Credit Scores Sink 1/3 of Possible Homebuyers
According to a recent study, nearly 30 percent of all Americans searching for home loans are effectively locked out of the conventional mortgage market because their FICO credit scores fall below 620. (See AOL Real Estate's guide on "How to Get a Home Loan With Bad Credit.")
The fact that so many Americans have poor credit ratings isn't necessarily new information. Experian, one of the big three credit bureau, and Fair Isaac, creator of the FICO credit score, have each found that about 40 million to 45 million Americans have bad credit, or scores of of less than 600.
What is different -- and most telling -- about the study by Zillow Mortgage Marketplace is that it analyzes not just a generic group of Americans, but specifically those Americans who are actively looking for a home loan.
And for such would-be borrowers with low credit scores, the news was disturbing. They couldn't get a single lender to offer a quote for a home loan -- not even for a mortgage with a high interest rate.
Zillow Mortgage Marketplace fields in excess of 300,000 loan requests monthly from potential borrowers. Users can anonymously request mortgage quotes from hundreds of lenders nationwide. Lenders then supply loan quotes based on each consumer's circumstances.
Among applicants with low credit scores, however, Zillow's analysis showed that these borrowers were unlikely to receive even one quote for a 30-year, conventional fixed-rate mortgage. This was the case even among applicants who had lots of cash on hand, and could put a 15 percent to 25 percent down payment on a home.
"We are in an era of historically low mortgage rates, reaching levels not seen in decades," said Zillow Chief Economist Dr. Stan Humphries. "Coupled with four years of home value declines, homes are more affordable than we've seen for years. But the irony here is that so many Americans can't qualify for these low rates, or can't qualify for a mortgage at all.
good credit ratings were able to readily score loan offers on Zillow. The lowest interest rates were offered to individuals with the best credit scores, or FICO scores, of 720 or higher. Borrowers with 720 or better scores received an average annual percentage rate of 4.3 percent for conventional, 30-year fixed-rate mortgages. For those with scores that fell between 620 and 719, the quoted APRs depended on the exact score, but ranged from 4.73 percent and 4.44 percent.
Zillow's analysis took into account more than 25,000 quotes submitted between Sept. 1 and Sept. 15, 2010.
Zillow's research highlights yet another reason it may take a long time before the country's struggling housing market rebounds.
It's one thing to have a lack of willing buyers, as is the case among 25 percent of all renters recently surveyed by Trulia, who said they planned to rent forever. But it's another matter when willing potential buyers are shut out of the conventional loan market. And since bad credit is the issue -- whether due to divorce, layoff, financial irresponsibility or something else -- only two alternatives exist for these prospective homeowners.
They can seek out FHA loans, which now require a minimum FICO credit score of 580. Or they can simply wait until they re-build their credit ratings. For many homeowners, the latter would no doubt be the smarter, more sustainable path to homeownership.
But in an era where people buy first and learn later about the rights and responsibilities of homeownership, I doubt that will be the option most will choose. Instead, FHA loan programs will simply continue to surge in popularity.
Plus, "if someone has a 580 score, they will still get the same 96.5 percent financing," from FHA, after putting down a low 3.5 percent down payment, notes Ray Kuplaste, a mortgage broker and sales manager at United Capital Lenders in Southampton, Pa.
At the very least, though, if you have spotty credit, you should review your credit files before applying for loans to see what problems might be fixed ahead of the mortgage loan process.
The National Foundation for Credit Counseling says that a shocking two-thirds of adults in America haven't actually checked their credit reports in the past year, let alone their credit scores -- even though credit reports are free of charge at AnnualCreditReport.com. You can also get a free FICO credit score, via myFICO, Fair Isaac's consumer website.
And if you're seeking either a conventional loan or a government-backed FHA loan, it's certainly worth the time and effort to at least know where your credit stands before you apply for that much-needed mortgage.
For more tips on this and related topics see these AOL Real Estate guides:
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