Mortgage lenders have loosened credit considerably in the past year, especially for borrowers with less-than-stellar FICO scores.
The average credit score for borrowers who received a home loan in December was 727, down from 748 a year earlier, according to data released Wednesday by Ellie Mae, the Pleasanton, Calif., loan origination software firm. More significant is that in December, 31% of home loans had FICO scores below 700, up from 21% a year earlier.
"Credit standards in December were at the loosest level we've seen in years," says Jonathan Corr, Ellie Mae's president and chief operating officer. "There are more and more folks with credit scores below 700 that are getting loans."
Ellie Mae compiled the results from its clients' loan data. Roughly 20% of the nation's mortgage lenders use Ellie Mae's origination software.
The looser credit requirements have coincided with a shift to home purchases from refinances. It's also an indication that competition is heating up, forcing more lenders to move further down the credit curve.
Rising interest rates, plummeting refinance volumes and weak home purchase applications have forced lenders to loosen credit, albeit from fairly tight standards of the past few years.
Borrowers with FICO scores from 621 to 699 got the biggest boost, representing 28% of all home loans at the end of December, compared with just 19% a year earlier. (FICO score ranges from 300 to 850.)
Rising interest rates, falling market share, lower gain on sale margins and an arduous regulatory environment have created one of the most difficult cycles for mortgage banking. Lenders are likely to continue loosening credit standards this year, Corr says, despite the dire predictions that new mortgage rules that went into effect on Jan. 10 would result in fewer borrowers getting mortgages.
"Lenders are getting more comfortable with their processes, the quality of loans and the fact that they're verifying and documenting everything," Corr says. "We had very tight credit before and it's started to move back to a level that is more balanced."
Since 2008, the pendulum of extending credit swung so far that nearly 60% of borrowers in 2012 had FICO scores of 750 or above. By last year, that number had dropped to 45%. In December, the average total debt-to-income ratio was 39%, up from 34% in 2012.
"It's really only in the last 12 months that we've really started seeing a shift towards looser credit requirements," he says