Are Banks Easing Lending Standards?

More borrowers may have an easier time qualifying for a mortgage as banks begin to accept lower credit scores and smaller down payments, according to the latest data from mortgage tracker Ellie Mae.

The average FICO score for a borrower who closed on a home loan last month was 732, a drop from 750 last year, Ellie Mae reports. Top FICO scores are 850. Nearly one-third of borrowers who closed on home loans had FICO scores under 700. That compares to 17 percent a year ago. Meanwhile, the average down payment for a home loan was 19 percent compared to 22 percent a year ago.

"We continue to see things open up ever so slightly month by month," says Ellie Mae President Jonathan Corr.

Many banks are showing these signs. In states that were hit hard by foreclosures, such as Arizona, Florida, and Nevada, JPMorgan Chase reduced down payment requirements on primary home loans from 10 percent to 5 percent. It also dropped its minimum down payment requirement on second homes from 20 percent to 10 percent. JPMorgan Chase says that the markets “have shown strong signs of improvement.”

Still, while some lenders are easing up, mortgage standards remain tight and may even get tighter next year, experts say. A new lending rule that goes into effect in January requires lenders to issue mortgages that meet federal standards or the lenders will face greater liability from borrower lawsuits if the loans default. Learn more about the Qualified Mortgage Rule.

"We're seeing tweaking of the underwriting standards, but it's not a wholesale loosening," says Guy Cecala, publisher of Inside Mortgage Finance. "The pendulum is still too far toward restrictive."

Source: “Home loans become a little easier to get,” USA Today (Oct. 23, 2013)