Home Loan Approval with a Lower Credit Score

New mortgages are being approved with lower credit scores, and FHA loans appear to be leading the shift, according to studies by credit developer FICO and other entities. “As we get further away from the Great Recession, underwriting criteria seems to have eased, and a broader section of consumers are obtaining mortgages as a result,” according to FICO’s report.

From January to March of this year, borrowers who were approved for FHA loans—which offer low down payment options for first-time home buyers—had an average credit score of 672, according to FHA data. During that same period in 2011, the average credit score for an FHA borrower was 701. FHA borrowers also have had higher debt-to-income ratios in recent years. Debt-to-income ratios measure monthly household income against other debt, such as credit cards, auto loans, and personal loans.

It’s Taking Less to Get an FHA Home Loan

First-time and low-income mortgage borrowers may have an easier time qualifying for a Federal Housing Administration loan. Ginnie Mae, a government agency that issues bonds backed by FHA loans, reports that the average credit score on FHA-backed loans fell to 680 in 2013, and the average debt-to-income ratio rose to 40.3 percent — both indicators that credit may be easing.

In comparison, Ginnie Mae reported in January 2013 that the average credit score was 701 and the debt-to-income ratio was 38 percent.

“The FHA theoretically allows credit scores as low as 580,” the L.A. Times reports. “But lenders, buffeted by defaulted loans and demands that they buy back troubled mortgages that they sold, generally have set standards higher since the mortgage meltdown.”

Source: “Average Credit Score Falls on FHA Loans,” Los Angeles Times (Feb. 27, 2014)