Stacking the dice against borrowers |
It will be harder to qualify for a home loan under new Fannie Mae requirements. (Photo: iStockphoto)
Borrowers will need a higher credit score beginning Dec. 12 to get a home loan if their lender plans to sell the mortgage to Fannie Mae, the quasi-government mortgage finance company. Fannie Mae and its sister company Freddie Mac purchase the majority of all residential mortgages and their rules are often followed throughout the industry.
The changes are part of the mortgage market's attempt to tighten credit standards after helping to create a real estate meltdown because of loose lending criteria that led to historic foreclosure rates.
Borrowers with a 20 percent down payment must have a credit score of at least 620, 40 points more than the previous requirement. Fannie Mae will also reject loans where the borrower has more than 45 percent of their gross monthly income going toward paying debt, such as credit card payments, car loans and student loans.
The national average credit score is 680 to 690. Consumers with a credit score below the mid-600s are likely to pay a significantly higher interest rate than those with better scores. A score of at least 750 is required to get the best mortgage rates.
Brian Faith, a Fannie Mae spokesperson, told the Washington Post that loans to people with credit scores below 620 fell seriously behind at a rate about nine times higher than other loans purchased in the same period.
The economy in general and the fear of the banking sector to lend has led to a 2.8 percent drop in lending from July through September by U.S. banks, the farthest drop since 1984, according to federal data.
Most lenders are expected to follow Fannie Mae’s lead and some have already adjusted their criteria. If they don’t, lenders will lose a key source of money. The vast majority of lenders sell their loans to Fannie Mae or Freddie Mac and then use that money to fund more loans.
Although the tightened lending standards will make it impossible for some buyers to qualify for a loan, it will help the long-term credibility of residential-backed securities.
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