It's easier for borrowers — but still not easy

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Credit availability has been trending upward since late last year and increased slightly in March, according to the Mortgage Bankers Association. An increase in the MBA's Mortgage Credit Availability Index indicates lending standards are loosening, while a decrease means credit is tightening.

But despite the recent uptick, the access to credit is still far below its pre-pandemic highs. Current availability is similar to 2014 levels, the mortgage bankers' report shows.

That means if you don’t have a top-notch credit score and a sizable down payment, be prepared to face a higher level of scrutiny from lenders. You might be asked to provide additional documents related to your employment or income, to help prove you’ll be able to pay back your loan.

If you own your own business, you could be in for an even bigger shock, says Steven Ho, a senior loan officer with Quontic, an online bank and mortgage lender.

"It's been much more difficult for someone who owns a business to obtain a loan," Ho says. "They want to see recent business transaction history. It’s almost an audited financial statement they’re asking for."

Lenders got stricter after COVID first flared up

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Lenders are loosening up a bit now after making things much tougher for borrowers in 2020.

After the coronavirus hit, Chase, Wells Fargo and other large banks began tightening their lending standards, requiring borrowers to have credit scores of at least 680 and make 20% down payments on certain home loans.

Meanwhile, mortgage originations to top credit score borrowers rose sharply last year as those who were able to keep their jobs throughout the pandemic and save money along the way purchased bigger homes and refinanced their loans.

During the final three months of 2020, 71% of mortgage originations went to borrowers with credit scores over 760. That was up from 64% during the same period of 2019, according to data from the Federal Reserve Bank of New York.

"You were either able to get a mortgage if you were actively working, and benefit from a tremendous interest rate, or it was really really hard to get a loan," says Ho.

If you’ve been wanting to apply for a mortgage but aren’t sure if your credit is up to snuff, it’s easy to get a look at your credit score for free.

Your best bet may be a government-backed loan

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As lending eases up again, government-insured loans in particular have become more available to borrowers, according to the MBA’s credit index.

That includes mortgages backed by the Federal Housing Administration, the U.S. Department of Agriculture and the Department of Veterans Affairs, all of which have lower credit score and down payment requirements. If you qualify for a USDA or VA home loan, you don't need any down payment.

As a group, credit for these government-backed loans increased in March for the sixth time in seven months, and hit its highest level in a year, the MBA says. That's helping more Americans become homeowners.

"As we look ahead to the expected growth in the purchase market, which will be driven by millennials and first-time homebuyers, credit availability to qualified borrowers will play an important role in supporting this demand," says Joel Kan, the MBA’s chief forecaster.

FHA loans are especially popular with first-time buyers who might not have a big hunk of cash to put down. The requirements include a credit score of 580 or higher, and a down payment as low as 3.5%.

How to improve your odds with a lender

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Borrowers with bigger budgets also are enjoying more relaxed standards.

The supply of jumbo loan credit — that is, big-ticket mortgages made on the most expensive homes — rose for the sixth month in a row during March.

But if you’re not one of those high-roller borrowers or don’t have pristine credit, there are ways to improve your financial situation so you can qualify for one of today's low mortgage rates before they slip away.

If you can stand to add more points to your credit score, try paying down your credit card debt with the help of a lower-interest debt consolidation loan.

And, to build up a down payment, you might consider a lower-stakes way to invest. One popular investing app helps you grow your “spare change": It rounds up your everyday purchases and drops the difference into an investing account, so you can get some returns from the record-breaking stock market.

About the Author

Nancy Sarnoff

Nancy Sarnoff

Senior Reporter/Editor

Nancy Sarnoff is a senior reporter and editor at MoneyWise. Previously, she covered commercial and residential real estate for the Houston Chronicle where she also hosted Looped In, a podcast about the region’s growth, development and economy. Her work has been recognized by the National Association of Real Estate Editors and the Society of American Business Editors and Writers.

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