Mortgages Are Getting Harder to Come By, Especially for Lower-Income Borrowers

Mortgages are being offered at great rates right now -- but they're hard to get.

With mortgage rates near record lows, it's theoretically a great time to secure a home loan. Of course, there are a few problems with that. In addition to climbing home prices and a new refinance fee that could soon make refinance loans costlier, there's an even bigger issue: Lenders are making it much harder to qualify for a mortgage.

While that's true across the board, first-time homebuyers and lower-income buyers are likely to face outsized challenges in securing a loan. That's in part because Ginnie Mae, which guarantees loans popular among these borrowers, has imposed much stricter new credit requirements.

Lower-income buyers and first-time buyers may not be able to get home loans

The Mortgage Bankers Association tracks credit availability using a benchmark index measuring the amount of credit available to borrowers according to their credit characteristics. In 2020, the index has shown that credit was less available during eight of nine months for which data was collected. Last month, credit availability dropped to the lowest level since 2014, and it's now 35% below where it was during the same period in 2019.

Credit becomes less available when lenders tighten their standards for borrowers. Lenders have increasingly imposed new restrictions due to fears of stalled economic recovery and the uncertainty surrounding COVID-19. This has hit lower-income and first-time borrowers especially hard in part because programs for those with lower credit scores have disappeared amid the fears of further lockdowns and rising unemployment. And, perhaps even more importantly, the COVID-19 pandemic has led Ginnie Mae to restrict access to credit for less-qualified borrowers.

While around 38% of Ginnie Mae mortgages for new homebuyers went to borrowers with FICO® Scores below 700 and debt-to-income ratios above 40% in January of 2020, these numbers have fallen sharply. Ginnie Mae reduced the number of mortgages in this category to 36% in August. And refinance loans to borrowers with these credit and debt profiles fell from 12.8% in January of 2020 to under 5% in August of this year.

Borrowers with higher debt-to-income ratios and lower credit scores have fewer options to begin with, so the fact that Ginnie Mae loans have become less accessible may shut many of the borrowers who would most benefit from record low mortgage rates out of the market entirely.

What to do if you're struggling to get approved for a mortgage

If you're hoping to refinance your mortgage or secure a loan to buy a new home, there are steps you can take to maximize your chances of loan approval in a tighter credit market.

Working on your credit score and debt-to-income ratio are two of the most important things you can do. You can improve your credit by paying down debt, which will also help your debt-to-income ratio.

You can also make sure there aren't mistakes on your credit report that could lower your score, and consider contacting lenders if you have late payments or other derogatory information on your report. If you've generally been a good customer and only made one or two mistakes, they may be willing to remove them from your credit history.

Finally, shop around with mortgage lenders, as some may be more willing to give you a loan even if your financial credentials aren't perfect.

By taking these steps, you'll hopefully be able to secure a mortgage at an affordable rate in order to lower your monthly payment on your home loan or buy the home you've dreamed of.