Is It Difficult to Get a Mortgage Now?

Getting a mortgage has become much more challenging in recent years. Increased scrutiny from lenders, rising interest rates, and stricter requirements have made it harder for many people to qualify If you’re considering applying for a mortgage, here’s what you need to know about the current lending environment.

Why Has Getting a Mortgage Become More Difficult?

There are several key reasons why lenders have tightened standards for approving mortgages:

• Response to the 2008 housing crisis. During the lead-up to the 2008 financial crisis lenders were giving out mortgages to borrowers with poor credit and little income or assets. When many of those borrowers defaulted, it caused the subprime mortgage meltdown and mass foreclosures. As a result lenders swung the pendulum in the other direction and now apply much more rigorous standards.

• Rising interest rates. As interest rates rise, fewer people can afford the monthly payments on a mortgage. So as rates have increased over the last couple of years, it has pushed some borrowers out of qualification range.

• Regulatory changes. New regulations like the Dodd-Frank Act imposed stricter regulations on lenders to avoid another crisis. This includes verifying a borrower’s ability to repay and limiting risky loan features.

• Lender caution. Many lenders are being extra cautious about who they approve for mortgages to avoid making risky loans. They don’t want to be stuck with more defaults.

Key Challenges Borrowers Face

Here are some of the biggest hurdles borrowers encounter when trying to get approved for a mortgage today:

• Credit score requirements have increased. It used to be possible to get a mortgage with a FICO score as low as 620. But these days, you typically need a credit score of at least 680 to 720 to qualify with most lenders. Requirements are even higher for jumbo loans.

• Higher down payment requirements. Prior to the housing crisis, little or even no down payment was required. Now, you often need at least 10-20% down to get approved. Jumbo loans may require as much as 30% down. Coming up with this large amount of cash is difficult for many buyers.

• Full income documentation is mandated. Stated income or “liar loans” are a thing of the past. Lenders now require pay stubs, W-2s, tax returns, and other documentation to verify your income. Any gaps or inconsistencies could lead to denial. Self-employed borrowers face extra scrutiny.

• Large cash reserves are expected. Lenders want to see you have at least 3-6 months of mortgage payments available in cash reserves after closing. Some even require reserves to cover 12 months of payments.

• Debt-to-income ratios are capped. Your total monthly debt payments, including the new mortgage, can’t exceed 43-45% of your gross monthly income in most cases. Lower ratios may apply.

Tips for Getting Approved in Today’s Market

While lending standards are tighter, it is still possible to get approved if you take the right steps:

• Get your credit score over 700. Take time to build your credit history and improve your score before applying. Pay all bills on time and correct any errors on your credit reports.

• Save for a down payment of at least 10%. Larger down payments of 20% or more make approval easier and allow you to avoid private mortgage insurance.

• Reduce your existing debts. Pay down credit cards, auto loans, student loans and any other debts so your DTI ratio stays low.

• Show consistent income. Provide documentation for at least 2 years of steady employment and income sources. Longer is better.

• Keep 6-12 months of reserves. Having cash reserves proves you can afford payments if you face a job loss or other financial hit.

• Get pre-approved. Going through pre-approval helps determine the size loan you qualify for. Then you only look at homes in your approved price range.

• Ask about alternative loans. If you don’t meet requirements for conventional mortgages, FHA, VA and USDA loans provide options for lower credit scores and down payments.

The Mortgage Process Takes Longer

In addition to stricter approval standards, borrowers should be prepared for the mortgage process to take significantly longer these days. From pre-approval to closing, you can expect the process to take at least 45-60 days. It may take several months if you have credit or income challenges. Quick closings are less common.

Providing all the required documentation also takes time. After initial approval, you’ll likely need to submit more tax returns, bank statements, and other paperwork before final underwriting. Be responsive to lender requests to avoid delays.

Patience and diligent preparation are now key when applying for any mortgage. But if you put in the work to improve your financial profile, getting approved is still feasible for most borrowers. Just recognize it is a more demanding process compared to the lax pre-crisis days.