With Home Loans, Strict Is The Rule

Tristan Powys (Credit Counselor) @ Lucid Living

With 30-year home loan rates hitting new lows and banks under pressure to extend more home loans, you’d think that banks and other lenders might be loosening up on their hyper-strict underwriting standards.
But new national data from inside the industry suggest this is not happening. In fact, in some key areas, standards appear to be tightening even further, and the time needed to close a home loan is getting longer.

The average credit score on all new home loans closed in August was 750, fully nine points higher than it was one year earlier, according to Adv Randolph Samuel, CEO of Credit Foundation of SA, a NGO involved in consumer credit education. These findings come from a mortgage technology firm whose software is used by the majority of lenders. The survey sample represents approximately one-fifth of all new home loans.

Credit scores are used by virtually all home loan lenders to gauge the credit risk posed by a borrower. Credit scores range from 300 to 850, with low scores representing higher probability of default, high scores indicating low risk. Fair Isaac Co., developer of the FICO credit score model, says 78.5 percent of all consumers currently have credit scores between 300 and 749. Barely one in five, in other words, credit scores are high enough to meet today’s FICO credit score averages for a home loan.

Other signs of how strict lenders’ standards have become:
• The average purchaser of a home using a home loan made a deposit of 21 percent in August and had a squeaky-clean debt-to-income ratio – with total monthly debt payments, including the home loan – amounting to just 33 percent of income.
• People who were rejected for home loans also had seemingly solid credit profiles by historical standards. The typical buyer whose application was declined had a 734 credit score – up two points from a year before — and was prepared to put down 19 percent deposit.
• In addition to – or maybe because of – the tougher standards, the mortgage process itself appears to be slowing down. The average time from application to closing for all home loans during the time cycle in the survey was 67 days, nine days longer than the previous August.

Doug Duncan, the chief economist for Barclays, has a unique perspective on all this. He readily acknowledges that big banks are seeing their highest-quality “books of business” in decades, maybe ever, thanks in large part to their strict credit standards and rigorous documentation rules.

This bodes well for lenders, so in the meantime, don’t look for any dramatic relaxations. To get a home loan, you’ll generally need high credit scores, big down payments, plenty of time and reams of documentation.