The financial health of people applying for mortgage loans has slightly worsened recently, according to LendingTree. America's leading online source for mortgage offers keeps its finger on the loan market's pulse, and publishes each quarter the results of its Borrower Health Report. This was the key finding of the latest of these, which covered the third quarter of 2013.
Borrower Health Scores
Every quarter, LendingTree assigns each state a Borrower Health Score and also calculates a national score. That national score stood at 79.94 points for the July-Sept. period, down only very slightly (1.56 points) from the previous quarter, and was still 7.28 points up on the same time in 2012. What caused the change? The analysts who wrote the report identified two factors in particular. One of these was credit scores. The average for prospective purchasers declined to 636 in the third quarter, down four points from the 640 in the second. So, as a group, home buyers were slightly less creditworthy, though the drop was only 0.6 percent.
Loan-to-Value Ratios the Critical Factor
However, the main cause of the worsening in home buyers' financial health was a change in loan-to-value ratios (LTVs). These are essentially the amount you are borrowing expressed as a percentage of the value of the home you are buying. And, on average, they went up that quarter to 89.8 percent from 88.4 percent in April-June. So, in other words, people were borrowing a slightly bigger part of the price they were paying for their homes, and so making proportionately smaller down payments.
Borrower Health Important
You might think that things that make it easier to borrow to buy a home are to be welcomed. And, within reason, you may be right. However, the increase in LTVs could at least in part have resulted from rises in home prices (CoreLogic's Home Price Index showed a 12.4 percent hike over the 12 months ending August 2013), and may be a disadvantage to borrowers. Someone who saved $20,000 to buy a $100,000 home last August would have had a 20 percent down payment. If the same home this August cost $112,400 that $20,000 would be just 17.8 percent. Similarly, although we may still be a million miles away from the can-they-mist-a-mirror lending criteria of a few years ago, we know from bitter experience that making indiscriminate mortgage loans to less-creditworthy borrowers does nobody any favors. Borrower health is important.
No Need to Worry Quite Yet
But perhaps it's something we don't have to worry about quite yet, as LendingTree president and CEO Doug Lebda observed. He commented in a statement, "Because home prices have been steadily increasing, this minor slip in the Borrower Health Score isn't necessarily unsettling." He continued, "In order for the housing market to maintain and improve home prices, there needs to be a growing pool of well-qualified borrowers in the market for homes. Housing market recovery is geographically dispersed and dependent on the overall jobs market as well. States that ranked high in LendingTree's Borrower Health Report had enough highly qualified, active borrowers to support the higher home prices." Those geographical variations are critical, so check out your location on the map, which ranks borrower health from the best state, Hawaii, to the worst, Mississippi.