Is Tight Credit Keeping Even Good Buyers Out?

September 15, 2011

It’s not easy to get a loan these days, say housing experts. Even home buyers with excellent credit are struggling to get approved for a loan, as home lending standards have tightened to some of their strictest level in decades. 

Tightening credit is affecting home sales and hurting the housing industry’s recovery, economists note, as more borrowers face increased scrutiny in qualifying for a loan at the best rates. To get the lowest interest rates, home buyers are having to come with higher credit scores and larger down payments than just a few years ago, as well as having to show steady employment, verify assets, and even explain new credit cards and small bank account deposits, USA Today reports. Banks hope the higher standards will lead to fewer future defaults. 

Higher Credit Scores, Larger Down Payments

Through June, single-family home loans bought by Freddie Mac boasted an average down payment of 29 percent and an average FICO credit score of 751. In 2007, average down payments were 23 percent and FICO scores averaged 707.  

Federal Housing Administration loans, which tend to be a lure for buyers without large down payments, are also being issued to buyers with higher credit scores than in the past. From January through March, FHA loans went to borrowers with an average credit score of 704, up from 631 four years ago.

In an analysis recently done by Zillow of 3.6 million loan inquiries, it found that prospective borrowers getting the best loan rates had average down payments of 28 percent. Three years ago, prospective borrowers averaged down payments of less than 24 percent, according to Zillow. 

"It used to be anybody with a pulse could get a home loan. Now you have to be an Olympic athlete," Guy Cecala of Inside Mortgage Finance, told USA Today. "The pendulum has swung too far."

Source: “Tight Standards Make Mortgages Tough to Get,” USA Today (Sept. 14, 2011)