Borrowing for a Home Mortgage Just Got Easier
Last week, two major lending changes suddenly made it easier to get a mortgage. And here in Alaska, the Alaska Housing Financing Corporation has jumped into the mortgage market with a new grant program. First, changes to that dreaded credit score that everyone worries about. Equifax, TransUnion and Esperian, the three major credit rating agencies, will drop tax liens and civil judgments from some consumers’ profiles if the information isn’t complete. Now, in order for a tax lien or civil judgment to appear, it must include the person’s name, address and either date of birth or Social Security Number. According to a recent article from CNBC.com, about 7% of the 220 million Americans with a credit profile, have liens or civil judgments against them. This change could up a mortgage applicant’s credit score by as much as 20 points which could allow them to have a lower rate or a higher mortgage amount.
The second big news is mortgage giants, Fannie Mae and Freddie Mac, are now allowing borrowers to have higher levels of debit and still qualify for a mortgage. Previously at 45% debt to income ratios, that ratio is now 50% of pretax income. Specifically, this increase in debt to income ratio is designed to help the millennial buyers with significant student loan debt qualify for their first home. As the millennials (24 to 35 age group) mature, marry and start a family, their housing needs are rapidly changing from living with parents or renting to home ownership. In the U.S. and here in Alaska, millennials and baby boomers are the two largest home buying groups.
These two significant changes are as a result of lenders experiencing a pinch in profit margins as buyers have pulled back. However, higher interest rates and higher home prices have created fewer homebuyers, at least in the lower 48. Here in Alaska, sales for the first five months of 2017 are in a virtual dead heat when compared YTD 2016 but summer inventory is increasing, creating more competition amongst sellers.
The Alaska Housing Finance Corporation has also jumped into the mortgage market with an aggressive new program called Closing Cost Assistance Program (CCAP). This program will provide closing cost assistance equal to 4% or 3% or the loan amount to qualified homebuyers. Alaskan residents with a minimum credit score of 660 or better may receive a 4% grant and borrowers with a minimum credit score of 640 to 659 may receive up to a 3% grant. Note the word ‘grant’. This grant is a gift. It is not borrowed money and does not need to be paid back. The catch is a slightly higher interest rate on a 30-year fixed rate AHFC mortgage.
All three of these changes are designed to bring more buyers into the market place with hopefully a minimum amount of additional risk of default. We all remember the crash of 2008 when anyone could get a mortgage with stated income. Hopefully, these changes will provide new opportunities for home ownership without putting undue pressure on the mortgage system.