If you listen to the soothing voices of NPR in the mornings, you may have heard NPR's Wendy Kaufman's interview discussing the challenges of refinancing with lower credit scores. I actually meet with Wendy about a week ago in Bellevue so she could interview me for this piece which I'm told will be airing again around 8:50 this morning PST on KPLU (88.5 a.m.).
You can also read the text version which includes a link to the broadcast: Home Loan Blues: Refinancing Isn't So Easy
Here are some points I'd like to add to the interview:
It is more challenging to refinance (or purchase) in today's market. Especially if you compare it to the wild subprime era of a few years ago…however the pendulum is still swinging tighter. Mortgage guidelines absolutely needed to swing back from subprime, however some people may surprised to experience a mortgage transaction today. The broadcast included a borrower who had to take clear copies of his documents–that would have happened before too assuming his supporting documentation (bank statements) were even required. Today's underwriter is asking a lot more "why" instead of simply checking off a box that was generated by a streamlined automated underwriting system. Qualifying for a mortgage is not impossible but you do need to be cooperative and provide what your mortgage professional asks of you…including that last page of your bank statement, even if it's blank.
With regards to credit scoring, we continue to see the minimum allowed credit score being raised. It used to be that a 700 credit score or higher was considered great. Now there are three different credit score "brackets" with conforming mortgages if your score is in the 700 range. With higher loan to value loans, like FHA, many lenders are requiring a mid-score of 640 or higher (some lenders may go lower but I expect their credit score standards to increase too at a higher rate).
There are programs available for refinancing your home if you have lost equity and/or have a lower credit score. If home owners currently have an FHA mortgage or conforming mortgage that qualifies for a Home Affordable Refi, they may still be able to take advantage of today's low rates. If your home is located in Washington state, I'm happy to review your scenario at no obligation to see if refinancing makes sense for you.
Listen to the NPR interview where I discuss credit scores.
Did not know that the data was scored differently depending on who is pulling the credit. With 1/3 of the U.S. having “bad credit”, do you see a push to bring these people back in the market to absorb the glut of housing?
Jonathan, right now the trend is that lenders and big banks are raising the bar when it comes to credit scores. I think it will be quite a while before they reverse this trend.
Consumers need to check their credit by using the free tools that are available and use credit responsibly.
I also feel strongly that if the government wants to help the housing market, what they need to do is make refinancing easier…if someone has good credit, employment history and income… why have an appraisal? I think they should be waived the same as some Fannie Mae HARP refi’s and FHA streamlines.