Lenders toughen standards for buyers

In some cases, down payments are required to be bigger.

Milwaukee Journal Sentinel

MILWAUKEE — Would-be homeowners with middling credit scores are finding mortgages difficult to come by as wary lenders clamp down on credit.

Credit score guidelines for conforming loans — loans eligible for purchase by mortgage giants Fannie Mae and Freddie Mac — tightened in late February, said Brian Goode, president of Badgerland Mortgage Group Inc. in Racine, Wis.

Customers making a down payment of less than 20 percent of the loan now need a FICO credit score of at least 680, he said, while those borrowing most or all of the value of their homes need scores north of 730.

Two borrowers with very different credit scores might have landed the same interest rate a year ago; now, risk-based pricing, tiered by credit score, has been on the rise since Fannie Mae and Freddie Mac introduced it in December.

Borrowers with credit scores below 680 might have anywhere from a few tenths of a percentage point to a whole point tacked onto their interest rates.

“It used to be that if you had a 620, you could get the same rate as somebody with an 800,” Goode said.

“Now, if they have doubts about your credit, you’re going to pay for them.”

Borrowers with income that is difficult or impossible to verify might need credit scores as high as 730, he said.

The median FICO credit score nationally is about 720, said Craig Watts, a spokesman for Fair Isaac Corp., which develops the model that produces FICO scores.

About 42 percent of consumers have credit scores below 700, according to Fair Isaac.

About 27 percent have scores between 600 and 700, a range in which getting a mortgage is no longer a sure thing, said Jean Badciong, vice president of operations for First Choice Mortgage in Waukesha, Wis.

“Anybody from 600 to 680, we used to be able to do those all the time,” said Badciong, who is also the treasurer of the Wisconsin Association of Mortgage Brokers.

Today, she said, about half the people who come to the company for a mortgage can’t get one.

“Underwriters are going over those files with a fine-tooth comb,” she said.

“We really have to cross all our t’s and dot all our i’s.”

She said customers with credit scores in the mid-600s might not see better access to loan products until late this year or 2009.

Those looking ahead to buying a home should check their credit scores to see if they need to improve them to qualify for a loan, she said.

Sue Stankus, president of Suburban Mortgage Group, of Milwaukee, said mortgage insurers have also tightened credit requirements, making it harder for those who need to borrow more than 80 percent of the value of their homes to get loans.

A year ago, borrowers with credit scores as low as 500 could get mortgage insurance, she said.

The bar for the minimum score to get insurance has crept up gradually since then, and jumped at the beginning of March from about 575 to 620.

The minimum credit score for people who need insurance to borrow more than 95 percent of the value of their home is now 680, Stankus aid.

“A lot of people who previously could qualify for that insurance no longer qualify at all,” meaning they can’t get a loan, she said.

John Scherer, a financial planner with Trinity Investment, said those who expect loans to be handed out as freely as they were a few years ago might need to get used to waiting.

Prospective home buyers need to pay more attention to long-term strategies like building their credit and saving for down payments than they did in years past, he said.