November 18, 2010 – Several years ago, the mortgage underwriting standards of banks were so liberal that nearly anyone could get an approval, regardless of income levels or credit scores. The subsequent real estate crash and huge number of mortgage defaults since those easy lending days has resulted in much tougher underwriting standards.
Many borrowers with adequate income and home equity are still unable to refinance or purchase a home due to credit scores that are below the minimum requirements established by the banking industry.
It is estimated that one third of all Americans are now unqualified for mortgage approval based on credit score.
According to research from Deutsche Bank, the number of Americans with credit scores below 600 has increased to 26% from only 15% prior to the start of the recession. Further examination of credit data reveals that 9% of all Americans have a credit score in the 600-649 range.
Based on current credit score requirements for a mortgage approval, any applicant with a score below 600 is almost certain to be turned down by a banking institution. Borrowers in the 600-649 range are also considered “weak” candidates with a high turn down rate, especially if the credit score is below 620.
Based on the total number of Americans with a credit score of 649 or lower, up to 35% of all Americans are effectively locked out of the refinance or purchase mortgage market for the foreseeable future.
If a low credit score is the primary reason for not being able to refinance and benefit from the lowest mortgage rates in history, there are steps that a consumer can take to raise the credit score. For example, a low credit score may be due to inaccurate information on the credit report which can be relatively simple to correct.
Credit scoring is done using complex models employed by the major credit reporting bureaus that assess factors such as how much credit is currently being used, open collections, amount of debts outstanding, payment history, number and type of accounts and the age of open accounts.
Learning how the credit scoring system works, what can cause a credit score to change and what steps are necessary to improve a credit score can result in a significantly higher credit score and lower consumer borrowing costs. A great way to get started is to take advantage of information offered by government agencies.
The Federal Reserve has published a comprehensive consumer’s guide on Credit Reports and Credit Scores which provides answers to the most common and important questions about credit. In addition, the Fed has a separate section of in depth information on Improving Your Credit Score. The time invested in learning about credit and how to improve a credit score is time well spent since it can result in saving thousands of dollars a year through lower rates on revolving, installment and mortgage debts.