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If you’re thinking about buying a house and you haven’t applied for a mortgage since 2006, you’re in for an unpleasant surprise. The lax standards of the real estate boom era—like “no doc” loans, approved without supporting documentation, and “stated income” mortgages, where no proof of income was required—are history. If you want a mortgage today, get your credit score up, pay off debt, put some cash in the bank, and get your paperwork in order because you’re going to be asked to prove your income, assets, debts, and other financial commitments.
Today’s tighter standards have resulted in a greater percentage of loan denials and higher FICO scores. In 2010, for example, the nation’s 10 largest mortgage lenders denied 26.8 percent of loan applications, an increase from 23.5 percent in 2009, according to an analysis by The Wall Street Journal.
The leading reason a lender will deny your loan is because it has concerns that you can repay the loan. You’ll need to prove your ability to pay the loan before you receive any money from the bank by doing the following:
Average FICO credit scores for loans approved by Freddie Mac and Fannie Mae today run in the 760s compared to 620 to 640 during the housing boom. Ellie Mae, a company whose software processes 20 percent of all U.S. mortgages, reports the average FICO score among denied applications has risen to 750 from 741 since August 2011. Even the FHA is requiring a minimum FICO score of 580 to qualify for a loan with a 3.5 percent down payment.
Some, notably the National Association of Realtors and the National Association of Home Builders, claim that these tough new hurdles are impeding the housing recovery by making it extremely difficult for qualified borrowers to get mortgages. A white paper issued by the Federal Reserve in January agreed, noting that mortgage lending has significantly declined among potential first-time homebuyers—an important source of incremental housing demand.
In February, Federal Reserve Chairman Ben Bernanke called for increased lending to creditworthy homebuyers and more loan modifications and mortgage refinancing to help revitalize the housing industry and economy. The NAR reported Bernanke said in a speech to home builders that tightened borrowing was necessary to protect banks, investors and borrowers during the housing crisis, but now the pendulum may have swung too far.
Is this pressure sending a signal to lenders that their tight lending policies may be doing more harm than good? As the spring home-buying season gets underway in earnest, can homebuyers look forward to more moderate lending practices and underwriting policies? Unfortunately, the answer so far seems to be no.
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.