Wednesday, December 12, 2012 / by Nathan Clark
There have been many moments in real estate since 2006 that have made us think, “Wow, have times changed.”
There were housing-related numbers that in 2006 or even a little later, we were shocked to see:
- The 306,000 new home sales recorded in 2011
- The 3.32-percent 30-year, fixed-rate mortgage recorded this month
- The 65.9-percent homeownership rate last year, the lowest since 1998
- The 21-percent drop in U.S. median home sales price from 2007 to 2011
I think that even the “experts” who saw the real estate bubble’s eventual burst coming would admit they didn’t expect to see some of those numbers. That goes to show you the unprecedented nature of housing’s decline.
But now, during its slow-but-steady recovery, there are some numbers that are just as, if not more shocking. Here’s the first:
That’s the average credit score of those recently denied on mortgage applications, according to the Fair Isaac Corporation and the December issue of Money Magazine. Let that sink in for a moment – that’s the average score of applicants who were denied a mortgage.
I’d say that in real estate – more than any of the above – that’s the number that matters the most right now.
A few years ago, if you had a 729 score, you’d be considered a very good-to-excellent credit risk. Now, you’re out of luck. Anybody who tries to tell you that lending standards haven’t tightened all that much is out of their mind. And this number is your proof.
Want even more numbers? The average credit score for those approved for a mortgage was 762, according to FICO in the same report. And that score corresponded with a monthly payment equal to only 21 percent of gross household income and a total household debt-to-income ratio of 33 percent.
Now, that doesn’t mean you have to have a 762 in order to buy a house. The 729 number doesn’t mean you wouldn’t qualify, either. What the numbers DO confirm, however, is what most have feared: Lending standards are still tight.
Anecdotally, I’ve heard that perhaps things are loosening. This might simply be a case of rising property values making banks feel as though the property used as collateral on a loan is less of a risk. Banks, like buyers, have for years had to weigh the risk of a property declining in value after a purchase. Most experts would agree that the days of price downswings are behind us in most markets.
That leaves the borrowers as the prime risk to banks, pretty much how it’s always been. If you’re saying to yourself “Yeah, but it’s not fair that a 729 used to be excellent and now it’s not,” you’re right. It’s not fair. It’s like the baseball hall of fame suddenly deciding that being a .300 hitter now isn’t good enough to get in. The statistical way of determining risk, the supposed best way of keeping score, has been changed by the banks.
I’m not sure why, exactly, a bubble caused by banks and houses is now being paid for by human beings whose behaviors are suddenly not up to snuff. Banks over-lend and property values fall, and suddenly someone who has done nothing to lower his or her credit score is suddenly not good enough?
I DO, however, know this: Until banks make mortgage available for more people, the housing recovery will be at least partly stunted. There’s a growing demand for homes again among buyers, and for the recovery to continue and expand, there’s going to have to be a corresponding supply of mortgages that allows them to do so.
I also know that if you’re in the market for a home, or will soon be in the market for one, you should start working on your credit profile as soon as possible. Even if you’re above that lofty 762 threshold, a higher score will get you a better rate.
I cannot stress enough how important it is right now to get a copy of your credit reports. Examine them carefully. Look for mistakes. Challenge what you find and ask creditors to make updates.
Pay your debt down. Save money for a larger down payment. Do what you can to increase your income.
The banks are asking a lot of you if you want to qualify for a home loan, which can feel daunting. But knowing what you’re aiming for and starting on some goals as soon as possible can make things a lot easier.