April 25, 2014 12:00 am • Kenneth R. Harney Washington Post Writers Group
Are you on the home- buying sidelines this spring because you think you won’t be able to qualify for a mortgage?
You may be part of the surprisingly large crowd of folks who fear the home-loan unknown. A new national consumer survey by OmniTel found that 56 percent of all potential purchasers of homes say they’re out of the market because they don’t want to face the possibility of rejection by lenders.
Many potential buyers believe they need near-perfect credit scores to get a home loan.
Debt-to-income ratios are another insurmountable obstacle in many potential buyers’ eyes — enough so that they don’t even try to obtain a mortgage. Most lenders use two forms of debt ratios: a “front end” ratio that compares the monthly costs of the proposed new mortgage and other housing expenses with the applicant’s monthly income; and a “back end” ratio comparing all recurring monthly debt obligations, including housing expenses, student loans, credit cards and the like, with the applicant’s monthly income. Roughly a third of potential buyers believe their debt ratios are too high.
But what’s the statistical reality? Monthly, Ellie Mae analyzes a huge sample of new mortgage originations nationwide. Here’s what it found for March:
- Thirty-three percent of all new loans last month had borrower FICO scores below 700. A year ago it was just 27 percent. (FICO scores max out at 830, which is considered excellent credit; applicants with scores under 700 present higher credit risks to lenders.) Federal Housing Administration (FHA) insured home purchase loans had an average FICO in March of 684. Conventional mortgages, those designed for purchase by investors Fannie Mae and Freddie Mac, still have relatively high FICOs — they averaged 755 in March, but that was down slightly from 759 a year before.
- Debt ratios also are more generous than many probably imagine. FHA’s average front end (housing costs) ratio last month for purchase loans was 28 percent. In other words, if your projected housing and mortgage-related costs represent 28 percent of monthly income, you’re average. Fannie Mae and Freddie Mac loans averaged 22 percent ratios on the front end. Back end (total recurring debt) ratios for FHA averaged 41 percent. For Fannie and Freddie it was lower — 34 percent.
- Down payments can be small if that’s what you need. FHA’s average down payment last month for home purchases was 5 percent, but many borrowers put down just 3.5 percent. Fannie and Freddie allow 5 percent down as well, provided you can pay mortgage insurance premiums. VA loans can go to zero down if your veteran status allows you to qualify. Department of Agriculture home buyer loans also allow for no down payments.