Everybody knows how important credit scores are to obtaining a home mortgage. But are lenders lately playing a numbers game with consumers — claiming they’re willing to accept lower scores while actually approving applicants with higher scores on average than they did last year or even earlier this year?
That’s an important question for people who want to buy a home but don’t have stellar credit scores. They may have heard that that there has been more flexibility on scores in recent months, but what are the facts?
▪ The Mortgage Bankers Association, which publishes a monthly index of “credit availability” based on lenders’ offering terms, reported last week that conditions for applicants have improved for “eight of the last nine months,” including for loans where borrowers have “lower credit scores.”
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▪ But data from Ellie Mae Inc., a mortgage software company that produces a highly regarded monthly report on accepted and rejected loan applications, paint a different picture: Average FICO credit scores on non-government and government-backed mortgages for home purchases have been rising — not falling — all year.
FICO scores are the dominant credit risk measure used in the mortgage field. Scores run from 300, which indicates a high risk of default, to 850, which signifies the lowest risk.
In January, according to Ellie Mae’s latest report, the average FICO credit score for applicants who closed on non-government mortgages to purchase homes was 752. During the course of the year, it has risen steadily to 757 in July, the latest month surveyed. That’s a higher average than during any month in 2014, and well above prevailing scores during most of the past 15 years.
Federal Housing Administration (FHA) loans show a similar pattern: Mortgages closed during January had average FICO scores of 682. In July, they averaged 689, five points higher than the average for 2014. Veterans (VA) loan scores are also up — 709 in July on average compared with 704 in January and 701 last December.
The average FICO score for American adults was 695 in April, according to FICO. Though credit scores represent just one element in a mortgage application — debt-to-income ratios, down payments and documented income are at least as important — the average American consumer’s score comes nowhere near what’s been typical in the non-government (“conventional”) mortgage marketplace, which is significantly larger than the government (FHA-VA) marketplace. Conventional loans typically are originated for sale to giant investors Fannie Mae and Freddie Mac. Both corporations say their minimum acceptable credit scores are 620 FICOs; FHA accepts scores as low as 580. Lenders, however, are free to set their own, higher limits, and many do.
So what’s going on? Are lenders cherry-picking when it comes time to approve applications? Or are other factors at work here?
Most lenders I’ve spoken with insist that loan terms have eased in recent months, including modest declines in acceptable FICO scores. Bill Banfield, a vice president at Quicken Loans, the largest non-bank mortgage originator, says “there have been a lot of changes” to underwriting guidelines that should allow greater numbers of buyers to qualify for a loan. Though Banfield would not discuss average credit scores at Quicken, he noted that the company is approving qualified applicants for FHA loans who have FICO scores down to 580.
Dan Keller, a mortgage adviser with New American Funding in Kirkland, Washington, says small movements in average scores on closed loans are no big deal because “a credit score today isn’t getting in the way of getting a mortgage” — it’s rarely the back-breaker for an application. Underwriting systems judge potential borrowers on their total package, not just one factor, such as credit scores.
Mike Fratantoni, chief economist for the Mortgage Bankers Association, told me that part of the seeming conflict between the credit availability report and Ellie Mae’s statistics can be traced to the fact that they are measuring different things. The MBA survey examines what terms lenders are offering — their menus and requirements that are available to consumers. These have definitely loosened up during the past year, though maybe the word hasn’t gotten out sufficiently to consumers, he says. The Ellie Mae report, by contrast, focuses on the end result of actual applications. Some borrowers may have acceptable credit scores but negative issues elsewhere in their applications.
That’s one theory. But the bottom line for consumers is who gets approved and who doesn’t. And the statistical evidence suggests that it is increasingly people with higher scores on average, not lower, who are making the final cut.
Kenneth Harney is executive director of the National Real Estate Development Center.