When the Federal Reserve recently polled senior bank executives on whether they’ve been loosening credit criteria for home-mortgage applicants, most bankers said, “No way, not us.” They’ve kept their rules tight to avoid the problems the lending industry experienced in the housing bust of the past decade. Studies by the Urban Institute’s Housing Finance Policy Center have estimated that lenders’ historically strict underwriting standards have prevented millions of would-be buyers from becoming homeowners. Researchers said that between 2009 and 2014, 5.2 million mortgages were “missing” — that is, they would have been made if lenders had relaxed their tough post-recession requirements.
But there’s new statistical evidence that, at least in some areas, standards have been easing. A study conducted by credit-score developer FICO and released in August found that credit scores for new mortgages have been dropping.
“As we get further away from the Great Recession,” FICO researchers said, “underwriting criteria seems to have eased and a broader section of consumers are obtaining mortgages as a result.” The study did not specify which type of loans exhibited the most easing.
New loans with FICO scores below 700 — including some in the rock-bottom 400s and 500s — have increased from 21.9 percent of the market in 2009 to just under 30 percent (29.7 percent) last year, according to FICO researchers. (FICO scores range from 300, indicating severe credit-history problems and high risk of default, to 850, where the probabilities of missed payments or default are extremely low.)
So where has the easing been occurring? Conventional mortgage approval requirements haven’t budged much at the giant investors Fannie Mae and Freddie Mac, both of which were bailed out by the federal government 10 years ago. Although minimum down payments for some borrowers have been reduced in the past two years and debt-ratio rules have been relaxed a smidgen, there has been virtually no decrease in average credit scores for home-purchase loans, according to monthly data compiled by software company Ellie Mae. Nor have there been statistically noteworthy increases in applicants’ average debt ratios at Fannie and Freddie.
But loans insured by the Federal Housing Administration appear to be a strikingly different story. From January through March of this year, the average credit score for new-home purchase loans was 672, according to FHA data. By contrast, the average was 701 during the same period in 2011. Refinancings where borrowers replace their existing FHA loans with new ones carried average FICO scores of 709 in mid-2012; earlier this year, that had plummeted to 661.
There has also been a big increase in FHA loans with high debt-to-income ratios (DTIs) within the past several years. DTIs are a crucial measure of home buyers’ ability to repay their loans. They weigh monthly household income against ongoing bills for credit cards, auto loans, personal loans and other obligations such as child support and alimony, plus mortgage payments. The heavier your monthly debt obligations, the more likely you are to go delinquent on your new mortgage.
Between January and March of 2018, 1 of every 4 FHA loans had a DTI of more than 50 percent, according to the latest data available from FHA. As recently as 2013, just 12.7 percent of approved new FHA applications carried such a high debt load. In the first quarter of this year, almost 30 percent of new FHA borrowers had DTIs between 43 percent and 50 percent.
What does this mean for buyers who can’t meet the credit-score and DTI standards needed for most conventional loans? The good news is that you may have a path to homeownership at FHA. But if your household debts are heavy — especially if they exceed 50 percent of your income — get professional financial-counseling advice before signing up for an FHA loan. Your FICO score may meet FHA’s easing standards and your DTI may pass the test. But if you have to spend half or more of your income on your mortgage and other credit payments, you need to ask: Can we really handle this?