With 30-year mortgage rates hitting new lows and recent borrowers’ payment performance the best by far in decades, you’d think that banks and other lenders might loosen 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 loan is getting longer.
The average FICO credit score on all new loans closed in August was 750, nine points higher than a year earlier, according to Ellie Mae, Inc., a Pleasanton, Calif.-based mortgage technology firm whose software is used by many lenders.
At Fannie Mae and Freddie Mac, the dominant players in the conventional mortgage market, the average FICO score was even higher. For refinancings in August, the average approved borrower had a 769 FICO score, up six points from August 2011. The average score for borrowers purchasing homes was 763, one point higher than the year before.
FICO scores are used by virtually all mortgage lenders to gauge the credit risk posed by a borrower. Scores range from 300 to 850. Fair Isaac Co., developer of the FICO scoring model, says 78.5 percent of consumers currently have scores between 300 and 749. Barely one in five, in other words, scores high enough to meet today’s FICO score averages at Fannie and Freddie.
Other signs of how strict lenders’ standards have become:
• The average purchaser of a home using a Fannie-Freddie loan made a down payment of 21 percent in August and had a squeaky-clean debt-to-income ratio amounting to just 33 percent of income. Refinancers had an average equity stake in their houses of 30 percent.
• People who were rejected for Fannie-Freddie mortgages also had seemingly solid credit profiles by historical standards. The typical buyer whose application was declined had a 734 FICO score and was prepared to put down 19 percent.
• The mortgage process appears to be slowing down. The average time from application to closing for all loans during the time cycle in the Ellie Mae survey was 49 days, nine days longer than the previous August. For refinancings, the average was 51 days, up from 37 days a year earlier.
What’s going on here?
Doug Duncan, the chief economist for Fannie Mae and former chief economist for the Mortgage Bankers Association, believes, however, that the underwriting cycle could start to loosen up as banks’ fears of costly “buy backs” of existing loans recede and long-awaited rules on mortgage lending are unveiled by the federal government.
That’s somewhere on the horizon. But in the meantime, to get a mortgage, you’ll generally need high scores, big down payments – except for FHA, which accepts 3.5 percent down – plenty of time and reams of documentation.