Rewarding Stellar Credit
By LISA PREVOST
Lending terms are easing up for borrowers who have superior credit. But mortgages are no easier to come by for applicants with unexceptional FICO scores.
According to a recent analysis by Ellie Mae, a mortgage software company in Pleasanton, Calif., credit-score and down-payment requirements have eased. A national sample of mortgage loans closed in August showed an average FICO score of 734 for approved borrowers, down from an average 748 last year. (FICO scores range from 300 to 850, with higher being better.)
Lenders are also approving more loans for those whose credit scores are below 700, according to Jonathan Corr, the president of Ellie Mae. “About 31 percent of loans in August had scores less than 700, compared to 15 percent a year ago,” he said.
At the same time, the loan-to-value ratio — the loan amount expressed as a percentage of a home’s value — rose a bit, meaning that banks were willing to lend more and require smaller down payments. The average ratio was 82 percent in August, which reflects a down payment of 18 percent, about three percentage points lower than last year’s average.
Most of the loosening happened on the refinancing side. Now that these transactions are on the wane, thanks to rising interest rates, lenders may begin to compete more aggressively for purchase business. “The quality of loans right now in terms of underwriting is the highest it’s been in quite some time,” Mr. Corr said. “So I think there is definitely a feeling that there’s some room there. How much lenders decide to do remains to be seen.”
Rolan Shnayder, a partner of H.O.M.E Mortgage Bankers in Manhattan, says certainty about the new lending rules under the Dodd-Frank Act has made it easier to obtain loans for clients. But “they haven’t loosened any credit guidelines to make it available to more people than what is currently available,” he said, adding, “Banks want the 10-to-20-percent down, unless you’re an F.H.A. borrower.”
An analysis by Zillow, a real estate Web site, found the bar actually rising for borrowers seeking the best mortgage rates. The study looked at 13 million loan quotes and about 225,000 requests for 30-year fixed-rate purchase loans made through the site in September. The most favorable rates were offered to borrowers with FICO scores of 740 or higher; that’s up from 720 in a similar analysis in September 2010.
Borrowers with scores below 620 — about 28 percent of Americans, Zillow says — couldn’t even get a rate quote. “If you look at the borrowers on the fringe,” said Erin Lantz, Zillow’s director of mortgages, “credit is not any easier to get now than it was three years ago. Despite the improvement in the economy and homes being incredibly affordable and mortgage rates at all-time lows, still about a third of Americans are shut out of the market.”
David H. Stevens, the president and chief executive of the Mortgage Bankers Association, agreed that credit expansion so far had applied only to better-qualified borrowers. He noted that jumbo loan volume was up significantly, while lower-loan-balance mortgages $150,000 and under were declining. “Those are a proxy for first-time buyers, buyers with more marginal qualification standards,” he said.
Once the Dodd-Frank rules are in place, Mr. Stevens said, lenders may begin “taking on some marginally expanded risk to meet the needs of these borrowers, but they won’t do it without charging some type of risk premium.”
He predicts that competition for mortgage volume will very likely drive lenders to lower their credit-score standards for F.H.A. loans, and to resurrect “piggyback” loans, which allow borrowers to take out two loans simultaneously to get around paying for private mortgage insurance.