Mortgage Credit Availability Dropped in June: What Buyers Need to Know

It may be getting a little harder to qualify for a mortgage.

To qualify for a mortgage, you generally have to meet certain requirements. For one thing, you need:

• A strong enough credit score
• A reasonable, non-excessive level of existing debt
• A steady job
• Funds for a down payment

Many mortgage lenders have tightened their borrowing requirements in the course of the pandemic. After all, there's risk involved in giving out mortgages, and lenders need to make sure they're working with borrowers who are likely to continue repaying their home loans.

In May, mortgage lenders relaxed borrowing requirements, and credit availability increased compared to where it stood in April, according to the Mortgage Bankers Association. That made it a little easier to qualify for a mortgage. But in June, mortgage credit availability decreased by 8.5%.

If that percentage looks like a lot, well, it is. June's level of mortgage credit availability is the lowest since September of 2020. And that could make it more difficult to buy a home in the near term.

How to give yourself a better shot at a mortgage

Just because mortgage credit availability declined in June doesn't mean your chances of borrowing are ruined. If you're a strong candidate, you may have no trouble getting approved for a home loan.

Still, before you apply for a mortgage, there are steps you can take to increase your chances of approval.

1. Boost your credit score

Your credit score speaks to how trustworthy a borrower you are. As a general rule, you need a minimum credit score of 620 to get a conventional mortgage. But now that lenders are getting stricter, a score of 620 may not suffice.

It pays to work on increasing your credit score. A better score not only raises your chances of getting approved for a mortgage, but it can also help you qualify for a low interest rate. You can boost your credit score by:

• Paying all incoming bills on time
• Paying off some existing credit card debt
• Looking out for credit report errors (and correcting those that may be dragging your score down)

2. Shed some debt

Your debt-to-income ratio is another measure lenders use to see if you qualify for a mortgage, as it measures your existing debt relative to your income. If your ratio is high, it sends lenders the message that you're already spending a lot of your earnings on debt obligations and that you may not manage to keep up with a mortgage if you're approved for one. Paying off debt is the best way to bring that ratio down.

3. Make sure you have a solid down payment

The more funds you have available for a down payment on a home, the less you'll need to borrow. And the less you borrow, the less risk mortgage lenders take on. It could pay to start a side job for a few months. That way, you can use your earnings from it to help you save for a down payment.

While lenders may have gotten stricter with borrowing requirements in June, that doesn't mean you're destined to have your mortgage application denied. At the same time, it pays to do whatever you can to increase your chances of getting the loan you want and at a rate that makes your monthly payments easier to manage.