In this year’s increasingly tough underwriting environment, do you have what it takes – credit score, debt-to-income ratio, equity or down payment – to qualify for a home loan? Bob Walters, chief economist for Quicken Loans says it’s “pretty pristine out there” in the mortgage market right now. Even those who are rejected for loans appear to have what used to be considered solid and acceptable credit-risk profiles. According to a new statistical analysis, based on a large sample of all mortgage applications approved and denied in recent months, which tapped data from the loan processing software used for roughly one-fifth of all new mortgage applicants nationwide, supplied by the technology firm Ellie Mae Inc. the average successful applicant for a conventional home purchase mortgage in February, the latest month for which data is available, you would need: 1) A FICO credit score of 764 (Fannie Mae and Freddie Mac once considered 620-640 FICOS the minmium for a conventional prime mortgage). 2) A loan-to-value ratio of 78%, or a down payment of 22%. 3) Debt-to-income ratios of 21% for housing expenses and 34% for total household monthly debt. Applicants who were rejected or did not get to closing lately had what was once considered strong qualifications with an average of: 732 FICO scores, 19% down payments and debt-to-income ratios of 24% housing costs and 41% total debt.
The main alternative to conventional financing – the Federal Housing Administration – requires much smaller down payments and usually has more generous credit standards. According to Ellie Mae’s data, successful applicants at FHA has average FICO scores of 701 during February and debt-to-income ratios of 28% for housing, 41% for total household monthly debt. And although FHA accepts down payments as low as 3.5%, successful applicants put down an average of 5% down.
It is still possible to get conventional financing with lower down payments, but those loans require almost perfect credit and come with high mortgage insurance premiums and add-on fees by Fannie Mae and Freddie Mac, as well as stringent debt-to-income limits. Keep in mind that these are averages, and each individual case is unique. Many home buyers do successfully close transactions with FICO scores and debt ratios that don’t quite meet the current benchmarks, often because their full financial and credit-risk profiles take them beyond Fannie Mae’s and Freddit Mac’s automated underwriting systems.
Don’t despair, but be aware of the emerging trends that affect your ability to purchase or refinance.