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For the past several years, many borrowers have found that lenders had put in place tighter guidelines at the same time that mortgage rates were at historically low levels. This made it nearly impossible for many consumers to purchase homes or refinance existing mortgages. However, with a housing recovery in process and the recent rise in mortgage rates, mortgage credit availability has also increased.

According to the Mortgage Bankers Association’s Mortgage Credit Availability Index, mortgage credit availability rose during the month of July. This was the fourth consecutive month for increased readings. For July, the index rose to 112.3 which was up 2.2% from June.

When credit availability levels decrease, lenders are tightening standards and making it more difficult to obtain approval. Back in March of 2012, the index was at 100 which indicated a tight mortgage market. As levels increase, lenders are making credit more available to consumers for mortgages. 

In recent months, lenders have increased their offers to borrowers for cash-out refinances and slightly higher loan to values. While some have lowered their credit score mandates, borrowers still must have good credit to obtain a mortgage.

The increase in credit availability goes hand in hand with higher home prices and slightly higher mortgage rates. As home prices increase, there is more opportunity for homeowners to obtain cash out refinances as equity continues to increase with rising property values. According to the June CoreLogic Home Price Index, home prices across the nation rose 11.9% on a year over year basis during the month of June, 2013 when compared to June, 2012. This increase includes distressed homes and is the sixteenth straight month that monthly increases have occurred. These increases have also brought many homeowners out from underwater mortgages. During the first six months of 2013, home prices rose 10% and at the fastest pace since 1977.

Low mortgage rates and low home prices may increase home affordability, however, these two scenarios will also lead lenders to tighten up their lending guidelines. With the slight increase in mortgage rates over the past few months, mortgage applications have fallen dramatically for refinances. However, lightening up on credit availability will open up mortgage approval for a whole new group of consumers who were denied in the recent past. Without doing so, the lack of business will be too great a risk that lenders want to avoid. A return to a normal and stabilized housing and mortgage market is necessary in order to keep the housing recovery intact.

Rosemary Rugnetta has been writing since 2010 for FreeRateUpdate.com, a company that matches consumers with banks and lenders offering low mortgage rates. Previous to her writing career, Rosemary spent 13 years working hands-on in the mortgage industry as a mortgage loan analyst, certified mortgage underwriter, loan processor and property manager.