Credit scores: Average Joes no longer need apply

Anyone got a lead lined suit? Don't think your good credit score protects you from the fallout from the mortgage meltdown.

After getting whacked by defaults on junk mortgages, lenders are requiring much higher scores for borrowers to qualify for the best rates.

Here's roughly how it works these days: Grade A borrowers now generally need credit scores of 750-760, up from 660-680 two years ago.

Borrowers slightly less credit worthy, the so-called "Alt-A" folks, will need scores of roughly 680, not 620 like before.

As for subprime borrowers, well, you probably know that story. Most of them won't be buying any houses for awhile.

Comments

[PF Woods]

HIDDEN DANGERS LURKING

The media seems to be focusing on the new home financing challenges that we are currently experiencing. That is an important issue that won't go away for a while.
However, the snake lurking in the weeds, that I believe will bring the economy to a screeching halt is the HELOC refinancing tragedy.
So many homeowners, who have been using their home as an ATM, and living beyond their means, will find that they are in way over their heads in short term debt. This is the main reason why people got a HELOC in the first place, isn't it?
Now they call in their friendly neighborhood mortgage broker, or call DITECH, etc and they tell them - "Sorry buddy, you are upside down on your home equity by about 20%!"
Uh Oh- what happens next?
The homeowners can no longer live their "lifestyle" and have to start cutting back. But that doesn't work because there's no more cash in the "savings account-aka HELOC.
Most of these folks have only been in this house for 2-5 years. There is no "home" here, it's a house, an investment.
What percentage of these people will actually walk from these homes? If it's only 1 in 10- that creates a whole new flood of depreciating assets in our neighborhoods.
Yikes- hang on to your cash, boys and girls, you're going to need it!

[suncoastsam]

As a mortgage broker I am experiencing this first hand. I'm trying to find a loan for a borrower with a 535 credit score and it's very difficult. Two subprime lenders raised their minimum score requirement to 560 this week while I had the loan with their underwriters. It's getting very difficult if you don't have good credit.

[Maria Seocr]

I think that if people don't realize that this credit problem is hurting all of us, they are going to have a huge awakening when they wake up one morning to find they don't have a job and like the first guy said, uh oh, your loosing your house too! The housing industry crashing as it is, in some way will affect almost every type of income. Even Walmart has reported record lows! Loans, no matter what type, have come accross my desk in trouble, not because of their mortgage payment but because they are paying $700.00 a month or more just to taxes and insurance. In many cases that is more than most of our mortgage payments use to be before home prices soared. People could pay their mortgages, or at least many of them, if they were not being choked to death by those sources in which goverment has control of. Goverment has benefited largely from the increase in revenue because of the housing boom, why shouldn't they step up now to fix what they should have stopped a long time ago?

[Dave]

Why would you even try and find a mortgage for someone with a 535 credit score? Doesnt that tell you something? I guess it's all about the "sale" you're gonna get yours! Good job, keep adding to the problem!

[Jonathan Roy]

Dave, just because someone has a low credit score doesn't mean they shouldn't be allowed to buy a home. Some people do have bad credit because they simply don't pay their bills on time. But others might have tens of thousands in medical collections, while all of their normal tradelines have never been late. (This is the sort of situation FHA is great for, since it has no minimum credit score, requires good credit history on actual tradelines, but ignores all medical derogs).

You can't judge someone's ability and willingness to repay based on credit score alone.

This blog entry is a bit misleading though. Although banks do their own thing with who knows what guidelines (doing a loan for a bank employee that the bank turned down and sending that loan to the bank's wholesale division never gets old), there's no actual minimum credit for "the best rates". It's all up to the automated underwriting systems. You can have a 600 score and get an A-credit approval, and you get the same rate as someone with an 800 score.

The only major thing when A-credit borrowing that can hurt you is if you are doing less than 20% down and have a credit score under 620, then your mortgage insurance will be much more expensive. Starting this year, you no longer get A-credit MI just because you have an A-credit automated approval (although there is one or two wholesale lenders with an exemption until the end of 2007). This can get pretty expensive, and it isn't practical to do combo loans to avoid MI any more with a score under 620.

From a credit score standpoint, the real change I've seen is Alt-A programs from Fannie Mae require a 660 score now instead of 620 before. Non-Fannie Alt A has almost totally been totally wiped out by the secondary market issues (investors won't buy these loans any more).

True subprime lenders are requiring larger down payments for the lowest credit scores. One company I've worked with before won't lend over 80% now.

FHA will probably start to make a nice comeback, although the minimum net worth requirements are a problem for a lot of small shops. If they do away with that, it'd make FHA loans much more available to those who would benefit from them.