LendingTree's Borrower Health Report takes the temperature of would-be borrowers every calendar quarter, and the most recent check-up suggests that while borrowers may not be in top condition, they are still in relatively good health.
The LendingTree Borrower Health Report compiles information on would-be borrowers who apply for a mortgage via LendingTree. The Borrower Health Report takes into consideration credit score, loan-to-value ratio, and the overall qualification percentage of would-be borrowers to create a rating on a scale of 1 to 100 known as the Borrower Health Score.
It's Down, But It's Up
During the third quarter, the Borrower Health Score dipped by 1.56, to 79.94. This suggests that borrower mortgage qualifications aren't quite what they were in the second quarter, but to put this in perspective, the Borrower Health Score is still 7.28 points above where it was a year earlier. That means the broader trend is towards improving qualifications among mortgage-seekers, even though this trend took a step back in the third quarter of 2013.
Among would-be borrowers included in the Borrower Health Score, loan-to-value ratios crept up during the third quarter, while average FICO scores declined. Both of these changes are consistent with an erosion of borrower qualifications - the irony is that it seems borrowers are seeking larger loans (relative to the value of the properties in question) with weaker credit histories. This naturally resulted in a decline in the Borrower Health Score.
That decline is consistent with the overall economic climate in the third quarter. The most recent employment report from the Bureau of Labor Statistics indicated that net job creation had slipped a bit in recent months from the average level of the past year. Plus, the prospect of the government shutdown beginning on October 1 cast a shadow over the weeks leading up to that deadline, dampening optimism about the economy in the third quarter.
With the latest budget crisis now in the rear-view mirror, the fourth quarter direction of the Borrower Health Score will be highly significant - will would-be borrowers shake off the effects of the budget disruption, or will their qualifications for borrowing continue to take a hit?
Here's what the answer could mean to several different aspects of the housing market:
- Mortgage rates. Recent years have shown that worsening economic conditions can mean low mortgage rates - but the rub has been that fewer people have been able to qualify for mortgages to take advantage of those low rates. For more on this, see the point below on mortgage availability.
- Mortgage availability. During the housing boom, it was relatively easy to get home loans with bad credit. Once burned by heavy defaults though, lenders tightened their standards considerably. Those standards might loosen up again once the economy is thriving, but that still seems a long way away. Under today's shaky economic circumstances, a dip in the Borrower Health Score will probably translate to more applicants being turned down for loans.
- Housing prices. If a growing volume of loan applicants can be maintained without sacrificing qualification levels, it would bode well for housing prices. The implication would be that there is an increasing pool of well-qualified borrowers out there ready to support home prices. The slip in the Borrower Health Score during the third quarter is too slight to suggest the qualifications of potential borrowers are badly damaged, but the relationship between this score and the volume of applicants will be a key thing to watch moving forward.
- Home shoppers. People looking to buy a home can still get low mortgage rates, but they have to be prepared to come to lenders with healthy credit scores, and to make a sizeable down payment. The latter will not only help them get approved for a loan, but will allow them to start off with more home equity from day one of the mortgage. Having a healthy amount of home equity is a key towards your future flexibility to sell your home, borrow against it, or refinance a mortgage.
Finally, its worth noting that while national trends are significant, local conditions will matter most when you go to buy a home. Third quarter Borrower Health Scores ranged from a high of 96.16 in Hawaii to a low of 67.13 in Mississippi. This suggests that some areas have a healthy pool of qualified borrowers to support their housing markets, while the market will continue to struggle in other areas. Prospective home buyers should become familiar with both the health of their own credit and the health of the market in their area before making decisions about buying a home.