Want a mortgage loan? You better have good credit. Checking your credit score is one of the first things the lender will do when you apply for a loan. A low score will make it harder, if not impossible, to qualify for financing. But here’s the good news. A recent industry report showed that mortgage lenders might actually be easing their credit-score requirements for borrowers.
Ellie Mae, a company that provides software for the lending industry, publishes an “Origination Insight Report” each month with data compiled from thousands of home loans. The long-running and widely cited report is a fairly good indicator of what’s happening across the mortgage market, where underwriting is concerned.
Report Shows ‘Loosening’ of Credit Score Standards
The latest Ellie Mae report, which contained data for February 2014, suggests that it may be getting easier to qualify for a mortgage loan — at least where credit scores are concerned. In February, 33% of closed home loans had an average FICO credit score of less than 700, compared to 24% one year ago. This means the percentage of successful borrowers with scores below 700 has grown by 9% over the last year.
According to Jonathan Corr, president and chief operating officer of Ellie Mae:
Credit requirements remained steady month over month, but there has been significant loosening compared to where we were a year ago. The average FICO score on all closed loans was 724 in February 2014 compared to 745 in February 2013, or a 21-point decrease.
One of the “Big Three” Mortgage Qualifiers
Credit scores are one of the most important qualification criteria for home loan applicants. Lenders use these three-digit numbers to measure the level of risk associated with a certain borrower. For instance, a relatively low score suggests that a borrower has had financial problems in the past and therefore poses a higher risk to the lender.
Higher FICO scores suggest the opposite. Borrowers with higher credit scores have an easier time qualifying for home loans and other types of financing. They also enjoy lower interest rates.
Along with debt-to-income ratios and down payments, the credit score is one of the three most important qualification factors for mortgage loans. If there is, in fact, some degree of easing with credit score standards, it could create a larger pool of qualified borrowers in 2014.
Other Highlights from the Mortgage Market Report
February’s report illuminated some other interesting trends within the mortgage market, as well:
- Purchase dominance: After being dominated by refinance loans for a couple of years, the mortgage market is once more shifting toward purchases (i.e., home buyers). Purchase loans increased by 4% in February to account for 57% of all closed loans. This market shift is partly due to the fact that mortgage rates have risen by nearly a full percentage point over the last year, closing the refinancing window for many homeowners.
- Stable rates: The average rate for a 30-year fixed-rate home loan fell to 4.655% in February. That’s the first time the average rate has dropped, month-over-month, in three months. (This is an industry average. Borrowers with excellent credit enjoyed rates as low as 4.2% in February.)
- Adjustable loans: ARM loans are still taking a back seat to fixed-rate mortgages, as always. But they’ve increased in market share over the last year or so. In February 2014, ARM loans accounted for 6.9% of all loans processed with Ellie Mae’s software, compared to only 4.2% in 2013.
- HARP: The government’s refinancing program for underwater, or nearly underwater, homeowners has slowed. According to the report, HARP refinancing for borrowers with 95% LTV or higher fell to 12.4% last month, almost 2% lower than a month ago.
Key takeaway: Would-be borrowers who were denied financing a year ago for credit score reasons may want to reapply. Standards within the mortgage market seem to have eased since then, putting loans more within reach.