Conforming conventional loan limits regulated by the FHFA rose to $548,250 in 2021 for single-unit properties in most regions, from $510,400 in 2020, according to Yahoo Finance. Policies and standards established by banks and other lending institutions to help them determine the best lending strategies vary over time due to various aspects. Typically, a bank's financial status, the overall economic climate, and the real estate market are key factors that impact lending practices. For instance, since the beginning of 2021, loan limits have increased due to the rise in home prices. Lenders have also changed how they screen loan applicants, thanks in part to the changing economic climate. Whether you're a first-time or repeat home buyer, you're probably wondering what hopes regulations could bring in property financing. Below are a few things you should know about changes to mortgage lending standards.
Banks ease borrowing standards for commercial lending
In the fourth quarter of 2020, many banks eased consumer lending policies as they increased credit limits on credit accounts and reduced rates charged across consumer loans, including auto financing. While banks didn't change guidelines for mortgage lending and home equity line of credit, many large banks lowered rules for government-sponsored enterprise home loans. Interestingly, most banks tightened lending rules across major commercial real estate categories; non-farm non-residential, commercial and land development, and multifamily property loans.
Impact on borrowers
Mortgage requirements set by lending institutions and banks affect borrowers in many ways. Ideally, easing policies that detect lending practices results in reduced interest rates and increased access to loans. Additionally, lower credit scores are needed to obtain a loan, and lenders demand lower down payments. In the current economic climate, lending standards on commercial property loans remain tight, but residential lending policies are easing. For potential homebuyers, eased lending rules makes the process of accessing home loans straightforward. And that could help more borrowers purchase their dream homes.
How easing lending standards affects buyers and sellers
Easing mortgage standards for residential homes have a significant impact on both property buyers and sellers. It's important to note that more individuals become eligible to apply for loans when banks and mortgage lenders lower residential lending rules. As a result, the demand for new homes increases, strengthening the residential real estate market. For sellers, a strong real estate market provides opportunities for selling homes at higher profits. On the other hand, it may be difficult to find a home to buy because of increased competition in the market. Moreover, it would be wise to look for small banks or lending institutions when applying for a mortgage. That's because there's a huge difference in lending standards for residential homes based on bank size. Generally, large banks reported unchanged demand while small ones reported tightening demand on most home mortgages.
The 2021 Federal Reserve senior loan officer opinion survey revealed that banks are easing lending rules after a year of tightening standards because of the economic impact of COVID-19. Changing lending standards, especially in residential real estate, has significant impacts on buyers and sellers. Typically, eased lending rules reduce mortgage interest rates, make home loans more accessible, and create room for selling properties at a greater value.