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Getting a Mortgage is Easier These Days as Lenders are Willing to Take on More Risk

During the housing bubble, some lenders relaxed lending rules to the point that you didn't even have to provide documentation to qualify for a loan. After the housing bubble burst, lenders were considerably more strict about whom they granted a mortgage loan to and only consumers with excellent credit ratings were able to obtain a mortgage.

Stricter lending standards left many potential homeowners out of the housing market even as mortgage rates hit record lows. Unfortunately, potential new homeowners weren't the only ones left out in the cold. Many homeowners who wanted to refinance their loan but had a less then stellar credit score were also unable to get a new loan.

The pendulum is starting to swing again as lenders are willing to give loans to borrowers with lower credit scores. In Ellie Mae's July Origination Insight Report, the average consumer FICO credit score on loans made was 737 for the month of July, which is 5 points lower than June's average FICO score.

The percentage of loans made to those whose FICO score is above 700 also dropped year over year. Last year 82.75 percent of all loans closed in July had an average credit score above 700. For July 2013, only 75.07 of all loans closed had an average FICO score above 700.

The percentage of loans made to those whose FICO score was under 700 had a big jump year over year. In July's report, 25 percent of all mortgage loans had an average credit score under 700. In July of 2012, only 17.25 percent of all mortgage loans closed had a score of under 700.

Over the past several years, mortgage rates dropped to record lows, spurring millions of homeowners to refinance. The increase in refinance rates this year has put a damper on refinance demand. In January 2013, 73 percent of all mortgage loans closed were for refinances. In July 2o13, only 47 percent of loans closed were for refinances.

53 percent of all loans closed were for home purchases. This is the first time more loans were made for purchases then refinances since August 2011. Higher fixed 30 year mortgage rates are also driving demand for shorter term adjustable mortgages, which currently have lower rates. In January 2013, only 2.1 percent of loans closed were for adjustable mortgages but in July the percentage more than doubled to 5.2 percent.

Right now, adjustable mortgage rates might seem more appealing than long term fixed rates because the rates are lower now. However, if rates rise and your adjustable rate increases along with them, you may end up paying a higher mortgage rate on an adjustable loan than you would with a fixed loan. Mortgage rates today on 30 year fixed loans are just above record lows and still very low, historically speaking.

Mortgage rates will be moving higher for many years to come which is why you should lock in a fixed rate instead of taking a chance with an adjustable rate. If you get a 5 year adjustable loan your rate will be fixed for 5 years but then the rate will go higher.

5 years from now, 30 year mortgage rates are likely to be above 6.00 percent and possibly as high as 8.00 percent. Current mortgage rates on 30 year loans can be found as low as 4.00 right now if you're willing to pay points. To give you an idea of what the monthly costs would be when you compare a 4.00 percent rate to an 8.00 percent rate, for every $100,000 the additional monthly payment is $286.34. On a $500,000 loan that's a difference of over $1400 in monthly payments.
Author: Brian McKay
August 29th, 2013