There are 56 days left until the end of the year. So the Home Buying Institute is taking a fresh look at mortgage lending qualifications and standards, with an eye ahead to 2015. Over the past few weeks, we have been surveying lenders to find out what kind of standards they expect to have in place next year.
Our latest survey involved credit scores. In short, we wanted to find out what kind of credit-score requirements mortgage lenders are expecting in 2015.
We surveyed 21 lenders across the United States, by phone and by email. They included a broad range of small, medium-sized, and larger lending institutions. There were credit unions as well as traditional banks. While the survey was not scientific by any means, it gives us some insight into the mortgage credit-score requirements we can expect in 2015.
620 – 640 Still a Common Cutoff for Mortgage Borrowers
To be clear, there is no industry-wide cutoff point for borrower credit scores. Every mortgage lender has its own unique requirements, business practices, and risk-assessment procedures. Some lenders are highly risk-averse, and therefore require higher scores from borrowers. Others are a bit more “loose” with their underwriting requirements, and therefore allow lower scores.
With that being said, most of the companies we spoke to were setting the bar around 620 or 640 for minimum credit scores. This means borrowers who fall well below that range could have trouble qualifying for a home loan in 2015.
There was another clear theme in our survey. While credit scores are certainly important when it comes to getting a home loan, lenders today are also paying attention to the bigger picture. The phrase “whole borrower” was used more than once — apparently it’s a buzzword. In short, lenders tend to consider all aspects of a borrower’s financial background, and not just a credit score.
But they do have to draw the line somewhere, and it seems that many of them are drawing a line in the low 600s.
According to an informational booklet produced by the credit-reporting company TransUnion: “typically, a lender will use additional criteria and analytics beyond the credit score during the underwriting process and to further segment a population of consumers…”
So when deciding “to lend, or not to lend,” lenders usually consider other factors as well. But it is possible for a consumer’s score to elicit a rejection all on its own. This is often true in situations where the borrower’s credit is significantly damaged, like in the low-500 range. In such cases, the mortgage company might turn the borrower down flat, without considering any other factors.
But in cases where the score is average, or slightly below average, the lender will likely consider other compensating factors such as debt, income, payment history, etc.
Most Lenders Allow Lower Scores for FHA Home Loans
Several of the survey respondents said they have two levels or tiers in place for mortgage credit-score requirements. For example, they might require borrowers using a conventional loan to have a 640 or higher. At the same time, they might allow an FHA borrower to have a score as low as 600.
FHA home loans are insured by the federal government, under the direction of the Department of Housing and Urban Development (HUD). The Federal Housing Administration, which is part of HUD, insures lenders against losses relating to borrower default. As a result of this insurance, lending institutions often have more relaxed guidelines and requirements for FHA borrowers.
So don’t be surprised if you encounter two different mortgage credit-score requirements — one for conventional loans, and one for FHA.
Other lenders have a single cutoff point for all loans, regardless of the type of insurance (or the lack of it). Again, there is no single standard for credit scores across the industry. It varies quite a bit.
Why These Three-Digit Numbers Are So Important
Lenders use credit scores as a risk-assessment tool. They want to ensure they are lending to responsible borrowers, and one way to measure responsibility is by looking at a person’s borrowing history and patterns. Credit scores are based on such histories and patterns.
Generally speaking, borrowers with higher scores have a history of repaying their debts on time and in full. This is an appealing trait to lenders, and for obvious reasons. People in this category tend to have an easier time getting approved for home loans.
Low scores, on the other hand, are typically the result of missed payments, defaults and/or delinquencies. Borrowers in this category have a much harder time getting approved, and typically pay higher interest rates when they do get approved.
Government Actions Could Ease Credit-Score Requirements in 2015
Mortgage lenders are also concerned with making “bad loans” they’ll have to take back down the road. Many companies sell the mortgages they originate into the secondary market, which is comprised of Fannie Mae, Freddie Mac and investors. If a lender sells a loan to Fannie or Freddie that is later deemed to be faulty in some way, they might have to buy it back or replace it. In industry jargon, these are known as put-backs or buy-backs.
In October, Melvin Watt, director of the Federal Housing Finance Agency (FHFA), gave a speech at the Mortgage Bankers Association annual convention in Las Vegas. Among other things, he recognized the fact that lender uncertainty regarding federal mortgage rules leads to tighter credit standards.
According to Mr. Watt:
“We know that the Representation and Warranty Framework [which clarifies when lenders might have to repurchase loans] did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan. And, we know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores…”
He added that the FHFA, along with Fannie Mae and Freddie Mac, are clarifying their standards and rules to ease lender concerns. The idea is that this will lead to relaxed lending standards, possibly including lower credit-score requirements for mortgage loans in 2015. The Federal Housing Administration (FHA) is making similar efforts to clarify its policies and ease lender concerns.
We will keep a close eye on these and other developments relating to mortgage requirements in 2015. As for now, it appears that most lenders are looking for a credit score of 620 or higher. But this number is not set in stone, and it’s only one of several factors considered during the application and underwriting process.
Disclaimer: This story provides an overview of credit-score requirements for home loans in 2015. It is based on an informal survey of 21 lenders operating across the United States. This information gives you a general sense of what mortgage companies are looking for these days. But it should not be taken as “gospel.” Credit standards vary from one bank to the next. There is no industry-wide minimum. Additionally, lenders frequently make exceptions to their own rules and procedures, if they feel a person is well-qualified in other areas. Do not assume you are unqualified for a home loan based on the information above. The only way to find out for sure is to apply.