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season.   At least those that are qualified.  Mortgage rates are falling, home prices are stagnant, and the nation’s biggest banks have stopped tightening mortgage guidelines for now.

Mortgage guidelines maybe loosening

Each quarter the Federal Reserve issues a comprehensive survey to its member banks regarding market conditions and current bank lending practices. The survey specifically addresses residential mortgage lending.

Last quarter, for the second straight quarter, just two “big banks” reported a tightening of their respective prime mortgage lending standards. Every other bank either left guidelines unchanged, or loosened them a bit.

This is a major reversal from just three years ago when nearly all banks were tightening lending standards.

What does this mean for you? For homebuyers and would-be refinancers, it may lead to simpler and quicker mortgage approvals for the rest of this year, and beyond.  Banks need to lend money but they don’t like to lend if they think they are going to lose money.  It they are loosening their guidelines they may feel their risks have decreased and are looking to attract more borrowers.

Keys to mortgage approval: The big three

It is important that you do not confuse “loosening” lending standards for “easy mortgage money.” Banks are still careful about what they lend and who they lend to.

Today’s mortgage approvals carry three basic requirements.  Actually  these are the same requirement that were in place years ago and referred to as the three “C’s”.

1. You must have equity ( Collateral)
2. You must have income (Capacity)
3. You must have credit (Credit)

You have to play “Show me the money”

There are specific loan programs through the VA and the USDA for which no-equity mortgages (no money down) are still available, but 100% mortgage loans are in the extreme minority these days.  Most loans today require some equity or down payment, and the minimum equity standards are higher today than at any time in recent history.

Some simple math for you:

NI and SI = NL       No Income or Stated Income = No Loan

As compared to five years ago, income hurdles are higher, too.

Mortgage applicants must now meet strict debt-to-income limits, often set to 45%. This means that your monthly debts–housing costs, bills, etc.–may not exceed 45% of your documented monthly income. Lenders will verify this income via your federal tax returns.  Everything must be documented.  No more what used to be called “Stated Income” loans where figures were pretty much made up.

A crafty accountant may help you at tax time, but he will not be doing you any favors with respect to your next loan application. No documented income, no approval.

Stellar credit could save you thousands

Mortgages are readily available today with credit scores as low as 600, but the available interest rates are awful as compared to an applicant with credit scores in the low 700s. Banks give the best rates to applicants with credit scores over 740.  Want that low advertised rate?  Then you better have a supper credit score.  Otherwise you will end up being turned down or shocked that your rate isn’t what was advertised.

Want the best mortgage rates? You need all three

You will not get great mortgage rates simply by putting a lot of money down, or earning more than Warren Buffet.  The best mortgage rates are reserved for applicants that show strength across all three categories–not just one.

You will need sizable equity, strong income, and high credit scores to be considered a “prime” applicant. This will get you access to a bank’s lowest mortgage rates, and make your underwriting as quick and simple as possible.

Mortgage rates are great, homes are affordable, and approvals are getting more plentiful.