Last year, a strong housing market combined with fears that the Federal Reserve would eventually begin tapering its purchases of mortgage bonds. Together, these factors helped drive up the cost of a 30-year fixed-rate mortgage from about 3.3 percent in January 2013 to nearly 4.6 percent by September.
Since then, mortgage rates have backed off those recent highs, bobbling back and forth between 4.5 percent or so, and, recently, 4.2 percent. This has helped to keep housing affordable for those who want to buy a home. But it did pose the bankers a dilemma: How could they get more people to want to buy homes in the first place, so that they could sell more mortgages?
Answer: Make it easier to apply for a mortgage.
Mortgage Down Payments Live Down to Their Name
Last spring, lending data website LendingTree.com (TREE) released a report showing that the average down payment demanded by mortgage bankers to obtain a 30-year fixed-rate mortgage had fallen 9.4 percent since mid-2011. At 16.1 percent, it was nearly 4 full percentage points shy of the old rule of thumb that a home buyer should put 20 percent down on a new home.
At last report, mortgage bankers on average want to see a 15.78 percent down payment -- a bit more than what we saw last fall, but still continuing the downward trend in down payments.
Why? One clue may be found in recent comments from Freddie Mac vice president and chief economist Frank Nothaft, who's been highlighting declines in existing-home sales, in new-home sales as well, and even in permits taken out to build houses, in a series of reports through April. If home-buying is starting to taper off, then the bankers may be looking for a way to goose that market a bit.
Peering Into the Bankers' Bag of Tricks
Demanding less money up front to obtain a loan is one obvious way to ease more buyers into the housing (and home mortgage) market. Another tool is loosening up lending restrictions.
According to LendingTree, "Average credit scores for borrowers matched with lenders on the LendingTree network have dropped 6 percent year over year." This, says LendingTree, indicates banks being "more willing to consider a wider pool of borrowers."
Company founder and CEO Doug Lebda put it this way: "As the housing market improves and refinance activity declines, lenders are adapting their guidelines to improve credit accessibility for borrowers. Relaxed lending guidelines translates to a larger pool of qualified homebuyers."
What It Means to You
Obviously, if you're in the market for a home today, this is great news for you. According to Lebda, "Lenders have started to accept lower down payments and credit scores from potential borrowers." With actual mortgage rates now range-bound, it's a bit cheaper to obtain a mortgage today than it was a year ago, and there's also less uncertainty about which way mortgage rates are moving. Indeed, in some markets -- North Dakota, Nebraska, and West Virginia now being the cheapest -- bankers are demanding down payments of not much more than 12 percent of the value of a home, in exchange for a mortgage.
Throw in the fact that bankers are less antsy about the risk their loans will ultimately get defaulted on, and it's also a bit easier to get that mortgage loan approved.
Granted, it's developments just like these that sucked America into a financial crisis that nearly destroyed the economy six years ago. But if that's what it takes to get you into a new home -- and a new mortgage obligation -- apparently, the bankers are willing to risk it.
Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.