Are Mortgage Lending Guidelines Still Being Tightened?

Over the last few years, lenders became increasingly picky when it came to approving mortgage applications. After the housing meltdown, (which experts say was caused in part by overly generous lenders with shady business practices) banks began tightening their standards. But what about now? As the housing market begins to show some signs of improvement and the overall economy gets back on track, shouldn’t these lenders be loosening their purse-strings? It doesn’t look that way.

Since the mortgage crisis, guidelines for home loans have gotten progressively strict. A study released in the spring by Ellie Mae, a software company specializing in services for mortgage lenders, reported the following:

Average credit score on closed loans in March 2012: 750 (up from 740 six months beforehand.

Average loan-to-value ratio (LTV) in March, 2011: 76% (down 3% since August, 2011.

Although these tighter standards may make it harder for people to qualify for mortgages, tough lending guidelines may be a necessary evil. Experts warn, after all, that loose lending standards are what got us into this mess in the first place. Also, by examining the figures in the Ellie Mae report, it would appear that many Americans have maintained favorable credit ratings. This is good news, as it indicates healthy spending habits and the return of consumer confidence. The people who can continue to improve their credit ratings are likely to be able to compete for low interest rates in today’s market, despite the stricter lending requirements.

Unfortunately, not everyone feels sympathetic to banks that are slow to hand out money. Some feel the tight standards are keeping legitimately qualified borrowers from entering the market or lowering their mortgage payments by refinancing into a lower rate mortgage.

Although it’s impossible to make everyone happy, balance between overly strict qualifications and loosey-goosey lending practices could be what’s needed. Where that balance lies, however, is difficult to say.