Mortgage Lenders Are Getting Stricter, But You Don’t Need A Perfect Credit Score To Borrow

November 13, 2020
Last updated:
April 5, 2022
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Mortgage delinquencies are up, and credit scores are down across the nation. This can make getting approved for a home loan even harder than it used to be. How can you manage to qualify as a borrower without a perfect credit score? The good news is that while some lenders are clamping down, others are eager to pick up the slack.

From larger down payment and equity requirements to lowering the levels of cash-out proceeds for refinanced mortgages, banks and finance companies are revealing a skittishness not seen since the wake of the 2008-2009 financial crisis. This tightening of guidelines comes at a time when low interest rates invite more home financing applications, not fewer. The good news is that you still don’t need a perfect credit score to borrow.

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Why Are Lenders Tightening Standards?

During the last big credit crisis of over a decade ago, closed loans were routinely sold off to the secondary market, where the mortgages could be bundled into securities. When the crash hit, investors in those mortgage-backed securities lost vast sums because of widespread borrower default. The lenders had little choice but to lessen the risk of their borrower pool.

It’s surprising that banks tightened their requirements and cracked down on qualifying parameters for home loans. Requiring a more stringent qualification process of applicants was the only way lenders could protect their own financial health and credit ratings. Such measures restored the confidence of investors in the financial and real estate markets.

The Effect of COVID-19 on the Home Loan Industry

Circumstances today are different, if just as dire. The widespread economic suffering brought on by the COVID-19 pandemic includes job losses and depletion of savings. Many homeowners have been forced to depend on lender forbearance to avoid losing their homes.

The Mortgage Bankers Association reports that available credit has plummeted 26 percent since the onset of the coronavirus. Even in cases where FannieMae, FreddieMac and government-backing agencies like the Federal Housing Administration (FHA) are not making things harder to get a home loan, individual lenders are doing it because of pessimistic expectations about the future.

Even applicants with good payment histories, steady incomes and healthy asset holdings are now given extra scrutiny because of the uncertainty of the times. However, that doesn’t mean that a modest credit score should dissuade you from trying to get a home loan now while interest rates are at their lowest in years.

Which Guidelines Are Getting Stricter?

Lenders are raising the credit score minimums on conventional loans, and hiking down payment and equity requirements as high as 20 percent from minimums of 3.5 percent (the normal range allowable with mortgage insurance coverage). Such changes might price some applicants out of their original plans to get a mortgage loan.

Other lenders have suspended FHA-backed loans altogether, shutting down another avenue to loans that have been traditionally more amenable to lower scores and modest down payments. While many banks say they hope to resume FHA lending soon, others are hedging their bets until public health and economic forecasts are friendlier.

This leaves many borrowers faced with stringent requirements that are growing tighter by the month as banks seek to protect themselves against the possibility of default. Is a home loan now out of reach for a large subset of Americans seeking to fulfill their dream of homeownership? The answer is yes: you don’t need a perfect credit score to borrow if other factors are in your favor.

What Affects My Credit Score?

You want to take advantage of the low interest rates but the opportunity seems to have moved farther from your grasp as credit score goalposts move further and further up the scale. Knowing what goes into a credit score can help you understand how to prevent your score from dipping:

  • Payment history, with negatives being late payments, defaults and collection activity
  • Credit tenure, which describes how long you have maintained credit accounts
  • Credit diversity, which described how many different kinds of debt accounts you have, like installment payments, credit cards, auto loans, mortgages etc.
  • Recent accounts, which are seen as suspicious, especially if you have more than one newly-opened account
  • Ratio of in-use credit to available credit, meaning how much of your available credit you have already leveraged

Some of these elements of your credit score can take more time to adjust than others. One of the three leading credit bureaus, Experian, advises consumers: pay off debt and keep revolving credit balances to a minimum to help boost FICO scores.

What Are My Options With a Modest Credit Score?

If you have what was an acceptable credit score, but which now seems less so based on some lenders’ new requirements,  don’t give up hope. Officially, Fannie Mae, Freddie Mac, and other government-sponsored entities maintain a minimum threshold of 620 for conventional fixed-rate loans.

While larger financial institutions may opt to safeguard themselves by requiring higher credit scores, they do not dictate to smaller institutions, community banks, credit unions and niche mortgage companies. There are many diverse lenders who are happy to step in and work with you even if your credit score isn’t spectacular.

Institutions offering government agency-guaranteed products like FHA and Department of Veterans Affairs (VA)mortgages are traditionally more flexible with credit standards. These programs will not disappear just because some lenders cease to offer them. The nature of the guarantees afford some protection to the lender in the event of default.

Lenders will ask these three questions in addition to pulling your credit score. If these other numbers add up, there’s no reason for decisions to be made purely on the basis of an arbitrary cut-off number. At Sammamish, we believe in making homeowner dreams come true. Things like a larger than usual down payment and a favorable loan-to-value ratio can work wonders when it comes to dealing with a lower credit score.

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Why Choose Sammamish Mortgage?

At Sammamish, our loan officers are skilled at finding the right loan product to fit your credit score and your needs. Even with score minimums on the rise, there are still options for borrowers who have worked hard to prove their capability to repay. A substantial down payment can cover a multitude of credit “sins!”

We will assist you in finding out where and how your credit scores will work for you. Things like a long tenure with an employer, a very consistent and growing income, and high-value assets can raise a lender’s even if your credit scores might not conform to new realities.

Sammamish Mortgage has been in business since 1992, and has assisted many home buyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon and Washington.

Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.

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