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How much longer will credit restrictions remain tight?

Anyone who has tried to get into the mortgage market to buy a home in the last few years has likely found it difficult to do so. This is mainly because financial institutions across the country have carried especially stringent credit qualification standards for purchases as a result of the economic downturn. And while standards have loosened in some ways, it's still probably not going to be enough to get a far larger number of people into the purchase market. It's important to understand why that's the case.

There are, generally speaking, two reasons why mortgage standards still remain so high today. The first does indeed circle back to the causes of the economic crisis, as millions of Americans were given mortgages they couldn't afford and ended up defaulting on those loans. Consequently, lenders got extremely defensive about re-broadening credit standards to anything even close to resembling the unfortunate norms observed prior to the economic downturn. Even now, about six years after economists say the recession came to an end, it's still as much as seven or eight times more difficult to obtain a purchase mortgage.

'Purchase' is the key word, though
However, it's worth noting that it has been – and will continue to be – far easier for consumers to get mortgages if they already own homes. Refinance mortgages have been relatively easy for millions of Americans to obtain in the time since the economic downturn began nearly a decade ago. There is, of course, less credit risk associated with changing the terms of a mortgage that already exists than writing a new one. In general, those who get approved for a refinance will have already demonstrated a long history of paying their home loan bills on time and in full.

And because mortgage rates have been so low for so long, many Americans have moved to take advantage of that affordability and refinanced their existing home loans. That reduced the monthly payments they had to make – in many cases, by a considerable amount – and made owning a property far more affordable as a result. Consequently, as long as rates stay low, refinancing will be attractive to plenty of homeowners.

What does that mean for buyers?
But interestingly, experts say part of the reason purchase mortgage credit access hasn't loosened is that refinances are so popular they kept most of the home loan industry afloat for years. Basically, if refinances start to become less common, it's quite likely that lenders will broaden credit standards for purchases – potentially by a large amount – as a means of boosting mortgage origination numbers.

Of course, as long as mortgage rates remain low, refinances will likely continue to make up the bulk of home loan activity nationwide. Consequently, those who want to get into the purchase market now, while affordability is still fairly high, will probably just need to do some work over the next few months to increase their credit scores.

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