On loans, right stuff is getting tougher
WASHINGTON — A new analysis, based on a large sample of mortgage applications approved and denied in recent months, offers benchmarks for anyone thinking about financing a home purchase or refinancing. The study taps into data from the loan processing software used for about one-fifth of new mortgage applications nationwide, supplied by the firm Ellie Mae Inc.
Here's what you would have needed to be among the average successful applicant for a conventional home mortgage in February, the latest month for which data are available:
• A FICO credit score of 764, which is higher than the average for approved loans in November. It's beyond the 620-640 FICOs that Fannie Mae and Freddie Mac once considered the minimum for a conventional prime mortgage, and above the nationwide median FICO score of 711, according to a spokesman for Fair Isaac Corp, developer of the score.
• A loan-to-value (LTV) ratio of 78 percent, signifying a down payment of 22 percent. This is higher than the controversial minimum of 20 percent proposed last year by Obama administration financial regulatory officials who were seeking a standard for "safe" loans offering the lowest available rates and best terms.
• Debt-to-income ratios of 21 percent for housing expenses, 34 percent for total household monthly debt.
Homeowners who refinanced existing conventional loans had the best profiles of all: average 770 FICOs, 65 percent LTVs indicating 35 percent equity stakes, and debt-to-income ratios of 22 percent housing and 32 percent total debt.
The main alternative to conventional financing — the Federal Housing Administration (FHA) — requires smaller down payments, is more generous on credit standards and will stretch further on debt-to-income ratios than Fannie Mae and Freddie Mac, the mainstays of the conventional marketplace.
According to Ellie Mae's data, successful applicants at FHA had average FICO scores during February of 701 and debt-to-income ratios of 28 percent for housing expenses, 41 percent for total household monthly debt. Although FHA accepts down payments as low as 3.5 percent, successful applicants threw in a bit more — an average 5 percent down.
Successful FHA refi applicants had 722 FICOs, 12 percent average equity stakes, and lower debt-to-income ratios than purchasers — 26 percent on average for housing costs, 40 percent for total household debt.
Keep in mind these are averages. Many homebuyers make it through the application with FICO scores and debt ratios that don't meet the current benchmarks — often because their full financial and credit-risk pictures are good enough to get them accepted by Fannie Mae's or Freddie Mac's automated underwriting systems.