Trends in Lending and Mortgages

By Tara Mastroeni

Becoming a homeowner has long been considered to be a part of the American Dream, but most of us wouldn’t be able to achieve it without getting a mortgage. Since an estimated 64% of Americans currently own a home and 75% of non-owners say that they hope to buy at some point in their lives, it’s fair to say that the mortgage industry plays a big role in the homebuying process. 

Our team at House Method decided to take a look at some of the major trends happening in mortgages and lending right now. Like other industries, the world of lending is experiencing some major shifts in light of recent technological advancements and the current economic climate.

Whether you’re ready to buy right now or you hope to at some point in the future, you’ll want to read on to get a better sense of how the mortgage industry is changing and how those changes will impact your experience as a borrower.

The biggest trend in lending right now is an increasing digitization of the mortgage process

It should be no surprise that technology plays an increasingly large role in how you obtain a mortgage. We’re seeing consumers demand an easier, more streamlined experience as they go through the mortgage process and, as a result, we’re seeing a rise in FinTech (financial technology) companies who are willing to take on the challenge.

According to data collected by professional services firm Pricewaterhouse Cooper, potential borrowers are becoming more and more comfortable with the idea of going through the lending process online.

A 2013 study found that while consumers were satisfied with researching rates and applying for a loan via the internet, most of those surveyed said they would prefer to do so face-to-face by the time they needed to sign documents and pay upfront costs. By 2015, the participants stated that they would prefer a digital method for all the steps in the lending process, and that preference has only grown with time.

One reason why consumers may be so comfortable with the digitized mortgage process is that it saves time when compared to traditional methods. A 2018 Federal Reserve Bank staff report found that, on average, FinTech lenders are able to shave 10 days off of the average processing time for a loan. That number is expected to grow as more elements of the mortgage process become digitized.

The truth is that we’re only at the beginning of mortgage digitalization. Borrowers can compare rates online thanks to various lending marketplaces and they can also be approved for a loan in a matter of minutes. However, submitting loan documentation and going through the underwriting still follow traditional procedures, for the most part.

When asked what was coming up next for the digitization of the mortgage process, Viktor Viktorov, CEO and co-founder of REINNO, a FinTech company that focuses on real estate tokenization, had this to say:

“Right now, in the residential space, we’re starting to see people working towards digitizing the document collection portion of the mortgage process. It’s not there yet. [Various FinTech companies] are working on how to ensure that this technology meets industry regulations, but that’s the next step in the digital mortgage process.”

Viktorov also shared his thoughts on where he sees the mortgage industry ending up as digitization continues to grow at a frantic pace.

“FinTech is something that’s here to stay and it’s going to impact how we interact with money. In the future, we could see a world without mortgages, a world with a fully-digital transfer of homeownership.”

There’s an increase in non-qualifying mortgage loans

In addition to how the mortgage industry works, experts forecast that we’ll start seeing alterations to the types of mortgage products offered. In particular, DBRS, a globally recognized credit rating agency predicts that we’ll see an increase in non-qualified mortgage loans.

For reference, most mortgage loans are qualified. This means that they meet certain standards set forth by Fannie Mae and Freddie Mac—the two largest buyers of mortgage debt in the country—and that they can eventually be sold to secondary markets. Each of those two agencies has its own set of qualifying requirements that are a measurement of prospective buyers’ credit scores, employment histories, debt-to-income ratios, and down payment percentages.

Non-qualified mortgages, on the other hand, refer to any loan that falls outside of those typical standards set by Fannie Mae and Freddie Mac. Since these loans can’t be sold, they’re kept in-house as part of the lender’s portfolio, meaning that the lender can set their own standards for who qualifies. Non-qualified loans allow borrowers with non-traditional financial histories, such as those who are self-employed, to become homeowners.

DBRS believes that an increase in housing prices coupled with the continued shortage of housing inventory will lead to more prospective borrowers falling outside of the traditional underwriting criteria. Essentially, bidding wars will continue to drive up home prices, which will lead to more borrowers having to apply for mortgages that stretch their budgets beyond their qualifying limits, especially in terms of their credit scores.

According to Kathleen Tillwitz, managing director of operational risk at DBRS, “In an effort to increase affordability, DBRS believes that the U.S. market will continue to see more lenders widening certain aspects of the credit box throughout 2019.”

In her mind, that means the mortgage market will start seeing more non-qualifying loan options, even for those with less-than-pristine financial situations.

“DBRS observed some non-prime programs introduced in 2018 with FICO scores as low as 500, which were acceptable when coupled with certain other criteria, such as no prior bankruptcy or foreclosure in the last four to seven years,” she concluded.

Among non-qualifying loan programs, bank statement loans are becoming especially popular with self-employed borrowers

At its core, this increase in non-qualifying loan programs is thought to be a huge win for self-employed borrowers, who traditionally have had trouble qualifying for standard home loans. This discrepancy occurs when you look at the methods that lenders historically have used to verify a self-employed individual’s income in comparison to someone who has a single employer.

When applying for a mortgage, lenders will generally ask for two years of W-2s. This document reports the gross taxable wages that the individual makes at his or her job. Since people who are self-employed or who work as freelancers are not given W-2’s, lenders have traditionally asked to see two years of their tax returns instead. 

However, the issue with qualifying for a loan stems from the fact that lenders have used the individuals’ net income, which occurs after taking deductions for relevant personal and business expenses, rather than their gross pay. 

According to Eric Jeanette, a lender with Dream Home Financing, “After taking all of their deductions, a lot of self-employed [people] tend to show a very low net income or even a loss, which makes it virtually impossible for them to get approved for a loan.”

That said, Jeanette echoes the same assertion that DBRS made, predicting that things are about to get a lot easier for self-employed borrowers. For his part, he points to an increase in bank statement loans, a particular kind of non-qualifying loan program, as the impetus behind this change. 

Bank statement loans work exactly as their name suggests. With this type of loan program, borrowers are allowed to show 24 months of bank statements, rather than two years of tax returns in order to verify their income. It gives self-employed borrowers the chance to get approved based off of their gross income rather than their net income. 

“For many self-employed borrowers,” Jeannete says, ”[having access to this type of loan product] means the difference between qualifying for a loan or not at all.”

Beyond that, he also believes that non-qualifying programs like bank statement loans are bringing change to the mortgage industry as a whole. 

“Lenders are seeing how these bank statement loans are bringing in business,” he insists. “They’re looking to create more niche programs that would apply to additional subsets of potential borrowers.”

The new year may bring about even lower interest rates

Lastly, it’s impossible to discuss mortgages and lending without touching on the topic of interest rates. Put simply, when interest rates go down, prospective borrowers have more incentive to take their first step toward becoming a homeowner. When interest rates go up, they are much less likely to do so. 

With that in mind, let’s take a look at where we stand with interest rates today before predicting how they will behave in the future. Since the housing market bottomed out during the 2007 financial crisis, we’ve seen interest rates sink down to historic lows.

Recently, the Federal Reserve cut rates twice in an attempt to strengthen the economy and ward off fears of an upcoming recession. According to Fannie Mae, economists believe that rates will sink even lower in the new year. In 2020, the organization predicts that rates could drop as low as 3.4%

If rates fall that low, it’s likely we’ll see a continuation of the seller’s market that had started to wane when interest rates were rising. As more buyers flood the market thanks to lower-than-normal interest rates, we’ll start to see home prices rise even higher as buyers try to outbid one another for the same inventory.

MORE: Why Mortgage Applications Are Denied & What You Can Do About It

Tips for those shopping for a mortgage

Applying for a mortgage is a huge decision. When it’s time for you to buy a home, you’ll want to make sure that you end up with the right lender and the right loan product. Here are a few tips to keep in mind as you search for the mortgage that’s right for you:

  • Don’t forget to shop around—The interest rate that you’re offered on your home loan can vary from lender to lender. The fees that they charge may be different as well. Shop around with a few different lenders to see what rates and fees you’re offered before you make your decision.
  • Try shopping online to find better deals—In the past, most people simply went to their local lender for a mortgage. These days, with the automation and digitization of the mortgage process, you may be able to find online lenders who can offer you a better deal since they don’t have the same overhead as someone with a brick-and-mortar office.
  • Ask about non-qualified loan products—If you’re self-employed or otherwise have a non-traditional financial history, you may benefit from non-qualified loan products. As you shop around, ask about the different products the lender can offer you and compare 15- and 30-year mortgages, and choose someone who’s experienced with non-qualified loans. After all, it could mean the difference between you qualifying for a loan or getting passed over.

 


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