Mortgage rates are near all-time lows, but don't expect to qualify for them without near-perfect ... [+]
Mortgage rates are still hovering near record lows. According to Freddie Mac, the average rate on a 30-year, fixed-rate mortgage was a mere 3.33% last week—just barely above the record-setting 3.29% seen in early March.
What’s even better? The forecast released by Fannie Mae this month actually predicts rates will go lower, dipping to 3.1% by the third quarter and an unprecedented 2.9% later next year.
While this is certainly welcome news for those looking to get a deal on a new home purchase, it’s not necessarily cause for celebration.
In fact, those low rates probably aren’t even feasible for a large bulk of the population, thanks to tightening lender standards.
In recent weeks, mortgage lenders have been adopting stricter eligibility requirements, fearing a wave of foreclosures in the wake of COVID-19. Chase raised its minimum credit score to 700 for all new home loans earlier this month, while online lender Better.com raised its to 680.
These are just two of the hundreds of lenders that are raising the bar in light of the current health crisis. According to the latest Housing Finance at a Glance chartbook from the Urban Institute, the average homebuyer now has a 731 credit score. The median score is even higher at 740.
“Access to credit remains tight, especially for lower FICO borrowers,” the report reads. “The median FICO for current purchase loans is about 40 points higher than the pre-crisis level of around 700.”
Credit score averages are especially high in markets with big home prices, particularly those on the West Coast. In San Francisco, for example, the average borrower has a 770+ FICO score, and in nearby San Jose, it’s over 760.
Though banks tend to require higher credit scores than independent lenders (756 average score vs. 737), the standards are still tight—especially considering the average credit is just 703 in the U.S.
Consumers under 50—the bulk of first-time homebuyers—are even less likely to have eligible scores, averaging 662 to 684, according to Experian.
According to Ralph McLaughlin, chief economist at Haus, these stricter credit requirements, as well as many other market factors, could hurt both buyer demand and seller activity in the coming months.
“On the demand side, we expect uncertainty over the prospects of the U.S. economy, fears over exposure to the virus during the homebuying process, and tightening of credit standards to dampen demand for homes in the short run,” McLaughlin says. “At the same time, we expect home sellers—who often are also buyers—to hold back on listing their homes because of concerns over their ability to sell and also purchase another home.”
All in all, he predicts it will mean anywhere from a 38% to 45% drop in home sales over the next year.
