Mortgage Credit and Underwriting Guidelines Remain Strict

by 05 Apr 2012
( -- 4/5/2012 -- Mortgage lenders in the United States tightened their lending requirements and credit guidelines even before the fall of investment banking firm Lehman Brothers signaled the catastrophic bursting of the housing bubble in 2008. More than three years later, conditions for borrowers have not gotten any easier, according to a report by mortgage technology provider Ellie Mae. Ellie Mae develops software used by mortgage originators and loan underwriters.

The data and characteristics of the loan files originated, reviewed and processed on Ellie Mae’s software are tracked on the company’s servers. The report by Ellie Mae indicates that mortgage applicants who either refinanced an existing loan or purchased a new home in February had very high credit scores. The average credit score was 750, higher than the 740 average reported six months ago. The loan-to-value (LTV) ratio of most approved loans was 76 percent, meaning that lenders only approved mortgages for borrowers with pristine credit histories and very safe LTV ratios. Looking at the denied applications indicates that even borrowers with reasonably high credit scores and attractive LTV ratios did not meet the strict criteria sought by mortgage lenders these days. The average denial processed through Ellie Mae’s software platform consisted of applicants with 699 credit scores and 83 percent LTV ratios.

Considering that most home loan production these days is destined to be guaranteed by government-sponsored mortgage giants Fannie Mae and Freddie Mac, the report by Ellie Mae is dispiriting. The only alternative that borrowers with lower credit scores and modest down payments have these days is the Federal Housing Administration (FHA). Mortgages backed by the FHA can accommodate borrowers with credit scores as low as 620. Down payment requirements on FHA mortgages can be as low as 3.5 percent. The average borrower who refinanced an existing home loan with a mortgage product guaranteed by Fannie Mae or Freddie Mac had a very high credit score, around 770.

Denied refinance applications for Fannie and Freddie mortgages averaged credit scores around 720. In the heyday of the American housing bubble, a credit score above 700 guaranteed applicants the best mortgage interest rates and the most comfortable terms. FHA mortgage loans may seem like a better fit for average Americans, but a new rule taking effect this week will make it a bit harder. Borrowers with credit histories that indicate disputes of $1,000 or higher will no longer qualify for FHA loans.


Should CFPB have more supervision over credit agencies?