Credit requirements for home loans have remained very restrictive even as banks are offering credit cards and car loans to riskier borrowers. This has been pretty well-documented, but until now, nobody had actually crunched the numbers to figure out just how good your credit needs to be if you want to buy a house or refinance your existing mortgage. We’ve been hearing “720 is the new 680” for a couple of years now. As it turns out, that’s wrong. Even a credit score of 720 isn’t necessarily good enough anymore.
In an analysis of roughly 20% of all recent mortgage applications across the country, the average successful applicant had a FICO score of 764, according to the Los Angeles Times. This group of borrowers also had down payments of 22%, on average. For homeowners looking to refinance, the bar is set even higher: These applicants had an average FICO score of 770.
Even the borrowers who were rejected for a mortgage or didn’t close on the loan had an average credit score of 732. This could indicate that the numbers are skewing so high in part because prospective borrowers are self-selecting: In other words, people with credit that’s just okay aren’t even bothering to try getting a home loan — and no wonder, given the discouraging reality of today’s mortgage market.
The analysis in the Times also looked at what it takes to get a loan through the Federal Housing Administration today. Loans insured by the FHA are intended to help people with lower income or credit obtain home financing, but the same troubling pattern of only ultra-high scores making the cut emerges here, too. People getting FHA mortgages today have an average FICO score of 701.
To put into perspective just how far the mortgage market has shifted to favor only ultra-low risk borrowers, the historical dividing line between prime and subprime credit is 660. Now it takes, on average, a credit score of more than 100 points higher to land a mortgage.
Data released just last week by lending and credit education website CreditKarma.com shows that the average American had a credit score of 660 — down five points from about a year ago. The Times points out that borrowers with scores as low as 620 were considered acceptable applicants according to mortgage giants Freddie Mac and Fannie Mae. Even the median credit score, as per FICO, is 711 — well below what lenders today are green-lighting.
Not only is this bad news for would-be borrowers, it’s also an indication that the moribund real estate market might be stuck in neutral for some time to come. No matter how low prices drop, homes won’t sell if a majority of Americans don’t qualify for mortgages.