Low mortgage rates increasingly accessible for poor credit score borrowers - Bankrate.com

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Mortgage rates may be near multi-decade lows, but those favorable rates are becoming less accessible to borrowers with damaged credit. In fact, for many of those individuals loans are starting to become unavailable altogether.

In light of the pandemic that has weakened the economy and caused unemployment to skyrocket, lenders are tightening lending requirements and only taking on borrowers with good to excellent credit. Lenders, of course, have pretty much always offered the best rates to borrowers with high credit scores, but the gap is widening even further now.

In fact, a recent report from the Urban Institute shows that borrowers with credit scores above 720 are able to lock in mortgage rates 78 basis points lower than borrowers with credit scores of 660 or below.

The availability of mortgages is falling as well. According to the latest Mortgage Credit Availability Index from the Mortgage Bankers Association, the availability of loans has fallen to its lowest level since December 2014.

“The abrupt weakening of the economy and job market — and the uncertainty in the outlook — drove credit availability down in April for the second consecutive month,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a statement.

The decline was largely driven by lenders dropping low credit score and high loan-to-value ratio mortgage programs. Lenders are also pulling back on products like jumbo loans, HELOCs and cash-out refinances.

Overall, it’s getting tougher for those with poor credit to get a loan and lock in a low rate.

What credit score you need to get a loan

Credit availability could tighten even further in the weeks ahead, locking out even more borrowers with damaged or low credit.

For example, JPMorgan Chase won’t lend to borrowers with less than a 700 credit score and a 20 percent down payment. Other big banks are following suit and tightening requirements as well.

Indeed, your chances of getting a loan with a low mortgage rate are better if you have a credit score of 700 or higher.

In April 2020, nearly 93 percent of conventional home loans went to borrowers with credit scores of 700 or above, according to Ellie Mae’s Origination Insight Report. That’s up 3 percent from March 2020. The average FICO score of conventional borrowers purchasing a home in April 2020 was 756.

Only around 6 percent of loans went to borrowers with a credit score between 650 and 699, and only 1 percent of loans went to borrowers with a score of less than 650.

What to do if you’re locked out of low mortgage rates

In order to get approved for a mortgage with a great rate, start by improving your credit standing. It can take many weeks to resolve credit issues and even longer to improve your credit score, so give yourself plenty of time.

Here are steps you can take to improve your credit:

• Pay off delinquent accounts and recent collection accounts.
• Monitor your credit closely by checking your credit report for free at AnnualCreditReport.com.
• Make payments on time every month.
• Leave all credit accounts open.
• Avoid new credit inquiries.

Here are some steps you can take to get a mortgage with tarnished credit:

• Shop around thoroughly. Some lenders offer better financing terms to poor credit borrowers than others, which can save you thousands of dollars.
• Look for first-time homebuyer programs and for other programs used by first-time or entry-level buyers like FHA, VA, USDA, Fannie Mae HomeReady and the Freddie Mac Home Possible plan.
• Get a co-signer with excellent credit to help you.
• Make a bigger down payment if you’re able. Lenders may be willing to accept a borrower with bad credit in exchange for a larger down payment amount.
• Shop at more than just big banks and credit unions. Online banks, nonbanks, community banks and mortgage brokers are all options that may have better deals.

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