Lower Mortgage Rates Means Average Borrowers Might Need Higher Credit Scores

Lower mortgage rates could put a damper on home buyers seeking typical 30-year mortgages as lenders could become stricter and require higher credit scores.

Potential homebuyers who are set to start shopping during the peak home buying months should be prepared to have higher credit scores to qualify for the lowest mortgage rates available since the amount of credit made available by banks declines slightly as the rates move lower.

The average 30-year fixed-rate mortgage was 3.58% on Monday and remains the same as last week, according to Bankrate, a North Palm Beach, Fla.-based financial content company. This rate means owners will pay $454 per month in principal and interest for every $100,000 that is borrowed.

"Borrowers with credit scores above 740 are positioned to get the best rates in any environment," said Greg McBride, chief financial analyst for Bankrate. "The ability to get approved is really only in question for borrowers that were marginal at the outset."

While the historically low mortgage rates means consumers can take advantage of lower monthly payments and have an additional 6% in buying power, lenders are tightening their requirements for credit scores since the amount of money they are making is declining, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. The average 30-year rate nationally was 3.6% on May 10, the lowest rate in three years.

"Lenders are being a bit more risk averse than last year when average conforming mortgage rates were closer to 4%," he said. "This makes rational sense, because their margins are very thin."

Higher FICO scores are being required in conforming loans, which include typical 30-year mortgages and FHA and VA loans, compared to the end of 2015 when mortgage rates were 0.50% higher, said Smoke. A jumbo loan is typically one that is over $417,000 in most markets, but  that depends heavily on the location of the home and is at least $625,000 in designated high cost markets.

The average FICO scores for conforming loans were 749 compared to FHA loans of 675 in April while jumbo loan borrowers have a score of 764, he said.

"Lenders are certainly not taking on more risk," said Smoke. "We have witnessed data around credit availability conditions tightening a bit as it was 7% easier to get a mortgage at the end of 2015 compared to 2014. So far this year, credit conditions have tightened by 2% compared to December."

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