Why you can’t get a mortgage

You see them advertised all over the place.  “Mortgage interest rates are low, buy a home now”, but there’s a catch: It doesn’t matter how cheap rates are if you can’t get a loan.  It’s like the dangling carrot that you can’t get.

These days, only highly qualified borrowers can get financing — let alone the best rates.  Basically think of it as those that don’t really need the money are the ones that can get it.

Would you believe nearly a quarter of people who apply for loans are turned down, according to the Federal Reserve.

Many Realtors claim that “Good borrowers with one or two blemishes on their credit are being denied credit,” The denial rates tell only half the story. Many potential buyers aren’t even applying for loans because they assume they can’t get one.  They have heard the horror stories from their friends and just assume it isn’t worth it.

The average credit score for and FMNA/FHLMC loan has risen to 760 from 720 a few years ago. For FHA loans, the average score has gone to 700 from 660. Loans made to borrowers with sub-620 scores are almost nonexistent.  Is this because lenders have tightened their lending standards or only because marginal borrowers are no longer applying?  Probably a combination of both factors.

Another factor keeping people out of the mortgage market is that lenders now require much more up-front cash.  With the exception of a VA Loan and some Rural Housing loans, almost all other loans require a significant down payment.  FHA is 3.5%.  While conventional loans go to 95% most people put down more due to the high PMI cost.  The target of 20% to avoid the PMI can be quite an obstacle for most.

Industry insiders say all these factors have reduced the pool of buyers, lowering demand for homes and hurting prices.  People that need to sell are selling at huge discounts from previous prices.  Buyers that have financing or cash are finding some deals that were never available before.

Sales of existing homes in February, despite very affordable prices, were 30% off their peak, and home prices fell for the sixth consecutive month in January.

The government is also trying to figure out how to get out of the mortgage business.  Having had to backstop both FNMA and FHLMC from disaster, they are now trying to figure out how have both companies run with less government guarantees.  However, it was the implied guarantees that made investors want to invest in the mortgage that these companies made.  Without the backstop there is more risk which means interest rates might need to rise to cover the extra risk.

Add rising interest rates into the current scenario and it appears that we will continue to see declining demand for housing and further price reductions.