from those days. People were getting loans to buy houses they could not afford based on banks' accepting their word that they would be good for the money. That, as you might imagine, led to huge numbers of defaults, which caused housing prices to collapse in many markets.
Post-housing bubble, the mortgage industry tightened up. Nearly all loans required traditional documentation -- two years of tax returns, two months (or more) of bank statements, two pay stubs for every borrower, and verification of any non-payroll financial gains. In addition, many banks were less tolerant when it came to credit scores.
Now, while the no-doc days have not returned, standards are looser than they were in the aftermath of the bubble's burst. It's not easy to get a mortgage, but it's certainly easier than it has been.
What does it take to get a mortgage?
It's worth noting that with mortgage loans, there is always an exception to every rule. For example, when my wife and I recently purchased the condo we live in, our bank granted an exemption on verifying our tax returns with the Internal Revenue Service because we had our identities stolen to file a fraudulent tax return the previous year.
That exemption, which would have been easy to come by in 2004, was only granted because we were well-qualified, buying much less home than we could technically afford, and were putting 25% down. Had one of those three not been true, we may well have been denied.
In general, however, a credible mortgage company (and there still are predatory ones that will make non-traditional loans, generally not benefiting consumers) wants to see borrowers conform to the 28/36 rule. This means that the household should be spending no more than 28% of its verifiable monthly income on housing expenses (mortgage plus insurance and any homeowners' association fees) and no more than 36% on revolving debt in total.
The other major factor beyond income is credit score. There is no hard and fast rule for credit, but the Federal Housing Administration (FHA), which helps first-time buyers, requires at least a 580 for its loans with the lowest-required down payments. In general, borrowers falling into the poor-to-fair credit range -- 501-660 -- will face a harder time. It's not impossible to get a loan with credit at those numbers, but interest rates may be higher, and higher down payments may be required.
It's harder than it was, but not as hard as it has been
Qualifying for a mortgage has always had some grey area. For example, someone with a 620 credit score but income that puts him or her well below the 28/36 ratio should be able to get approved. Lenders are not being as lenient as they were pre-2006, but they have generally been more flexible than they were in the immediate aftermath of the housing bubble's bursting.
How hard it is to get a mortgage generally varies based on how qualified you are and how well you have your ducks in a row. A well-qualified buyer with all of his or her documentation ready to go should generally have an easier time of it. Someone pushing against the 28/36 rule or with less-than-stellar credit may have to speak with multiple lenders and will generally have to work much harder for approval.
Daniel Kline has never been denied for a mortgage, but has cut it close on a few occasions. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.