Record Low Rates Difficult To Get With Tight Underwriting
The average rate for a 30-year fixed rate mortgage hit all-time record lows last month with rates being reported as low as 3.49 percent, more than a full point below the 4.55 percent average from a year ago at this time. While the historic rate means great things for affordability, it also appears to be historically difficult to qualify for these record low rates.
Record rates are a boon to buyers. The monthly payment on a $200,000 mortgage at therate reported last month translates into a monthly principle and interest payment of $897 compared to $1,019 last year at this time. That is a savings of $122 per month and more than $13,000 over a 9-year period, the average tenure of a homeowner. That all sounds great, but the clutch of would-be buyers who qualify for these rates have tightened in recent years.
The current average credit scores on loans made by the FHA is 707, which is an improvement from 2011 when the rate averaged 709. However, the average score for a denied loan application was 669, well above the 656 average for loans originated back in 2001 and above to the 660 mark used by the Office of the Comptroller of the Currency to delineate prime loans.
Likewise, standards on conventional loans increased from an average of 711 in 2001 to an average of 765 this year. What’s remarkable is that the average FICO of a rejected purchase application was 724, well above the average credit sore of an originated loan back in 2001. The data provides insight into the characteristics of denied loan applications which in turn delivers a better understanding of how tight overall underwriting standards are. A high average credit score for denials would suggest limitations on underwriters’ ability or willingness to take into account mitigating circumstances for low down payments or high DTI ratios during the origination process.
The high average credit score of denied applicants suggests an impact on would-be mortgage applicants. Tight underwriting standards may already have signaled to less creditworthy borrowers that they are likely to be rejected and thus they may not even apply for loans.
Tight underwriting in the current environment comes as little surprise to most practitioners. This data provides better insight to how current underwriting compares historically and more importantly it provides insight into the quality of borrowers that are being denied. While home sales have experienced their strongest spring in years, the over correction in lendingstandards is holding the housing market back from a robust recovery.