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Trouble Qualifying for a Mortgage? Try Again Later

Lenders tighten guidelines as demand rises

Aug. 17, 2016

By SAM GARCIA Mortgage Daily


portrait of Sam Garcia

Consumers whose credit scores are not among the highest might want to wait until early next year before financing a home purchase or refinancing.

Data from Ellie Mae Inc., a major provider of technology for the mortgage industry, indicates that FICO scores on closed loans averaged 727 in July 2016.

Not only were average credit scores higher than 726 the previous month, but they have increased each month since January 2016, when they averaged 719.

Higher credit scores on closed loans mean that fewer consumers with lower scores are being approved for a home loan.

So why have average credit scores been on the rise?

This is likely due to increased demand.

Mortgage lenders have an infrastructure that can only handle so much loan volume. Expanding the infrastructure and hiring more employees is a longer-term decision based on expected future lending volume.

Recently, interest rates have unexpectedly declined -- making the monthly payments on homes more affordable and increasing the number of existing mortgage borrowers who could benefit from a refinance.

In turn, the number of people applying for residential loans has been greater than what lenders had previously anticipated.

So with infrastructures that can only handle a limited amount of loan volume, lenders are forced to moderate business by tightening lending requirements.

For instance, during the first quarter of this year, economists at secondary mortgage lender Freddie Mac estimated that mortgage originations totaled $385 billion.

During that same period, FICO scores averaged roughly 720 based on Ellie's data.

But during the second quarter, when Freddie estimated $535 billion in U.S. mortgage production, average credit scores climbed to around 724.

The continued increase in average scores during July came as Freddie forecasts $595 billion in third-quarter originations.

So if you're a consumer whose been declined for a loan recently, you might want to try again when mortgage lending slows down.

Based on Freddie Mac's forecast, mortgage originations are expected to fall to $485 billion in the fourth quarter of this year and tumble to $340 billion in the first quarter of next year -- likely making the first few months of 2017 a more fertile time for loan approvals.

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