Low FICO score? You're likely finding it easier to get approved for a mortgage.
The average credit score on closed loans is now just 727 -- ten points lower than it was just one year ago. Along with today's mortgage rates, which are at their best levels of the year and lowest point since June 2013, the FICO drop gives more U.S. homeowners the chance to refinance their homes.
If you haven't refinanced to current mortgage interest rates, or compared today's pricing, it's an opportune time to consider your options.
Many mortgage lenders now quote rates in the 3s with equally low APRs.
In its monthly Origination Insight Report, mortgage software firm Ellie Mae reports that the average FICO score of a closed loan dropped to 727 in July. It's a 10-point reduction from one year ago and well below last year's average.
With less-than-perfect credit, mortgage applicants are doing just fine, a reversal from last decade's mortgage market tightening.
By way of definition, "FICO score" is another way of saying "credit score". The FICO model, which was first developed by the Fair Isaac Company, has been in use for decades. It's meant to predict the likelihood of a person going delinquent on a mortgage.
High FICO scores correlate with a low default probability and low FICO scores correlate with a high default probability. Recently, the makers of the FICO score announced an update to their model which is expected to raise borrower credit scores across the board.
Under the new scoring system, mortgage applicants with medical collection items and no other items in collection, as one example, are expected to see a credit score boost of approximately 25 points. Other borrowers may see improvements of 100 points or more.
However, because lenders have lowered their average FICO requirements, all mortgage applicants should be finding it easier to get approved.
If you've been turned down for a mortgage because of your low credit score, it may be worth applying again. Some lenders are accepting scores as low as 580.
There are four "common" government-backed mortgage loans. One is the conventional loan, which is backed by Fannie Mae or Freddie Mac. One is the Rural Loan, which is backed by the USDA. One is the VA loan backed by the Department of Veterans Affairs; and, the last is the Federal Housing Administration's FHA loan.
FHA loans are a big reason why Ellie Mae reports falling credit scores. Earlier this year, lenders dropped the minimum FHA credit score by 60 points. You can now get an FHA mortgage with a credit score of 580 or higher.
Indeed, as compared to other loan refinanced loan types, the average FICO score for an FHA loan was lowest in July.
FHA loans now account for 20% of all mortgage transactions and, predominately, they've been used for purchasing homes. This is because, in addition to allowing credit scores down to 580, the FHA requires just 3.5% downpayment on a home.
This is the lower than the five percent downpayment required by Fannie Mae or Freddie Mac; and is available to all buyers in all states. By comparison, VA loans and USDA loans allow 100% financing, but buyers must meet unique qualification standards.
For example, in order to use a VA loan, mortgage applicants must be an active member of the military or a veteran of the U.S. Armed Services. To use a USDA loan, buyers must live in a non-urban area and must qualify under county-by-county USDA income limits.
FHA loans are accessible and easy for which to qualify. Furthermore, they're assumable. This means that a home with FHA-backed financing can be sold with its mortgage "attached". When you lock a 3.5% mortgage rate today, you can sell your home in 10 years with the accompanying 3.5% mortgage rate -- regardless of where current mortgage rates are a decade from now.
FHA loans also allow access to the FHA Streamline Refinance.
The FHA Streamline Refinance is one of the simplest and fastest refinance programs available today. Similar to the VA Streamline Refinance, the FHA program waives the need for income and employment verification, for home appraisals, and for credit scores.
Mortgage rates for the FHA Streamline Refinance are at a 14-month low right now.
Mortgage rates are at their lowest levels of 2014 and their best prices since June of last year For borrowers with low credit scores, the news is even better -- lenders are making it easier to qualify.
So, compare today's mortgage rates and see for what you'll qualify. Rates are available online at no cost, with no obligation, and with no social security number required to get started.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
Barry L. Systems Analyst
The Mortgage Reports is an excellent resource. I depend on the Mortgage Reports for the most up-to-date information regarding shifts in government policy and mortgage rate information in general.
Ron Z. Real Estate Agent
I am a full-time Realtor and I look forward to daily updates from The Mortgage Reports. The advice is useful and the insight is important. Thank you!
I enjoy reading The Mortgage Reports. The articles are informative with lots of good stats and trends.
2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)