August 24th, 2023 by MG
For a while, most folks felt secure knowing they were over the 620-640 FICO mark with their credit score. This number of course being the rough borderline for subprime credit. And up until now, that was pretty much all you needed.
However, as the housing bubble bursts open, it gets everything wet. We’ve been watching the effects creep closer and closer into other markets, and now it’s pushing the minimum requirements up even higher for non-subprime buyers.
According to Pioneer Press:
If you think you’re exempt from the current credit crunch because you have a decent credit score, think again.
Things are tightening up for folks looking for a mortgage or to refinance, even those not in the subprime category.
Lenders now expect borrowers to have solid proof of their income, more money down and higher credit scores than in the past.
For example, consumers with a FICO score in the 640 range that once qualified for 100 percent financing and a decent interest rate will see that rate go up a quarter of a percent or so, said Mark Teteris, CEO of Lakeland Mortgage, a residential mortgage lender in Bloomington. Such borrowers should also expect to scrape together a down payment of at least 5 percent, he said.
The changes for new borrowers stem from a tightening in standards by government-sponsored entities like Fannie Mae and Freddie Mac and by other investors that buy pools of mortgages.
During the mortgage boom of the past several years, some pools of loans that were rated “investment-grade” turned out to be loaded with high-risk borrowers. When these borrowers began to default on their mortgages, investors who bought the loan pools as mortgage-backed securities got burned and banks and GSEs holding the mortgages were hit by steep credit losses.
Now investors and GSEs are raising their standards in hopes of lowering their risk in the future.
This is no temporary blip, bankers and other lenders say. “I’d say this is going to be long term,” said Jim Miley, president of residential real estate for Bremer Financial Corp. in St. Paul. Miley said he has seen a definite upward migration in desired FICO scores. “I think we will continue to tighten until the investors are satisfied that the mortgage pools are basically ‘what you see is what you get.’ ”
The changes and stricter standards don’t mean that borrowers are locked out of the housing market altogether.
“Today you can go out and get a very rock-solid purchase price on a home and a very good mortgage,” Miley said. “You are going to be processed in a more prudent manner and you should be expecting to have a down payment.”
While a year ago, a plethora of 100 percent financing products existed, such options could be nearing extinction. Bremer and Lakeland both have pulled back on such offers, Miley and Teteris said. But what if you don’t have 5 percent to put down?
Still, some borrowers may be out of luck.
Mary Wetterlin, general manager of the first mortgage division at TopLine Federal Credit Union in Maple Grove said she’s met with several customers hoping to refinance before the interest rates on their adjustable rate mortgages go up this fall.
She’s having to say no more frequently than she would like.
For some homeowners, the value of their house has gone down as the inventory of unsold houses in their area has risen. Others don’t have enough equity to refinance, because they’ve already refinanced or borrowed some of the equity they had in their home to pay for improvements, discretionary items or debts.
Try as she might, Wetterlin just can’t make refinancings work for borrowers like these.
TopLine sells its loans to Fannie Mae, and “The Fannie Maes and Freddie Macs of the world are not so willing to take that debt,” Wetterlin said. “Maybe a few years ago they would have been willing to do that … but that has gone away.”
“We just can’t help people, even if we wanted to,” Wetterlin said. “I feel like I am sounding like Ebenezer Scrooge. … On the one hand I don’t want to see these neighborhoods blow up and end up (with) rows of foreclosed homes. … But it’s a struggle.”
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