Tighter credit stifles real estate marketplaceby Peter Miller
If you’re looking at today’s mortgage rates you know that loans never really come with one price. Instead, there are different prices depending on how you structure your loan and how you qualify.
One factor that will influence your mortgage rate is your credit score. The higher your credit score, the greater the chance you’ll qualify for a lower rate. For example, on a scale between 300 and 850, someone with a score of 700 might qualify for a 5 percent mortgage rate while someone with a score of 630 might pay 6.25 percent for the same loan.
Now, however, we see that lenders are tightening credit score requirements. A lender who might have offered 5 percent financing at 700 now wants a credit score of 750.
This shift toward tighter standards is not a by-product of credit score changes. Your score today may be the same as it was a year ago, but what has evolved is the lender’s view of risk.
The catch is that as lenders’ score requirements tighten, interest rates effectively rise. The borrower with a credit score of 700 that could have qualified for a 5 percent loan may now only qualify for financing at 5.375 percent, meaning they may qualify for a smaller loan or one that has higher monthly costs than would otherwise be the case.
In effect, mortgage rates may be near historic lows, but the path to getting such loans with those low(er) rates has gotten more difficult.
Fair Isaac, the developer of the credit score concept, looked at scores for roughly 170 million consumers and found that most people have fairly-strong credit–better than half of us have scores above 700 and almost one in six tops 800.
The same study also shows credit mobility–some of us are doing better than others in the credit department. For instance, the percentage of people with scores above 800 fell between April 2008 and April 2010, while those with scores between 500 and 549 increased.
Figures from the Federal Reserve show an interesting parallel: As a nation, we’re using credit cards less while we’re increasing the use of other forms of credit. In 2006, our high-cost credit card debt totaled $871 billion. By January 2011, it had been reduced to $795 billion. During the same period the use of other forms of credit grew from $1.513 trillion to $1,617 trillion. In effect, people are moving from high-cost forms of debt to debt with lower costs.
Real estate impact
The changes in the use of credit and lender views of lender risk have important implications for those with an interest in current mortgage rates:
- Less debt–especially credit card debt–means lower monthly costs. Lower monthly costs should make it easier to qualify for a mortgage.
- Our credit scores reflect that many of us have become more careful with personal borrowing. For instance, the typical FHA borrower now has a credit score of 703 versus 694 a year ago.
The result of these trends is that we’re shrinking the pool of potential homebuyers. The pay-off for good financial behavior is being off-set by stricter lender standards, meaning people with a solid income and good credit can’t borrow as much as they might have last year or the year before.
This is not a good outcome. We want more homebuyers to absorb the inventory of unsold properties, especially foreclosures and short sales. Getting distressed properties off the market is the key to stable, and perhaps higher, home prices.
Inflated lender worries about risk are now creating, er, more risk. Lenders would have fewer concerns if more buyers were bidding and buying and home prices were rising, but new lender policies make financing less attractive and more costly–and that’s not a shrewd formula for restoring the housing market.
Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.