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Mortgage approval rates are at the highest point on record for all segments of society across conventional and non-conventional purchase loans and refinances, according to the Consumer Financial Protection Bureau (CFPB), the federal government body responsible for collecting HMDA data.
Conventional mortgage denial rates fell to 8.4% in 2018, compared to 9.6% in 2017 and the peak of 19.0% that was recorded in 2007 at the beginning of the great housing crisis. Non-conventional loan denial rates fell to 12.7% in 2018, down from 12.8% the previous year and the peak of 17.4% recorded in 2008.
African American and Hispanic mortgage applicants are still more likely than the average buyer to be denied for a home loan. However, these 2 segments have also experienced the biggest improvement – with African American denial rates falling to 17.4% from a peak of 33.5% and Hispanics to 13.1% from 29.5% in 2007.
Mortgage denial rates per segment (%)
* Denial rates peaked for all segments in 2007 or 2008
Source: Consumer Financial Protection Bureau review of 2018 HMDA data
Conventional Home Loans are Becoming Popular Again
Alongside rising approval rates from top mortgage loan providers, more homebuyers are applying for and getting approved for conventional loans than at any time since the 2007-8 housing crisis. Prior to the housing crisis, conventional loans accounted for 80-90% of all home-purchase loans for one-to-four family, owner-occupied properties. As a result of the crisis, the share of non-conventional loans (comprising VA, FHA, and other government-backed loans) spiked to 54% in 2009 and stayed in the majority for a couple of years. By 2018, conventional loans accounted for 67% and non-conventional loans 33% of all home-purchase loans.
According to the CFPB, higher up-front and annual mortgage insurance premiums on non-conventional FHA loans (a loan offered to people with FICO scores of 500-619 and guaranteed by the Federal Housing Administration) appear to be driving home buyers toward conventional loans. Between 2010 and 2013, the annual mortgage insurance premium for a home purchase loan rose from 0.55% of the loan amount to 1.35% - and premiums appear to still be high today. Meanwhile, many lenders have begun offering conventional loans with down payments of 3%, making it easier for credit-strong, cash-poor borrowers to get approved.
Credit Score Still the Most Important Factor in Applications
The CFPB says the improvement in mortgage approval rates can be attributed partly to looser credit standards on the part of lenders. Indeed, Ellie Mae says the average FICO credit score of approved home-purchase loans hit 726 at the end of 2018, higher than the median American credit score of 676 but down from the average approved score of 750 in February 2012, when Ellie Mae began collecting data.
More pessimistically, the CFPB says the other main cause of higher approval rates is that many “riskier applicants” have given up on applying. To support this, it points out that the approval rate on applications for conventional home-purchase loans was higher in 2018 than during the housing boom years of the early-to-mid 2000s, even though credit standards were tighter in 2018.
Overall, lenders care more about an applicant’s FICO score than any other single factor. Fortunately, a person’s credit score is never set in stone. Click here to read Top10.com’s tips on how to improve your credit score.
Value of Home-Purchase Loans Has Been Rising Steadily
The overall picture wouldn’t be complete without looking at the value of home-purchase loans – which rose to $274,000 in 2018 from $202,000 at the peak of the housing crisis in 2009. During the past decade, the average home-purchase loan amount increased across all racial, ethnic, and income levels – consistent with rising house prices. Between 2017 and 2018, loan amounts increased by 7.1% for low-income borrowers, 5.1% for middle-income borrowers, and 3.3% for high-income borrowers.
From a long-term perspective, the CFPB report notes that average home-purchase loan amounts have followed historical trends in home prices, rising during the mid-2000s, falling sharply through 2008 and 2009, and then rising again. Trends in loan amounts differ substantially by race and ethnicity, which according to the CFPB were likely driven by local differences in home prices where the respective groups of borrowers live, incomes of the respective groups, and other factors that may affect the sizes of the homes these groups were purchasing.
On the whole, approved mortgage applicants are undoubtedly better off now than they were a year ago and generally better off than most of the period since the housing crisis. As Top10.com reported in August, home loan interest rates have been falling faster than home values have been rising, in some cases leaving buyers tens of thousands of dollars better off than a year ago.
Positive News for Homebuyers
Overall, things are looking up for homebuyers. For all the talk of rising home prices squeezing people out of the housing market, the data also show that more people are getting approved for mortgages – and with better interest rates to boot. Of course, there are exceptions to the rule: many millions of American adults are still unable to get approved for a home loan. For those standing on the sidelines, we suggest taking steps to build your credit score and comparing lenders to find out who is the most flexible when it comes to eligibility requirements and down payments.