Mortgage Lenders Loosened Their Standards in April: What Home Loan Applicants Need to Know
by Maurie Backman | Updated July 19, 2021 - First published on May 17, 2021
Is it becoming easier to qualify for a mortgage? April data points to that, but there are still certain standards applicants should hold themselves to.
A number of mortgage lenders opted to tighten their borrowing requirements in the course of the coronavirus pandemic. The logic was that due to general economic uncertainty, lenders needed to be a bit more selective about who they would loan money to.
But mortgage credit availability increased in April, according to the Mortgage Bankers Association's Mortgage Credit Availability Index (MCAI). Specifically, the MCAI rose by 2.2% in April, which indicates that lenders are easing up on requirements for borrowers and are giving out mortgages a little more freely.
That said, mortgage credit availability has still not returned to pre-pandemic levels, and there are still certain standards you'll need to meet. So if you decide now is a good time to buy a home, here are a few requirements you'll need to fulfill if you're hoping to get approved for a mortgage.
1. Have a strong credit score
If you're applying for a conventional mortgage, you'll need a minimum credit score of 620 to qualify. But that's just the bare minimum, and in today's lending environment, it's best to aim higher. In fact, in 2020's fourth quarter, the median credit score among mortgage borrowers hit a record high of 786.
Now this doesn't mean you need a credit score in the high 700s to get approved for a home loan. But you should aim to bring your score into the mid-600s at a minimum if you're applying for a mortgage today. Furthermore, the higher your credit score, the more likely you'll be to snag a low interest rate on your home loan. So boosting your score even a little bit could result in long-term savings on your mortgage payments.
2. Have a low debt-to-income ratio
Your debt-to-income ratio measures your monthly debt payments in relation to your income. The lower that ratio, the easier it'll be for you to qualify for a home loan. Typically, lenders want no more than 28% of your monthly income to go toward housing costs and no more than 36% of your monthly income to go toward all of your debt payments. If that's not the case right now, and you're over these limits, you may want to try and pay off debt before applying for a mortgage.
3. Have a steady job and income
For a lender to feel comfortable giving you a mortgage, you'll need to provide proof that you can keep up with its payments. To this end, you'll need a steady job and a high enough income to support the loan amount you want to take out. Be prepared to show proof of income via a series of recent pay stubs, and don't be surprised if you're asked to provide a letter from your employer stating that you're an employee in good standing.
4. Have a solid down payment
Though some conventional mortgage lenders will accept a down payment on a home that's as little as 5%, many will demand more money at closing -- anywhere from 10% to 20%. In fact, it's a good idea to come up with a 20% down payment, because that way, you'll not only increase your chances of getting approved for a mortgage, but you'll also avoid private mortgage insurance, which is a costly monthly premium you'll need to pay on top of your regular mortgage payment. If you don't have enough for a solid down payment, you still have some options. Check out the following resources for more information:
The fact that lenders are loosening their standards is a positive thing for home loan applicants. But that doesn't mean you'll have an easy time getting a mortgage, either. If you want to improve your chances of getting the financing you need to buy a home, make sure you can check the above items off your list. And if you can't just yet, take a little time to work on them before submitting those mortgage applications.
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