Just how hard is it to get a mortgage these days? Maybe not as tough as you think.

While few would deny that mortgage credit is considerably tighter these days than it was prior to the housing crash and Great Recession, many borrower still obtain home loans with relatively low credit scores and small down payments, according to a recent report from the Boston Federal Reserve.

That report, by Fed economists Jordan Rappaport and Paul Willen, notes that while credit scores for homebuyers qualifying for conforming mortgages have risen considerably since 2008, the lowest scores that are able to qualify for a mortgage have barely changed at all.

Specifically, they reported that the median credit score for borrowers obtaining a conforming mortgage - a loan backed by Fannie Mae or Freddie Mac, long the most common mortgage loans in the U.S. mortgage market - rose nearly 50 points from 2007 to 2010, to a high of 770 (it's currently retreated slightly to 760).

Lowest qualifying scores little changed

But when FHA loans - which have less strict credit requirements - are added to the mix, the report found that the credit scores of borrowers in the lowest 20 percent of scores able to obtain a home purchase mortgage were virtually unchanged - currently a median of around 670, the same as before the crash.

Overall, the median credit scores for both conforming and FHA purchase mortgages have risen only 10 points since 2007, to 730.

This relatively small change in credit score standards for mortgages overall is largely due to the increased popularity of FHA loans, which grew from about 5 percent of single-family purchase mortgages in 2006 to 44 percent of the market in 2010. Part of this was due to congress raising the loan limits on FHA mortgages to make them useful to a broader range of households, but it was also driven by their lower credit and down payment requirements compared to conventional loans.

Minimal down payments still common


As a result, the share of purchase mortgages with buyers making a net down payment of 5 percent or less is roughly comparable today to what it was during the housing boom, according to the report, despite the near-disappearance of no-money down mortgages following the crash.

So if borrowers can still get a mortgage with weak credit and little money down, why are people having difficulty getting home loans? The authors suggest that it's because lenders are subjecting all potential borrowers to stricter underwriting standards before approving any mortgage.

Documenting earnings can be a problem

This means that borrowers with irregular or hard-to-document earnings - such as a commission salesperson or a small businessperson - may have trouble qualifying for a mortgage, while someone with a modest but predictable income from an employer they've been with for a number of years may be able to obtain a mortgage despite so-so credit scores.

Tighter underwriting also means more conservative appraisals, meaning that a buyer may not be able to qualify for the full amount they need to borrow to make a purchase. Lenders are also looking more closely at individual properties as well, and shying off if there is even a hint of a problem with the title or other matters.

The report's authors' note that since the crash, federal agencies such as the FHA, Federal Housing Finance Agency, Consumer Financial Protection Bureau and others have been working to develop new standards for mortgage lending. Uncertainty about these new standards has made lenders extremely cautious about what loans they will approve. The authors suggest that finalizing those guidelines and eliminating that uncertainty may go a long way toward freeing up mortgage credit once again.

Published on July 25, 2014