Increased Mortgage Rates: Do They Offer Easier Credit Options?
After several consecutive years of seeing historically low interest rates, mortgage rates are again rising. With the number of refinances decreasing, banks are being forced to explore additional business opportunities. This has caused many banks to lower their rigid loan standards in an attempt to lure new homebuyers.
The latest reports show that credit availability increased by 2-percent in July, which was up 3-percent from May. Marking a significant increase, this jump is linked to interest rates rising.
Loan products that accept lower credit scores, offer higher Loan-To-Value ratios and offer cash-out refinancing options are responsible for driving this increase. With mortgage applications down by 50-percent from a year ago, refinances are no longer the primary source of income for the banking industry. In fact, new loan applications for home purchases are only up by a mere 5-percent.
As interest rates continue to increase, many homebuyers are on edge, especially those that are not accustom to gambling on large-scale investments, such as home purchases. When the real estate market plummeted in 2006, subpar credit standards were primarily to blame for the housing crisis. In 2007, the banking industry responded with rigid regulations that made it nearly impossible for the average homebuyer to purchase a single-family home. With lenders requiring substantial down payments as leverage in the event of a short sale or bankruptcy, combined with higher than normal credit scores, home ownership has been steadily decreasing over the past six years.
The government created the Federal Housing Administration (FHA) to help reduce bank’s strict borrowing standards. However, recently even FHA has had to raise their borrower guidelines, in addition to requiring insurance premiums. Once the devastation of the real estate market was in full swing, lenders then began adding their own guidelines on top of government requirements. Many banks felt no effect from instituting these rigid guidelines, as refinances were so abundant, it was actually important that banks minimize new loan applications.
Since May, refinance volumes have dramatically decreased and banks being forced to evaluate their own guidelines, especially those that relate to self-employed individuals and vacation home purchases.
As loan competition continues to heat up amid rising interest rates, many banks are being forced to layoff employees as refinance volumes decrease. While new home purchase applications have increased, home sales are beginning to plateau, which is making home purchases more competitive.
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