Following the U.S. housing bust, it got harder for households to get a mortgage.
It was especially hard for folks with lower credit scores.
However, lending standards have been loosening, and this is largely considered a good thing. But it also means it’s becoming easier for people with lower credit scores to get a mortgage.
Remember before the bust, lenders threw money at folks with poor credit, and who were at high risk of defaulting on their loans.
While we’re not seeing a repeat of that, this is a trend to watch closely.
Nick Timiraos at The Wall Street Journal points out two key findings about easing mortgage-lending conditions.
First, we’re seeing lower down payments on lending: For jumbo loans (those above the conforming loan limit and that are not securitized by Fannie Mae or Freddie Mac) the downpayment is down to 10 or 15%, down from 20% a few years ago.
For conforming loans ($417,000 for single-family homes in most states), the share of loans with a downpayment under 10% hit a five-year high, according to Black Knight Financial Services.
Last week, TD Bank announced that it would take down payments as low as 3% from first-time buyers and low- and moderate-income buyers, down from 5% when the program first launched last year, report Timiraos and AnnaMaria Andriotis at The WSJ.
Second, following the housing bust, lenders had been using overlays — basically, stricter requirements — to protect themselves. But some lenders have started to ease up on these overlays. The share of FHA borrowers with credit scores below 650 rose to 20% at the end of 2013, from 15% in August.
Earlier this year, Wells Fargo announced that it would lower its minimum credit score for certain mortgages backed by the Federal Housing Administration to 600, from 640.
This is the more worrisome trend. Many are concerned that the credit quality will decline as lenders get more competitive and try to gain market share.
Tighter lending left many Americans out of the housing recovery, and looser lending standards could help get them back into the market. While a credit score of 650 isn’t ideal, it will be interesting to see which way this goes.