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16 October 2013

Lenders Loosening Credit Guidelines

In an attempt to open up the strengthening housing market, more lenders are approving applications with for borrowers with lower credit scores. This is in part due to the significant amount of people now eligible to purchase again after foreclosure. Alienating this new demographic of borrowers would not bode well for the still healing market. […]

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In an attempt to open up the strengthening housing market, more lenders are approving applications with for borrowers with lower credit scores. This is in part due to the significant amount of people now eligible to purchase again after foreclosure. Alienating this new demographic of borrowers would not bode well for the still healing market.

According to Ellie Mae, whose software is used to make one-third of all mortgages in the U.S., is reporting that the average credit score among borrowers who received a mortgage in September was 732, down from a peak of 750 the year before. 731 is also the lowest average credit score since they started tracking this data in August of 2011. They’re also reporting that a greater share of borrowers have lower credit scores now than in the past – 32% of mortgages originated in September of this year were for borrowers with a FICO credit score of less than 700. A year ago, only 17% of borrowers were in the same range.

For comparison’s sake: before the recession it was common for borrowers with credit scores in the 600 range and below to get mortgages. Yikes.

On another level, willingness to accept lower credit scores underscores a delicate balance of lenders’ give and take tactics. When one risk factor is eliminated or significantly declines, some lenders are willing to take on more risk elsewhere. As home values increase, there’s less of a risk that borrowers will end up underwater, and therefore less of a risk of borrowers intentionally walking away from their home. This may explain why lenders have become comfortable taking on more risk in the form of lower credit scores.

Bottom line: it never hurts to apply. Scores are often higher than consumers think – especially if buying again after a foreclosure or short sale. With FHA’s “back to work” program allowing purchases as soon as 12 months after foreclosure and less emphasis on stellar credit scores many people qualify to purchase again sooner than they think!

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