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The One Graph That Explains Why a Good FICO Score Matters for Homebuyers

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When it comes to buying a home, there’s a lot more to the process than just finding an affordable home for sale and having enough money for a down payment. Most people need loans to finance such a large purchase, but even as the housing market has rebounded from the foreclosure crisis and low property values of 2010, mortgages remain very difficult to acquire. A report from the Urban Institute, a Washington-based economic-policy research group, concludes that 1.25 million more mortgages could have been made in 2013 on the basis of conservative lending standards practiced in 2001, years before the housing bubble began to inflate.

Whether or not a lender approves a borrower for a mortgage depends on several factors, like income and outstanding debt, but looking at the credit scores of mortgage borrowers during the last several years shows just how tight the market has been post-recession. Here’s how it breaks down.

Urban-Institute-FICO-Score-distribution

The Urban Institute estimates that the stringent credit score standards for mortgage origination resulted in 4 million mortgages that could have been made (but weren’t) between 2009 and 2013. From 2001 to 2013, consumers with a FICO credit score higher than 720 made up an increasingly large portion of borrowers, from 44% of loans in 2001 to 62% in 2013. Consumers with scores lower than 660 made up 11% of borrowers in 2013, but they represented 28% of home loans in 2001.

The study authors note that their calculations do not account for a potential decline in sales because consumers may not see homeownership as attractive as it had been before the crisis.

“Even so, it is inconceivable that a decline in demand could explain a 76% drop in borrowers with FICO scores below 660, but only a 9% drop in borrowers with scores above 720,” the report says.

On top of that, the authors found that tightened credit standards disproportionately affected Hispanic and African-American consumers. In comparison to loan originations made in 2001, new mortgages among white borrowers declined 31% by the 2009-2013 period, 38% for Hispanic borrowers and 50% for African-American borrowers. Loans to Asian families increased by 8%.

Millions of Americans are still feeling the impact of the economic downturn on their credit scores, because negative information like foreclosure, bankruptcy and collection accounts remain on credit reports for several years. Rebuilding the credit and assets necessary to buy a home takes time, particularly in such a tight lending climate, but by regularly checking your credit — which you can do for free on Credit.com — and focusing on things like keeping debt levels low and making loan payments on time, you can start making your way toward a better credit standing.

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This article originally appeared on Credit.com.

This article by Christine DiGangi was distributed by the Personal Finance Syndication Network.

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1 Comment

  • Although some of the author’s facts are correct, her conclusions are not. Lending standards are tighter than they were prior to the inevitable meltdown of 2008, but they simply represent a return to responsible underwriting. They are not particularly burdensome.

    When she says, “mortgages remain very difficult to acquire,” she displays a lack of knowledge of the underwriting process. I have to wonder whether she bothered to interview an actual loan originator.

    It is true that the borrower’s FICO score is important–but not for the reason she states in her article. For conventional loans (those sold to Fannie Mae or Freddie Mac), the minimum score is 620. That has been the case for years. A lower credit score will affect the cost of the loan, but not, typically, whether the borrower will be approved for the loan.

    Many in the press have quoted the statistic that average credit scores for approved mortgages have increased since the onset of the mortgage crisis. While the statistic is true, the conclusion from it is fallacious. Since required credit scores have NOT increased for conventional (not sub-prime) loans, it is far more reasonable to infer from the data that fewer people with lower scores are applying for mortgages. This, I am convinced, is because of articles like this one. Borrowers without flawless credit (and a credit report with a 620 score will have numerous derogatory entries) believe they will be rejected, and don’t make the attempt. It is a classic self-fulfilling prophecy.

    Here is the truth: a borrower with a credit score of 620 or better, an ability to document income and assets and a down payment of at least 3% is a very good candidate for a conventional mortgage. The credit requirements are even lower for FHA mortgages: 580.

    I would urge would-be homeowners not to accept articles like this one uncritically. Home ownership is possible even for those applicants whose credit history is less than perfect.

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