Over the past few months, credit standards have been slowly loosening, meaning it may now be easier for some borrowers to qualify for a mortgage. With the help of technology and data-driven algorithms, lenders are able to take on riskier applicants and offer lower rates.
In recent years, many traditional lenders have had issues with compliance due to increased government regulation, and so they've tightened their qualification standards. This has led to an increase in alternative lenders such as non-bank originators (NBOs) offering loans to those who don't meet traditional lending criteria. NBOs rely heavily on technology to evaluate risk, allowing them to accept applicants with lower credit scores and less income than a traditional lender would.
At the same time, automated underwriting systems (AUS) offered by the government-sponsored enterprises (GSEs) are becoming more commonplace. AUS can review an applicant's credit score and history in minutes and make an objective decision about the likelihood of default or delinquency. This process has drastically shortened the amount of time it takes to approve a loan application, allowing more borrowers to qualify for mortgage loans.
In addition, the emergence of Fannie Mae's Day 1 Certainty program and Freddie Mac's Loan Prospector has helped reduce the time to close a loan. Both programs allow lenders to verify the accuracy of the borrower's income and assets electronically and get a final decision within 24 hours. As a result, closing on a loan is now faster and simpler than ever before.
Finally, the gradual move away from manual underwriting and toward AUS has caused lenders to become more lenient with their qualification standards. Many lenders are now approving borrowers with as little as 3% down payment or even no down payment at all. Those with higher credit scores may find that they qualify for better terms and rates than they could have a year ago.
Overall, the credit standards for mortgages have been gradually loosening over the past several months, allowing more buyers to qualify for a loan. This is great news for those who do not fit the traditional lending criteria, as they can now find financing that fits their needs. For those who do fit the traditional criteria, they may be pleasantly surprised to find that they now qualify for more favorable terms and rates. Ultimately, the availability of various lending options means that homebuyers now have more choices than ever before.
This article was contributed on Nov 09, 2023
