Executives at FICO, the creator of a credit score widely used in the mortgage industry, say that the high credit score “cutoffs” that mortgage lenders imposed following the housing crisis are stricter than necessary, and executives urge lenders to consider lowering minimum score requirements.
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FICO credit scores that were once acceptable risks in the early 2000s — the 640 to 680 range — for mortgage applicants are rarer these days, reports the Los Angeles Times. In more cases, borrowers with FICO scores of 700 are struggling to get approved (FICO scores run from 300 to 850).
But the risk of default on more recent borrowers is much lower than at the onset of the recession, says Joanne Gaskins, senior director of scores and analytics for FICO. The company’s analysis shows that more borrowers are paying on time.
For example, in a FICO-run analysis of a FICO score level of 700 in 2005, about 36 borrowers paid their loans on time for every one who went into serious default. In 2011, about 91 borrowers paid their loans on time for every one defaulting mortgage borrower, marking a big decrease in risk to the lender.
VantageScore Solutions, another credit score company, says its analyses have shown similar results in an improvement of borrowers’ payment behavior. Barrett Burns, president and chief executive of VantageScore, says that mortgage lenders could expand home purchase possibilities for a large pool of consumers by lowering their credit score requirements – even without loosening up on their other standards of down payments or debt ratios.
Every 10 point reduction in a credit score requirement on mortgages has the potential to increase the pool of potential borrowers 2.5 percent, according to a study conducted last year by the Urban Institute and Moody’s Analytics. Therefore, a 50-point reduction in score requirements could potentially increase home purchases by 12.5 percent or by more than 12.5 million households, according to the study.
Some banks recently have moved to cut credit score requirements. For example, Wells Fargo, the nation’s largest mortgage lender, reduced minimum acceptable scores for conventional loans from 660 to 620. It also lowered score requirements for FHA loans to 600.