This is affirmed by Ellie Mae’s origination insights report for December 2016. The report covered both purchase and refi loans that closed in December and came up with a profile of borrowers of those loans. As expected, credit score is not the only deciding factor when it comes to mortgages, income and down payment matter too.
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The Borrower Profile
The report presented these key characteristics of borrowers of all closed loans in December:
- Average credit score (FICO) of 726.
- Average LTV of 78%.
- Average DTI of 25%/38%.
In all, (a) 71% of all closed loans and (b) 72% of all closed refis had both an average FICO score of over 700.
Let’s turn our attention to the scores below 700. If you look at the breakdown of the FICO score distribution for closed loans in December 2016, you’d see these credit score trends:
- For purchase loans, borrowers with scores of 650-699 took up 21.45%, followed by 8.72% of those with scores of 600 to 649, then 0.43% of those between 550 and 599, and 0.02% of borrowers with 500 to 549 credit scores.
- For refinance loans, borrowers in the 650-699 range took up 17.69%, followed by 6.96% of those in the 600-649 range, 1.98% of those in the 550-599 range, and 0.97% of those in the 500-549 range.
- For conventional loans (both refi and purchase), borrowers in the 650-699 range had a collective share of 12.63%, followed by 3.21% of those in the 600-649 range, 0.52% of those in the 550-599 range, and 0.21% of those in the 500-549 range.
- For FHA loans in general, borrowers in the 650-699 range took up 36.26%, which is also the highest percentage of its borrowers. Credit scores in the 600-649, 550-599, and 500-549 ranges held 19.63%, 3.39% and 1.48% respectively.
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It can be gleaned that borrowers with a credit score in the mid to low 500s can apply and get approved for a conventional or FHA loan provided that they have a good mix of compensating factors.
These compensating factors help turn around your application should you lack good credit for example. The two most common compensating factors are a large down payment represented by a loan-to-value ratio and a high ability to take on another debt measured by the debt-to-income ratio.
The loan-to-value ratio is basically the loan amount divided by the market value of the home as determined by an appraisal.
The average loan-to-value ratio found in the report is 78%. This means a down payment of 22%. If the LTV is low, as in this case, the risk factor or the chances of defaulting on your loan is considered low.
Your debt-to-income ratio will determine if your income is sufficient for your current and future debts, e.g. mortgages, car loans and personal loans.
There is no golden DTI ratio, but an acceptable one would be (i) monthly housing debts between 28% and 33% of your income, and (ii) total debts, including housing, not exceeding 38% of your monthly income.
The average DTI of 25%/38%, as noted above, safely falls within what is considered to be acceptable.
Obviously you have a fighting chance to secure a mortgage even with bad credit. Lenders look at your overall borrower profile when you apply for a mortgage. The key is to compensate your credit with something else appealing to the lenders.
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