First, borrowers are doing a much better job of getting their credit, debt, and documentation in order before they apply. Second, lenders have slowly relaxed some of the standards they use to approve applications.
As you gear up to buy a house in 2016, here are a few things you should know about the mortgage industry.
More Easing of Credit Standards
Mortgage lenders expect to continue easing their standards in 2016, according to a fourth quarter survey of major lenders by Fannie Mae.[2] The findings show that during the first quarter of the year, 16% of lenders expect to ease credit requirements for loans that conform to Fannie Mae’s and Freddie Mac’s underwriting standards and for government-backed loans like FHA and VA.
Meanwhile, the percentage expecting to tighten standards dropped to 2%. However, for other loan types, such as conventional loans, fewer lenders said they would ease loans over the first quarter.
FHA and VA loans are already significantly easier to qualify for than conventional loans. For example, the median FICO scores for purchase loans approved in December were 688 for FHA, 706 for VA and 754 for conventional—a huge difference.[3] Based on the Fannie Mae survey, look for that difference to increase in the months ahead.
Rising interest rates
While standards slowly improve, interest rates are expected to slowly worsen for home buyers. Most forecasts have rates ending the year between 4 and 5 percent on a 30-year fixed rate mortgage.
Ironically rates have actually fallen when most experts expected them to rise in the wake of the Federal Reserve’s decision in December to rates for the first time in nine years. Though they will probably be higher a year from now than they are today, they will still be very low compared to historic rates.
Down Payments
While easier lending standards and slowly rising rates don’t greatly increase the cost of buying a home, down payment requirements aren’t going to change much either.
The average down payment in the first quarter of last year was 14.8 percent of the purchase price, down from 15.5 percent a year ago to the lowest level since Q1 2012. However, the average down payment in dollars for 3.5 percent FHA purchase loans originated in the first quarter last year was $7,609 while the average down payment for conventional loans backed by Fannie Mae and Freddie Mac was $72,590.[4]
One of the reasons the average down payment declined last year was the popularity of low down payment loans. Loans with 3 percent or lower down payments accounted for 27 percent of all purchase loans in the first quarter last year, up from 26 percent in the fourth quarter and also 26 percent a year ago to the highest share since Q2 2013. Low down payment loans accounted for 83 percent of FHA purchase loans originated in the first quarter, while 11 percent of conventional loans were low down payment loans.[5]
First-time buyers should check out the thousands of low or no down payment programs sponsored by state and local housing authorities. Check out Down Payment Resource for more information.
Mortgage insurance in 2016
Fannie Mae and Freddie Mac both launched 3 percent down payment programs a year ago and these have been extended through 2016. However, like FHA, they both require mortgage insurance, which adds to the monthly cost of homeownership.
To encourage first-time buyers, last year FHA announced a 50 percent reduction in the monthly mortgage insurance premium. All three of these initiatives are being continued this year. More good news: in the waning hours of 2015 Congress extended the deductibility of mortgage insurance payments; at least for 2016, you will be able to deduct your mortgage insurance premiums from your federal taxes, just like you mortgage interest.
This tax provision only has a one-year lifespan, but Congress has extended it for the past few years though there no guarantee it will continue in the future.
[1] Ellie Mae Origination Insights Report, January 2014
[2] http://fanniemae.com/portal/research-and-analysis/mortgage-lender-survey.html
[3] Ellie Mae Origination Insights Report, December 2015
[4] http://www.realtytrac.com/news/home-prices-and-sales/q1-2015-u-s-home-purchase-down-payment-report/
[5] Ibid
source: totalmortgage.com
