Mortgage borrowers now more creditworthy

While the housing market is slowly recovering from the massive hit it took several years ago, consumers may now be feeling better about its current and future state, and their ability to participate in it.

Numerous statistics from a number of observers have shown a general improvement in the quality of the housing market in the past several months or more, and now data about consumers who want to participate in the homebuying process is improving as well, according to a report compiled by the Federal Reserve Bank of Atlanta, based on information in the Home Mortgage Disclosure Act database. In 2011 there were just 7.1 million mortgages finalized, a decline of 10 percent from 2010 and the lowest total seen since 1995, when 6.2 million loans were pushed through.

Borrowers in better shape
Though the number of loans was down considerably, the creditworthiness of borrowers took a massive step forward, the report said. Since the end of 2006, which was about when the housing bubble burst, the average borrower's credit rating has climbed roughly 40 points, and through the end of 2011 stood at the highest levels seen in the last 12 years.

Further, borrowers were also more forthcoming about the amount of money they listed as earnings on their mortgage applications, the report said. Prior to the housing meltdown, many lenders and borrowers may have allowed misrepresented or overstated income levels to be listed, without being verified, on mortgage applications. This was part of the reason the real estate bubble burst; consumers who said they made more than they actually did were granted loans they couldn't afford and eventually defaulted on those mortgages, leading to foreclosure and plummeting property values. The shift toward greater honesty in listing incomes will likely lead to better credit quality across the entire housing market.

"Comparing home-purchase borrower incomes reported in the HDMA data with income reported by homebuyers in household surveys suggests that incomes on mortgage applications were likely significantly overstated during the peak of the housing boom," the Fed's researchers said. "In more recent years, there is no evidence of overstated incomes."

Nonetheless, the rate at which banks turned down consumers' mortgage requests remained relatively unchanged, the report said. In all, 23 percent of all applications were denied by lenders, which, when coupled with the higher credit ratings for consumers, may simply indicate that lenders were more reticent to extend financing in general.

Confidence growing
Meanwhile, perhaps as a result of consumers being in better shape, as well as the general improvements seen in the housing market in recent months, those who would consider selling their homes are also feeling better about their chances of doing so, according to a separate survey by the real estate company Redfin. For instance, 83 percent now believe they'll get a higher price for their home if they hold onto it for another year or two, up from 80 percent at the end of September.

Further, 40 percent said they still considered the economy to be a major hurdle toward selling their property, but that was down from 49 percent a month earlier, the report said. Meanwhile, only 15 percent think that right now is a good time to sell, but that's a slight increase from 13 percent. Conversely, 58 percent believe it's a good time to buy, down from 61 percent.

And while these changes were small, they do reflect current trends of growing confidence among sellers, who are also now less interested in finding alternatives to putting their homes on the market, such as renting, the report said. It's therefore possible that if these trends continue for the next several months or more, that the inventory in the housing market could begin to thin considerably.

Lingering issues?
Of course, that will be extremely dependent on borrowers' ability to actually obtain the mortgages they want. Again, despite the fact that consumers' credit scores are on the rise, lenders were rejecting applicants at high rates through the end of last year, and many have noted that heavier federal regulation could lead to more rejections, because of the uncertainty it creates in the lending industry. And while many experts believe the market will continue improving at least through the end of next year regardless of what happens, it's possible that consumers might not be able to take advantage of the extremely affordable conditions seen today.

If you want to have the best possible chance of not only qualifying for a loan of any type, but also obtaining the most beneficial terms on it, you might want to check your credit report before applying. This will help to ensure that you know of any unfair markings which may be marring your credit score.