How do your clients stack up as potential mortgage candidates in this year’s increasingly tough underwriting environment? Do they have the right stuff — credit score, debt-to-income ratio, equity or down payment — to get through the minefield?
A new statistical analysis, based on a large sample of all mortgage applications approved and denied in recent months, offers valuable benchmarks for anyone thinking about financing a home purchase or refinancing an existing loan. The study taps into data from the loan processing software used for roughly one-fifth of all new mortgage applications nationwide, supplied by the technology firm Ellie Mae.
To fit the profile of just the average successful applicant for a conventional home purchase mortgage in February, the latest month for which data are available, here’s what you would have needed:
• A FICO credit score of 764. Not only is this higher than the average score for approved loans as recently as November, it’s far beyond the 620-640 FICOs that Fannie Mae and Freddie Mac once considered the minimum for a conventional prime mortgage. It’s also well above the median FICO score nationwide, which is currently 711, according to a spokesman for Fair Isaac Corporation, developer of the score.
• A loan-to-value (LTV) ratio of 78 percent, signifying a down payment of 22 percent. This is higher than even the controversial minimum of 20 percent proposed last year by Obama administration financial regulatory officials who were seeking a standard for “safe” loans offering the lowest available rates and best terms.
• Debt-to-income ratios of 21 percent for housing expenses, 34 percent for total household monthly debt.
How about the profiles of people who applied for conventional loans to buy a house, but were rejected or didn’t get to closing? By historical standards, they were a fairly impressive group on average as well, with 732 FICO scores, 19 percent down payments and debt-to-income ratios of 24 percent (housing costs) and 41 percent (total debt).
Homeowners who refinanced existing conventional loans had the best profiles of all: average 770 FICOs, 65 percent LTVs indicating 35 percent equity stakes and debt-to-income ratios of 22 percent housing and 32 percent total debt.
The main alternative to conventional financing — the Federal Housing Administration — requires much smaller down payments, is more generous on credit standards and will stretch much further on debt-to-income ratios than Fannie Mae and Freddie Mac, the mainstays of the conventional marketplace. What’s the profile for success — and denial — at FHA? You might be a little surprised.
According to Ellie Mae’s data, successful applicants at FHA had average FICO scores during February of 701 as well as debt-to-income ratios of 28 percent for housing expenses and 41 percent for total household monthly debt. Although FHA accepts down payments as low as 3.5 percent, successful applicants threw in a bit more — an average 5 percent down. People who didn’t make the cut averaged 666 on FICO and 6 percent for down payments, and had debt ratios of 30 percent (housing costs) and 46 percent (total debt).
Successful FHA refi applicants had 722 FICOs, 12 percent average equity stakes and lower debt-to-income ratios than purchasers — 26 percent on average for housing costs, 40 percent for total household debt.
What to make of numbers like these? First observation: Ouch! It’s “pretty pristine out there” in the mortgage market right now, said Bob Walters, chief economist for Quicken Loans. Even those rejected for loans appear to have what used to be considered solid and acceptable credit risk profiles.
It is still possible to get conventional financing with lower down payments — say, 10 percent or even 5 percent — but those loans require nearly flawless credit and come with steep private mortgage insurance premiums and addon fees by Fannie Mae and Freddie Mac as well as stringent debt-to-income limits. For cash-short buyers with good — but not outstanding — credit scores who are looking for a low down payment alternative, FHA is the way to go, unless they qualify for VA (veterans) or USDA (rural housing) loans requiring zero down.
Another thought about the numbers: Even though the profiles of successful borrowers may look challenging to match, keep in mind these are averages. Many homebuyers make it through the application gantlet with FICO scores and debt ratios that don’t quite meet the current benchmarks — often because their full financial and credit-risk pictures are good enough to get them accepted by Fannie Mae’s or Freddie Mac’s automated underwriting systems.
So don’t fret if you don’t measure up to the averages. You still may have a good shot. But know this about today’s mortgage standards: They’re arguably tougher than ever.
Kenneth Harney is a syndicated real estate columnist.