Are mortgage lenders finally loosening up a little on their credit score requirements – opening the door to larger numbers of home purchasers this summer and fall?
It depends on what type of loan you’re seeking. If it’s a Federal Housing Administration insured mortgage, the answer is a resounding yes. The average FICO credit scores for approved applicants for FHA home-purchase loans have been dropping steadily this year, according to new data from Ellie Mae, a Pleasanton, Calif.-based company whose mortgage origination software is used by most large lenders.
But if you’re shopping for financing in the much broader conventional market – where most mortgages are purchased or guaranteed by giant investors Fannie Mae and Freddie Mac – scores have not budged for months. They averaged 755 FICO in June, the same as in January, four points below their average for all of 2013. FICO scores run from 300 to 850; higher scores indicate lower risk of default.
Though credit scores represent just one factor that lenders use in determining whether to grant an applicant a mortgage, today’s average scores are far above historical norms and represent a high hurdle for many would-be purchasers – especially first-time, minority and moderate-income buyers.
Phil Bracken, a mortgage-industry veteran and founder and chairman of America’s Homeowner Alliance, a nonprofit group that promotes affordable housing, called current score levels “serious” contributors to a national problem: homeownership is now at 64.8 percent, its lowest level since 1995, in part because so many consumers can’t get past lenders’ severe underwriting tests. The ownership rate for Americans under 35 is 36.2 percent, the lowest on record.
“There are lots of people out there who are creditworthy and should be eligible” to buy a home, Bracken said. Scores are not the only obstacle in their way, but they play a powerful role.
Leaders of both of the country’s major credit score model developers – FICO and VantageScore Solutions, LLC – have confirmed to me that banks could reduce their scoring requirements from today’s highs and not materially increase their risk of delinquencies and defaults. In the process, they would increase the volume of mortgages they make, spur more home sales and stimulate employment.
So what’s holding them back? Interviews with top officials at lending institutions suggest something that may not be widely understood by consumers: Fear and finger-pointing are gumming up the system.