Housing markets have improved substantially in 2015. Existing homes sales are on the rise and closing numbers are up. On the consumer side, things are looking good for homebuyers with mortgage interest rates remaining at historic lows.
But all of that good news is weighed down by an unexpected trend for homebuyers with a lower credit score.
As of July 2015, the chief economist at Realtor.com, Jonathan Smoke, believes it’s actually getting harder for borrowers with a lower credit score to get a mortgage. Here’s a look at Smoke’s findings, and the reasons why it isn’t getting any easier for new buyers with lower credit scores to get a mortgage.
It Was Supposed to be Easier to Get a Mortgage in 2015
In December of 2014, Fannie Mae and Freddie Mac announced some big policy changes that excited the experts. The lending giants made moves to improve transparency, which in theory would make it easier for people to apply for a mortgage, while also encouraging lenders to approve more loans. Fannie and Freddie made it more explicitly known where their credit thresholds would lie for approved mortgages, and the required FICO threshold of 620 seemed low enough that approval rates should have shot up.
At first glance, it seems like some of the predictions surrounding an increase in mortgage approvals were accurate: in June, 2015, only 22% of home purchases were made as all cash transactions, down significantly from 32% in June, 2014. That suggests higher reliance on loans to buy homes, and when you couple those numbers with increasing home sales, it makes sense to assume it’s becoming easier to get a mortgage. But when Jonathan Smoke dug into the numbers, his conclusions threw those assumptions out the window.
Mortgage Approval Rates, by the Credit Numbers
While Fannie and Freddie only require a FICO score of 620 to qualify for a fixed-rate home loan, the real FICO score to actually walk away with a mortgage is often higher. And when Smoke took a close look at these numbers, he found some strong evidence that it isn’t getting any easier to get a mortgage: in fact, it’s getting harder for many.
In June, 2015, the average score of an approved mortgage applicant that led to a closing was 727, comfortably within the 726-732 range that we’ve seen over the past year. When you broaden that sample window to two years, you get an average approved range of 724-742, signaling that the range is narrowing but not necessarily around the low end of the spectrum.
Meanwhile, the average FICO score of a denied mortgage has dropped a bit since last year, from 686 in June, 2014 to 672 in June, 2015. While that looks promising at first, the drop is the result of a lot more applicants, especially in the lower credit range. These applicants, Smoke found, are being turned down for a mortgage in large numbers.
Why is it Still Hard to Get a Mortgage?
In short, lenders aren’t making credit as assessable as expected. Housing prices are on the rise as demand for a home soars, but these improved metrics haven’t been met with higher loan approval rates by lenders. Further moves by the Federal Reserve have experts predicting that approval rates for mortgages will rise soon, but consumers will have to wait and see if these predictions pan out.
Will it be Easier to Get a Mortgage in the Future?
For some homebuyers, like those with pristine credit or those looking for larger Jumbo Mortgages, it might be a lot easier to get a mortgage in the near future. But for borrowers with lower credit scores, it may not become any easier.
As always, the lesson borrowers are again learning in today’s mortgage climate is to take care of their credit score. If you have a good FICO score, you’re almost always able to get a mortgage to buy a home. But if you have a poor credit score, you’ll find it difficult to borrow money.
For this reason, if you are thinking about buying a home in upcoming months, it’s not too early to meet with a mortgage loan originator to learn about your mortgage options. Most likely, there are things you can do today to safe money and qualify for a better mortgage.