Even as many financial institutions reduce the credit qualifications needed to obtain many types of loans, mortgage lenders seem to be increasing their standards for which consumers they will extend credit to.
How Have Mortgage Requirements Changed?
New statistical analysis from tech firm Ellie Mae found that the average successful home loan applicant who found their request for financing accepted in the month of February had a credit score of 764, considerably higher than the number seen as recently as November, according to a report from the Los Angeles Times. This mortgage news may be troubling to consumers for two reasons. First, that rating is significantly higher than the score the federally-controlled mortgage backing firms Fannie Mae and Freddie Mac require to obtain what is considered a prime mortgage; usually that score is between 620 and 640. Second, the 764 average is considerably higher than the current national median credit rating, which stands at just 711.
Along similar lines, those who successfully applied for home loans through the Federal Housing Authorities had credit scores of 701 back in February, the report said. Now, that number has ballooned to 722, still above the national median credit score. This, too, is troubling because the FHA is supposed to help those with diminished credit ratings to obtain a home loan if they want one, but if the average person receiving approval of these applications still has a credit rating higher than the national median, it’s likely that many aren’t being given the opportunity to buy.
To make matters worse for some borrowers, the average down payment on non-FHA loans was 22 percent, well above the 20 percent minimum recommended by the White House in recent months, which itself was the subject of considerable debate, the report said. Meanwhile, down payments on FHA-backed loans stood at just 5 percent, though the agency only requires borrowers to put down a minimum of 3.5 percent.
Denied for a Mortgage
If those lofty standards were required to actually obtain home loans, some might wonder how those who were rejected for these lines of credit fared, and the answer may be surprising. Those who sought traditional, unbacked home loans but were rejected had an average credit score of 732, and were prepared to make down payments of 19 percent of their home’s value. Meanwhile, the average person denied an FHA-backed mortgage had a credit score of 666, and a proposed down payment amount of 6 percent of the property’s value.
The takeaway, then, is that consumers who want to obtain a home loan should be prepared to have a significant portion of their total home loan ready to be covered as part of their down payment. This is because larger down payments help to mitigate the lender’s risk in granting even creditworthy borrowers the significant amount of credit that a home loan requires. By adding this insulation from risk, though, they are making it more difficult for even extremely creditworthy consumers to get a mortgage.
