FICO Scores Hit Record High

FICO Scores Hit Record High

Bajak and Associates

Lesson learned?  Whether they saw their credit decimated by the housing crisis and the Great Recession or merely watched loan standards tightened beyond their ability to qualify, Americans seem to have taken to heart the importance of their credit scores.  The result, FICO says, is that consumer credit scores have reached a new high, an average of 704 points.

How Credit History Impacts Your Credit

Kenneth Harney, in an article for the Washington Post's Writers' Group, quotes FICO Vice President of Scores and Analytics Ethan Dornhelm that Americans are "making more judicious use of credit." This means higher scores on the FICO model that weights them not only in terms of on-time payments but on the length of the credit history, the amount and type of credit a consumer has available, and how much of that available credit is being used.

The 704 point average score, on scale that runs from 300 to 850, is a substantial improvement from the average of 686 in 2009.  Harney points out that a lot of the improvement, 5 points, has been added in the last two years, one of the fastest two-year runups in FICO history.

A score of 704 is considered good, meaning a consumer is a fairly safe bet for performing on a loan as agreed, and usually gets that borrower a fairly good interest rates and other terms.  The best deals are usually reserved for those with scores of 750 or better. However, while FICO scores for most categories of borrowers are rising, Harney points out that the averages for people taking out mortgages are sliding, down from 745 in the years after the crash to about 733.  This, of course, is not a reflection on borrowers but rather an indication that mortgage lenders are relaxing their standards, accepting slightly lower scores in their underwriting.

There are variations in average scores by age. Persons 18 to 29, a range that includes some Millennials and most adults of Generation Z, have an average score of 659.  They will typically have not only credit histories but thinner credit files, many any negative report will weigh more heavily on the score. The average score for people ages 40 to 49 is 690, and for those 60 and older, it's 747.

There are a lot of factors that help account for the overall higher scores.  First, fewer people have truly awful ones.   Those with scores under 500 now constitute 4.2 percent of the total, down from 7.3 percent in 2009 and the share with scores from 500 to 549 has dropped from 8.7 percent to 6.8 percent.

On the other end of the spectrum, 22 percent of those with a FICO number are considered "super-scorers," with a score over 800.  Forty-two percent have scores between 750 and 850.

Some help may have come from a change in reporting by the three major credit bureaus that we noted a few weeks ago. So-called collection reports, defaulted accounts that are sold to a third-party, have been handled differently since the first of this year.  They must be associated with a contract or agreement to pay and marked as paid when they are.  Medical accounts have to be at least 180 days past due before being reported and all collection accounts must have sufficient information to link them to that consumer.  The number of credit files with collection accounts were reported by the Federal Reserve as dropping from 12 percent last year to 9 percent at present.

Dornhelm says that lessons from the housing crisis are clearly affecting scores and consumer behavior.  He thinks more Americans have access to and better understand their credit scores and how to manage them, including managing the amount of their debt.


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Source: Jann Swanson, Mortgage News Daily

Fannie Mae To Ease Financial Standards

Fannie Mae Will Ease Financial Standards for Mortgage Applicants

LenderVolt

It’s the No. 1 reason that mortgage applicants nationwide get rejected: They’re carrying too much debt relative to their monthly incomes. It’s especially a deal-killer for millennials early in their careers who have to stretch every month to pay the rent and other bills.

But here’s some good news: The country’s largest source of mortgage money, Fannie Mae, soon plans to ease its debt-to-income (DTI) requirements, potentially opening the door to home-purchase mortgages for large numbers of new buyers. Fannie will be raising its DTI ceiling from the current 45 percent to 50 percent as of July 29.

DTI is essentially a ratio that compares your gross monthly income with your monthly payment on all debt accounts — credit cards, auto loans, student loans, etc., plus the projected payments on the new mortgage you are seeking. If you’ve got $7,000 in household monthly income and $3,000 in monthly debt payments, your DTI is 43 percent. If you’ve got the same income but $4,000 in debt payments, your DTI is 57 percent.

In the mortgage arena, the lower your DTI ratio, the better. The federal “qualified mortgage” rule sets the safe maximum at 43 percent, though Fannie Mae, Freddie Mac and the Federal Housing Administration all have exemptions allowing them to buy or insure loans with higher ratios.

Studies by the Federal Reserve and FICO, the credit-scoring company, have documented that high DTIs doom more mortgage applications — and are viewed more critically by lenders — than any other factor. And for good reason: If you are loaded down with monthly debts, you’re at a higher statistical risk of falling behind on your mortgage payments.

Using data spanning nearly a decade and a half, Fannie’s researchers analyzed borrowers with DTIs in the 45 percent to 50 percent range and found that a significant number of them actually have good credit and are not prone to default.

“We feel very comfortable” with the increased DTI ceiling, Steve Holden, Fannie’s vice president of single family analytics, said in an interview. “What we’re seeing is that a lot of borrowers have other factors” in their credit profiles that reduce the risks associated with slightly higher DTIs. They make significant down payments, for example, or they’ve got reserves of 12 months or more set aside to handle a financial emergency without missing a mortgage payment. As a result, analysts concluded that there’s some room to treat these applicants differently than before.

Lenders are welcoming the change. “It’s a big deal,” says Joe Petrowsky, owner of Right Trac Financial Group in the Hartford, Conn., area. “There are so many clients that end up above the 45 percent debt ratio threshold” who get rejected, he said. Now they’ve got a shot.

That doesn’t mean everybody with a DTI higher than 45 percent is going to get approved under the new policy. As an applicant, you’ll still need to be vetted by Fannie’s automated underwriting system, which examines the totality of your application, including the down payment, your income, credit scores, loan-to-value ratio and a slew of other indexes. The system weighs the good and the not-so-good in your application, and then decides whether you meet the company’s standards.

Fannie’s change may be most important to home buyers whose DTIs now limit them to just one option in the marketplace: an FHA loan. FHA traditionally has been generous when it comes to debt burdens: It allows DTIs well in excess of 50 percent for some borrowers.

But FHA has a major drawback, in Petrowsky’s view. It requires most borrowers to keep paying mortgage insurance premiums for the life of the loan — long after any real risk of financial loss to FHA has disappeared. Fannie Mae, on the other hand, uses private mortgage insurance on its low-down-payment loans, the premiums on which are canceled automatically when the principal balance drops to 78 percent of the original property value. Freddie Mac, another major player in the market, also uses private mortgage insurance and sometimes will accept loan applications with DTIs above 45 percent.

The big downside with both Fannie and Freddie: Their credit-score requirements tend to be more restrictive than FHA’s. So if you have a FICO score in the mid-600s and high debt burdens, FHA may still be your main mortgage option, even with Fannie’s new, friendlier approach on DTI.

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Source: Kenneth R. Harney, Washington Post