May 27th, 2020 10:56 AM by Jackie A. Graves, President
Mortgage rates may
be near multi-decade lows, but those favorable rates are becoming less
accessible to borrowers with damaged credit. In fact, for many of those
individuals loans are starting to become unavailable altogether.
In light of the pandemic that has weakened the economy and caused
unemployment to skyrocket, lenders are tightening lending requirements and only
taking on borrowers with good to excellent credit. Lenders, of course, have
pretty much always offered the best rates to borrowers with high credit scores,
but the gap is widening even further now.
In fact, a recent report from the Urban Institute shows that
borrowers with credit scores above 720 are able to lock in mortgage rates 78
basis points lower than borrowers with credit scores of 660 or below.
The availability of mortgages is falling as well. According
to the latest Mortgage Credit Availability Index from the Mortgage Bankers Association,
the availability of loans has fallen to its lowest level since December 2014.
“The abrupt weakening of the economy and job market — and
the uncertainty in the outlook — drove credit availability down in April for
the second consecutive month,” said Joel Kan, MBA’s associate vice president of
economic and industry forecasting, in a statement.
The decline was largely driven by lenders dropping low
credit score and high loan-to-value ratio mortgage programs. Lenders are also
pulling back on products like jumbo
loans, HELOCs and cash-out
Overall, it’s getting tougher for those with poor credit to
get a loan and lock in a low rate.
What credit score you need to get a loan
Credit availability could tighten even further in the weeks
ahead, locking out even more borrowers with damaged or low credit.
For example, JPMorgan Chase won’t lend to borrowers with
less than a 700 credit score and a 20 percent down payment. Other big banks are
following suit and tightening requirements as well.
Indeed, your chances of getting a loan with a low mortgage
rate are better if you have a credit score of 700 or higher.
In April 2020, nearly 93 percent of conventional home loans
went to borrowers with credit scores of 700 or above, according to Ellie Mae’s
Origination Insight Report. That’s up 3 percent from March 2020. The average
FICO score of conventional borrowers purchasing a home in April 2020 was 756.
Only around 6 percent of loans went to borrowers with a
credit score between 650 and 699, and only 1 percent of loans went to borrowers
with a score of less than 650.
What to do if you’re locked out of low mortgage
In order to get approved for a mortgage with a great rate,
start by improving your credit standing. It can take many weeks to resolve
credit issues and even longer to improve your credit score, so give yourself
plenty of time.
Here are steps you can take to improve
Here are some steps you can take to get a
mortgage with tarnished credit:
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