Getting Over The Loan Qualification High Hurdles

The market for buying and selling a home has lately been a tale of countervailing forces.  Inventory has been low for an extended period and that puts upward pressure on prices.  Borrowing rates remain low, as well, meaning buyers can afford more and can bid higher.

But borrowing is tougher than it's been in decades, as banks -- chastened by the excesses of the 2008 financial meltdown -- have maintained tight-fisted lending standards to the point they are a major drag on the housing recovery.

The Wall Street Journal's MarketWatch website reported just the other day that "the housing sector has become one of the few troublesome spots in the economy this year, with some analysts pointing to tight credit as a major factor."

The chart below displays the number of lending institutions reporting to the Federal Reserve whether their lending standards are easing or tightening.  All categories of borrowing have been getting tighter in 2014, even prime loans, though less sharply than other types.

source: www.marketwatch.com

Mortgage credit has "taken a step back," the story quotes one leading analyst from TD Bank, and these tighter lending standards will slow the market further.

For those buyers who qualify for credit, the trend means fewer competitors to bid up prices -- even considering the reduced stock of inventory.  But qualifying is more frustrating than it's been in a very long time, and as a result, some buyers are turning toward alternative credit products that are easier to obtain.

Bankrate.com has found that more affordable but higher risk adjustable-rate mortgages are staging a comeback and, as homeowners have seen equity recover, home-equity credit lines are also coming back into play.

We’ve even seen some creative homeowners use their existing equity to leverage the next purchase.  We had a recent client looking to buy here in Lancaster without selling their out-of-state property, which has built up significant equity.  By taking a line of home-equity credit on that place, they were able to finance their purchase here, both cheaper and without the hoop-jumping of qualifying that now attends to a traditional mortgage loan.

It takes a determined buyer with a strong stomach for the additional risk, but financing alternatives like that represent at least one available strategy to help overcome the extreme caution with which lending institutions have kept all but the most highly qualified borrowers out of the market.