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Mortgage News — How To Overcome Tight Credit

How to overcome tight credit

Is real estate financing tougher to get than in the past? Much of today’s mortgage news reflects the idea that home loans are hard to get, perhaps one reason why the real estate market remains fragile. Alternatively, for many borrowers there may be ways to avoid tight credit hazards.

“For borrowers with anything less than pristine credit, it is hard to get a mortgage,” said the Urban Institute in a recent study.

UI estimates that “4 million more loans would have been made between 2009 and 2013 if credit standards had been similar to 2001 levels.”

According to the Institute, “Mortgage credit today is much tighter than it was at the peak of the housing bubble in 2005 and 2006, which is expected and appropriate. But, it is also significantly tighter than it was in 2001, prior to the housing crisis. The factors contributing to the tight credit box are complex, ranging from the issue of lender overlays due to repurchase risk, to the high costs of servicing delinquent loans, to fears of litigation by the Department of Justice, the HUD Inspector General, or State Attorneys General.”

Mortgage News: Tight Credit?

While there is widespread agreement that mortgage standards are tight that does not mean home loans are impossible to get. In fact, millions of people obtained financing during the past year and you can bet that not all of them had anywhere near perfect credit.

How do they do it?

Several points stand out.

First, this is an especially good time to be a borrower because interest rates are low, well-below 4 percent at the time of this writing. All things being equal, low rates mean it’s easier to afford given levels of financing.

Second, there’s plenty of mortgage money out there, a key reason rates are so low.

Third, that mortgage standards are tighter today than in 2001 makes a lot of sense.

How come? In 2001, the country had just completed eight years of remarkable growth, adding some 22 million jobs and completing four years of federal surpluses. In contrast, after the mortgage meltdown in roughly 2006 and 2007 the country was teetering on the brink of depression; $1.7 trillion in bailout money was spent on big banks, financial organizations, and auto companies; and, seven million homeowners were foreclosed. It was absolutely clear mortgage standards had to change because the criteria used after 2000, and the loan products marketed to the public, had so wildly missed the mark.

Fourth, according to Ellie Mae’s Origination Insight Report for February, the typical conventional loan borrower had a 754 FICO credit score for purchasing and a 747 average for refinancing.

However, not everyone uses conventional financing. For instance, the typical FHA refinance went to a borrower with a 690 credit score. Those who wanted to buy through the FHA program? They averaged 683.

VA-qualified borrowers also did very well: The typical VA borrower had a 717 score for refinancing and a 702 score when borrowing to purchase a home.

The difference in scores between these borrower segments is huge. For instance, among those who wanted to buy real estate, the typical FHA borrower had a credit score that was 71 points lower than a conventional borrower.

If you’re worried about credit take a look at the FHA and VA programs. They’re plainly available with lower average scores than conventional financing so “tight lending” concerns are far less of a problem.

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