September 18, 2012

Credit Scores and Mortgage Approval


What kind of credit score do you need to qualify for a mortgage? A new survey of bank executives by the Federal Reserve provides some answers. 
It’s well-known that it’s harder to get a mortgage these days than it was back in the boom days of the housing bubble, when it seemed almost anyone could get a loan as long as they had a pulse. But just how much harder is often unclear, especially for those with less-than-perfect creditscores.

 

mortgage lending now vs. 2006

 
In April, the Federal Reserve surveyed senior loan officers from more than 80 banks operating in the United States to assess bank lending practices. It found that, although lending practices are more restrictive than they were six years ago, some banks are just as likely to approve a loan today as they were in 2006, even for borrowers with weaker credit.
 
In a few cases, for borrowers with better scores, banks even said they were more likely to approve a mortgage loan than they were six years ago. Not surprisingly, for all credit scores, a larger down payment significantly improved the odds of getting approved.
 
The survey asked senior loan officers about hypothetical borrowers with three different levels ofFICO credits scores – 620, 680 and 720 – and with down payments of 10 percent and 20 percent, for a total of six possible combinations. In each case, the bank executives were asked how likely they would be to approve such a loan today compared to an identical borrower in 2006.

 

Little change for 720 scores

 
As you might expect, the loan officers viewed potential borrowers with a FICO score of 720 most favorably. Over 90 percent said they were at least as likely to approve such a borrower with a 20 percent down payment as they were six years ago, and nearly one in 10 said they were much more likely to approve such a loan.
 
Reducing the down payment to 10 percent made them somewhat more reserved, although more than three-quarters said they were just as likely to approve such a borrower as they were in 2006, while 23 percent said they were less likely to approve such a loan.


680 FICO means fewer options

 
Borrowers with a FICO score of 680 faced steeper odds, but still had a good chance of getting approved if they could come up with a 20 percent down payment. Just over seven out of ten loan officers said their bank was equally likely or more likely to approve such a borrower for a mortgageas they were in 2006, while 28 percent said they were less likely.
 
With a 10 percent down payment and 680 FICO, half said their bank was at least as likely to approve the loan compared to six years ago, though of the remainder only 21 percent said they were much less likely to approve the loan, with 29 percent saying they were only somewhat less likely to approve.

 

Some lenders still open to 620 scores

 
The bank execs indicated they were much less likely to approve mortgages to borrowers withFICO scores of 620, regardless of their down payment. But even in these cases, a small but significant number said their banks were just as likely to approve these borrowers as they were in 2006.
 
About 29 percent said their bank would be just as likely to approve a borrower with a 620 FICOscore and 20 percent down payment as in 2006, with larger banks viewing these customers slightly more favorably. Nearly four in 10 said they were much less likely to approve such loans, with about one-third somewhat less likely.
 
With a 10 percent down payment and 620 score, 60 percent of loan officers said their banks would be much less likely to approve such a loan than they were six years ago, although 17 percent said the odds were about the same.
 
The survey shows the importance of shopping around for a mortgage lender, particularly when you have diminished credit or cannot come up with a large down payment. Although many lenders will turn such borrowers away, there are some who are still willing to work with such customers. Be aware, though, that such loans may very likely involve higher closing costs and/or interest rates than mortgages for borrowers with better credit and larger down payments.

No comments:

Post a Comment