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Lenders relax standards on home loans

Lenders are loosening standards on mortgages for homebuyers as fewer homeowners apply to refinance their loans, a Federal Reserve survey shows.

Some mortgage lenders have loosened credit standards for homebuyers as demand for loans from refinancers slows, a Federal Reserve survey shows.

 More than a quarter of the large banks in the report say they have somewhat eased the credit standards on residential mortgages over the past three months, according to the central bank’s October senior loan officer survey.

 Rates up, refis down

Nearly half of the banks in the survey reported weaker demand for residential mortgages. About 4 in 10 banks say their refinance application volume is substantially lower than the volumes seen prior to the increase in mortgage rates. The 30-year-fixed jumped by more than a percentage point in the spring after Fed Chairman Ben Bernanke said it could reduce the pace of bond purchases this year. Rates have adjusted down since then but remain more than half of a percent higher than they were prior to the hike.

As homeowners regain equity in their homes, some lenders say they also have eased standards on home equity lines of credit. About 1 in 5 banks in the survey says the demand for HELOCs has increased in the past three months. About 8.7 percent of lenders in the survey say they have eased standards on home equity lending. The majority say standards have remained unchanged.

 Good news for homebuyers

As the demand from refinancers shrinks, homebuyers get faster service from their lenders. About 44 percent of the lenders say the time for closing from the day of application has somewhat reduced since the volume of refinances fell.

 Most say they have not changed their credit score requirements for buyers since rates climbed, but two large lenders in the survey say they reduced their minimum FICO score. The survey does not specify the lenders.

Three out of 64 banks said they would be somewhat more likely to approve a mortgage to a borrower with a FICO score of 620 and down payment of 10 percent than they were before the increase in mortgage rates. The majority of lenders say the likelihood of approval for such a borrower hasn’t changed since the spring.

 ARM share gains

Some lenders also indicated that the demand for loans has shifted somewhat from the traditional fixed-rate loans to adjustable-rate mortgages because ARMs still offer attractive rates for borrowers. The average rate on a 5/1 ARM was 3.26 percent in Bankrate’s latest weekly survey. That’s about 1 percentage point lower than the rate on a 30-year fixed loan.

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