Mortgage rates may be near decades-long lows, but these favorable rates are becoming less and less accessible to borrowers with damaged credit. In fact, for many of these people, loans are starting to become totally unavailable.
In light of the pandemic that has weakened the economy and skyrocketed unemployment, lenders are tightening loan requirements and only accepting borrowers with good to excellent credit. Lenders, of course, have almost always offered borrowers with high credit scores the best rates, but the gap is widening even more now.
In fact, a recent report from the Urban Institute shows that borrowers with a credit score above 720 are able to lock in mortgage rates 78 basis points lower than those with a credit score of 660 or less. .
The availability of mortgages is also declining. According to the latest Mortgage Bankers Association mortgage availability index, loan availability has fallen to its lowest level since December 2014.
“The sharp weakening of the economy and the labor market – and the uncertain outlook – lowered credit availability in April for the second month in a row,” said Joel Kan, associate vice president of economic forecasting and industrial MBA, in a press release.
Overall, it is getting harder and harder for those with poor credit to get a loan and get a low rate.
What credit rating do you need to get a loan?
Credit availability could tighten even further in the coming weeks, blocking even more borrowers with damaged or weak credit.
For example, JPMorgan Chase will not lend to borrowers with a credit score of less than 700 and a 20% down payment. Other big banks are following suit and are also tightening their demands.
This is because your chances of getting a loan with a low mortgage rate are better if you have a credit score of 700 or higher.
As of April 2020, nearly 93% of conventional home loans went to borrowers with a credit score of 700 or higher, according to Ellie Mae’s Origination Insight report. That’s a 3% increase from March 2020. The average FICO score for conventional borrowers buying a home in April 2020 was 756.
Only about 6% of loans went to borrowers with a credit score between 650 and 699, and only 1% of loans went to borrowers with a credit score below 650.
What to do if you are excluded from low mortgage rates
To get mortgage approval at a great rate, start by improving your creditworthiness. It can take several weeks to resolve credit issues and even longer to improve your credit score, so give yourself plenty of time.
Here are the steps you can take to improve your credit:
- Pay off overdue accounts and recent collection accounts.
- Monitor your credit closely by checking your free credit report at AnnualCreditReport.com.
- Make your payments on time every month.
- Leave all credit accounts open.
- Avoid new credit requests.
Here are some steps you can take to get a mortgage with tarnished credit:
- Go around thoroughly. Some lenders offer better financing terms to poor borrowers than others, which can save you thousands of dollars.
- Look for first-time home buyers and other programs used by first-time or entry-level home buyers like FHA, Virginia, USDA, Fannie Mae HomeReady and the Freddie Mac Home Possible plan.
- Get a co-signer with great credit to help you.
- Make a larger down payment if you can. Lenders may be willing to accept a borrower with bad credit in exchange for a larger down payment.
- Shop at more than the big banks and credit unions. Online banks, non-banks, community banks, and mortgage brokers are all options that may have better deals.