Mortgage Lenders Are Tightening Standards. How to Increase Your Chances of Snagging a Home Loan Today
by Maurie Backman | Updated July 19, 2021 - First published on April 28, 2021
It's getting harder to borrow for a home. Here's how to improve your odds.
There's a reason prospective buyers have been clamoring for homes -- mortgage rates sat near historic lows for the second part of 2020 and early 2021. And they're still quite competitive, even though they've come up a bit in the past two months. As such, mortgage lenders have been flooded with applications. But many of those applicants are getting rejected.
It's become harder to borrow for a home
During periods of economic instability, mortgage lenders tend to tighten their borrowing standards to protect themselves against undue risk. And that's precisely what's happened in the pandemic.
Mortgage credit availability, which is a measure of lenders' willingness to give out home loans, is near its lowest level since 2014, according to the Mortgage Bankers Association. Meanwhile, roughly 70% of mortgages issued in 2020 were given to borrowers with a credit score of at least 760, up from 61% in 2019. And the median credit score for approved borrowers was 786 during the fourth quarter, up from 770 during the same time frame in 2019.
By contrast, the minimum credit score required to get a conventional mortgage is 620. Of course, even during non-pandemic times, many lenders impose higher standards, which they have the right to do. But these days, the likelihood of getting approved for a conventional loan if your credit score's in the vicinity of 620 is pretty low.
How to get your home loan application approved
So you're interested in taking advantage of relatively low mortgage rates and buying a home. Great. But how can you make sure your mortgage application is approved?
Here are a few tips:
- Boost your credit score. You don't necessarily need a score in the mid-to-high-700s to get a mortgage, but the closer you can get, the better. You can raise your credit score by paying your incoming bills on time, paying off existing credit card balances, and checking your credit reports for errors that could bring your score down. For example, you might find past-due bills you never incurred in the first place.
- Keep your debt-to-income ratio low. Your credit score isn't the only factor mortgage lenders consider. They'll also look at your debt-to-income ratio, which measures your monthly debt payments relative to your income. If you're carrying debt, whether in the form of a credit card balance or personal loan, paying it off could improve that ratio. Along these lines, if want to apply for a mortgage, it's best to avoid taking out new loans.
- Sock away a nice down payment. It's possible to buy a home with less than 20% down. But you may be even more likely to get approved if you can come up with 20% of your home's purchase price at closing. Plus, if a lender sees you've saved a bundle, it may be more confident you can manage your money and will keep up with your monthly payments.
It may be trickier to get a mortgage these days what with lenders getting stricter, but it can still be done. A few strategic moves on your part could put you in a solid position to get approved for a home loan. That way, you'll achieve the impressive goal of buying a place of your own.
The Ascent's Best Mortgage Lender of 2022
Mortgage rates are on the rise — and fast. But they’re still relatively low by historical standards. So, if you want to take advantage of rates before they climb too high, you’ll want to find a lender who can help you secure the best rate possible.
That is where Better Mortgage comes in.
You can get pre-approved in as little as 3 minutes, with no hard credit check, and lock your rate at any time. Another plus? They don’t charge origination or lender fees (which can be as high as 2% of the loan amount for some lenders).
About the Author
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.