Could New Credit Standards Jump Start Housing Market?
Since 2008, getting a home isn't as easy as it used to be. Thanks to the financial crisis that year, mortgage lenders in response have tightened their restrictions for prospective homebuyers with less than stellar credit. Consequently, even with mortgage rates being very low, consumers with lower credit have often seen a roadblock from lenders which offsets the market, making it a very challenging climate for some buyers to obtain a home loan.
However, in the wake of a new deal just announced between Fannie Mae and Freddie Mac, we may see that tide shifting and opening up a lot more opportunities for borrowers to get the home loans they seek and home sales to rise right with them. The agreement between the mortgage servicing companies eases credit barriers so that potential home buyers with weaker credit ratings may finally gain access to home loans. For example, the talk is that Fannie Mae and Freddie Mac may install programs that enable lenders to offer a mortgage to a buyer with a down payment as low as 3%. This could help buyers who were otherwise shut out from the market come up with the necessary down payment they need while easing credit requirements for them to quality for a mortgage.
As a result of easier access to home loans, the housing market could receive a much-needed injection of new life from a new category of borrower. That’s potentially good for lenders, developers and more.
That said, there are also arguments against making it too easy to obtain a home loan – namely, some industry analysts worry that loosening credit standards and simultaneously offering programs with very low down payment options could take the housing market down a slippery slope it’s encountered before. “When you intersect both low down payments and weak credit profiles, that to me is a recipe for problems down the road,” says Greg McBride, Bankrate.com Senior Financial Analyst.
The key piece of this agreement appears to be creating stronger guidelines that attempt to right some past wrongs due to poor underwriting of loans and lack of income verification. These guidelines could provide lenders with greater peace of mind in lending to a borrower who is higher risk but can still technically qualify for a loan. The revised minimum down payment of 3% would also be in line with what the Federal Housing Administration (FHA) insures to first-time and lower income buyers.
Time will tell if lenders feel more at ease but it’s clear from this type of agreement between Fannie and Freddie that there may be a realization that the housing market can only grow so much depending solely on highly qualified buyers with excellent credit able to make 20% down payments. With new safeguards in place for lenders, we may see a more moderate climate that opens home ownership to a broader audience.