Being approved for a mortgage has gotten a little easier for consumers with good credit, according to a recent report from the Federal Reserve. The bad news is that standards are still tighter than pre-recession levels, and banks won't be further loosening them for a while.
The July report, which surveys senior loan officers about their banks' lending practices, shows almost one-fourth—23.9%—of all banks eased their credit standards in the last three months for borrowers with solid credit and incomes. According to the Wall Street Journal, this is the largest such action by lenders since the financial crisis.
Keith Gumbinger, vice president at mortgage research firm HSH, says that while loans can still be difficult for some consumers to get, banks are approving borrowers with slightly lower credit scores. Previously, Gumbinger says, banks required a FICO score of about 640 to approve a loan backed by the Federal Housing Administration, called an FHA loan. Now applicants with scores as low as 600 are getting the green light.
In July Wells Fargo lowered the minimum credit score needed for a jumbo loan to 700, down from 720, according to Reuters. Jumbo mortgages are generally necessary for consumers who need to borrow more than $417,000. Most banks have stricter requirements for jumbos than they do for smaller loans.
What's behind the easing? In short, banks are becoming less paranoid. Technically, the government will underwrite FHA loans given to those with credit scores as low as 580. However, banks are reluctant to lend to borrowers with such low scores because a certain number of defaults will cause the feds to pull their backing. As a result, many lenders require FICO scores above those minimums, or other additional requirements—collectively known as "overlays"—to make sure that doesn't happen.
What's more, in recent months housing prices have been going up. "If you're a lender and you make a loan to someone when home prices are rising, and [the loan] fails, well then congratulations," Gumbinger jokes.
One group benefitting from the changes is the self-employed, who tend to have fluctuating incomes. Since the housing crash, this group has found it extremely difficult to get credit because their unconventional or inconsistent income streams failed to meet the Qualified Mortgage standard that protects banks in case a loan goes south. As a result, lenders willing to give out non-QM loans had been demanding down payments as high as 35%, even from borrowers with a relatively high FICO score. Gumbinger says lenders are now more willing to look for other positive qualities, like a large number of assets or equities, or a higher credit score, instead of asking for huge sums of money up front.
The loosening is good for prospective homebuyers who previously may have just missed most banks' credit cut-off. What's not good is there's not much room to go from here in terms of lowering credit standards further. Banks theoretically have wide latitude to change requirements, and as housing prices go up they may loosen them further, but the primary determinant of who can get a loan are the credit limits set by government mortgage backers who securitize most of the mortgage industry.
Those limits are set by politicians, not bankers, and asking the voting public to allow less dependable mortgages is not exactly an easy sell, especially since bad loans helped cause the financial crisis.
"You're the head of the [Federal Housing Finance Agency], you lost billions and recovered billions, do you go stand before the American people and say in order to save the housing market we need riskier loans?" asks Gumbinger. "You may not want to put the American taxpayer at risk."
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