Good news for mortgage applicants: it may be easier to get approved even with a lower credit score.
Ellie Mae, a leader in mortgage software, reported that the average credit score of loans closed in January was 719; last January, the average credit score for closed loans was 731.
This marks the first time since Ellie Mae started collecting data that the average credit score dropped below what is considered an “excellent” credit rating of 720 or higher.
Credit score averages for approved loans are now at their lowest levels in more than four years.
Now, more home buyers and refinancing households are approved even if they are not in the highest credit tier.
Lenders are loosening requirements and making homeownership available to more applicants.
Average credit scores are at their lowest levels in over a year. At the same time, applicants are 6 percent more likely to close today than they were one year ago.
Now could be the right time to buy or refinance a home if you were turned down in the past because of your credit score.
Average Credit Scores of Closed Loans are Decreasing
Ellie Mae provides mortgage origination software to thousands of lenders across the country. More than 3 million loans pass through its software each year.
The company aggregates this data each month to publish its Origination Insight Report. In January, the data showed that credit scores of accepted applicants decreased across the board.
Borrowers with less-than-perfect credit may be approved today even if they were turned down just a few months ago.
The report analyzes credit scores for conventional, FHA, and VA mortgage applicants.
The average credit score for accepted FHA refinances was the lowest in over a year.
Approved FHA refinance borrowers had a score of just 645 on average. Conventional refinance applicants had an average score well north of 700. FHA refinance borrowers are the most likely to be approved of any group.
This is good news for borrowers who currently have an FHA loan. They are able to drop their rate and payment without providing an appraisal — or even income documentation — with the popular FHA streamline refinance program.
Homeowners who purchased a home with an FHA loan last decade likely have a higher mortgage rate than they could find today. They may have attempted to refinance a year ago, or even a few months ago, and discovered their credit score dropped due to the economic downturn late last decade.
Now that the economy is on the mend and borrowers are more likely to secure a stable income, lenders are more willing approve loans to borrowers with lower credit scores.
Fewer Loans Turned Down
The average credit score for loans that lenders turned down also decreased.
The average credit score of non-approved applications dropped to 645 in January, a decrease of from last January’s average of 675.
This trend indicates that lenders are more likely to approve a mortgage applicant with a “fair” or “good” credit rating.
In terms of numbers, “fair” credit means you have a score between 640 and 680. A “good” credit rating is a score between 680 to 720.
It is now much more likely that applicants will be approved if they are solidly in “fair” credit territory and approaching a “good” credit profile.
Borrowers Could Qualify with Lower Credit than Ellie Mae’s Averages
Mortgage applicants should note that Ellie Mae’s reported credit scores are averages. If your credit score is below the average, you could still qualify for a mortgage.
While the average credit score of a closed loan in January was 719, many lenders may accept borrowers with credit scores lower than that. For example, VA loans and USDA loans require a minimum credit score of 620, and FHA mortgages require a minimum score of 580.
With the low mortgage rates available and the lowest average credit scores of the year, now could be the perfect time to buy your first home or apply for a refinance.
Lender Confidence Improving. Check Your Eligibility
Lower required credit scores mean that lenders are growing more confident.
Lenders have been hesitant to give mortgages to borrowers with a credit score that is lower than what is traditionally considered “good.” However, their standard for a safe mortgage is falling back to pre-recession levels, and the consumers are the ones benefiting.
Because of their increased confidence, it could now be easier to get a mortgage with a lower credit score than it would have been at any time over the past seven years..
Today’s home buyers and refinancing households can take advantage of more lenient credit score requirements and incredibly low mortgage rates.