Private-sector mortgage lenders are warming to lower credit scores and down payments, although the underwriting bar remains high by historical norms.
According to Ellie Mae, credit scores for borrowers requesting conventional home loans dropped to 755 in March from 761 a year earlier. At the same time, Black Knight Financial reports that more than one in six home loans made outside of the FHA in the past year included down payments of less than 10 percent. While that falls short of the nearly 44 percent market share that low-down-payment mortgages claimed at the top of the housing bubble in early 2007, it is still the biggest amount since 2008.
The shift is not only a reflection of growing confidence in residential real estate but also an acknowledgement that the refinance market -- once a cash cow -- has all but dried up. Lenders now must compete to maintain and/or grow their share of the origination market, which means approving more borrowers with imperfect credit or smaller down payments. However, they do not appear to be revisiting the reckless lending practices that produced the credit bubble. "Credit is loosening, but it is loosening from a tight starting point," notes Mortgage Bankers Association chief economist Michael Fratantoni.
Smaller lenders are hoping to attract first-time home buyers with their relaxed underwriting criteria; while bigger lenders are easing down payments on jumbo loans.