Lenders Ease Credit Standards as Home Prices, Rates Rise

April 11, 2018 — 12:33 PM EDT

Thanks to rising home prices and mortgage rates, the most recent crop of home loan borrowers are sitting on more debt, prompting lenders to look at ways to ease lending standards. Citing data from CoreLogic, The Wall Street Journal reported that one out of five mortgages issued during the winter went to borrowers that have a debt-to-income ratio of 45%, which is the largest proportion since the housing crisis. It is nearly triple the proportion of mortgages that had that much debt in all of 2016 and in the first six months of 2017.

The continued rise in home prices and march higher for mortgage rates since the start of this year is worrying real estate agents, who fear that the current spring selling season could end up being among the weakest in recent years. That's even with consumers optimistic about the economy and their own financial situation. Still, there is an increasing number of people who don't think they can afford to purchase a home because of the mortgage rates and home values.

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According to Realtor.com, the number of new listings for homes above the $350,000 price point is still healthy, but home buyers looking for properties in the $200,000 to $350,000 price range will have a hard time finding options. Realtor.com reported that the average median listing price in the U.S. jumped 8% year over year in March to $280,000, surpassing the previous highpoint last July, when the median listing price was $275,000.

As a result of the lack of home affordability, particularly for first-time buyers, lenders have been exploring ways to ease the lending standards to get more people into homes. For example, according to The Wall Street Journal, Fannie Mae and Freddie Mac have been doing things such as backing loans by lenders that pay down a buyer's student loans and making it easier for self-employed borrowers to get a mortgage.

In the summer, Fannie Mae raised the debt-to-income limit on mortgages to 50%, which is higher than the 45% industry norm. Freddie Mac is also beginning to follow suit, noted The Wall Street Journal. As a result of the higher debt-to-income levels, the Urban Institute said that there were 100,000 new mortgages that otherwise would not have been issued. The percentage of borrowers with high debt-to-income ratios and low credit scores that have Fannie Mae-backed loans went to 25% in the first two months of 2018 from 19% a year ago.