New data highlights a marked increase in homebuyer credit scores last September; they were the strongest they have been in a minimum of six years. Encouragingly well-funded borrowers utilized the decline in mortgage rates, and lenders implementing more stringent credit standards was a contributing factor.
In September, the mean credit score for mortgage acquisitions stood at 736, a record high since market intelligence firm Intercontinental Exchange (ICE) first started recording the data. Compared to pre-pandemic figures in 2019, this is significantly higher, averaging about 10 points more. A study by Realtor.com fortifies this trend, revealing that mortgage credit scores were approximately 20 points above the national average.
However, this intensifying credit standards might indicate that it's increasingly challenging for those with lower credit ratings to secure a mortgage. "This points to an upswing in credit criteria in credit offerings, with most lenders now putting more emphasis on minimizing risk," said Phil Crescenzo Jr., the Southeast Division's Vice President at Nation One Mortgage Corporation. He added that prospective buyers with lesser credit scores might face limited offerings, denial, or even elevated interest rates.
Trends in the real estate sector often reflect more extensive economic patterns in the U.S. Therefore, increasing mortgage credit scores signify that securing a home loan might be more challenging despite decreased rates. As borrowing costs, previously soaring, start to shrink, experts suggest the housing market demand is increasing.
Mortgage rates have surpassed 6% for over three years, even hitting over 7% occasionally. However, when the rates dropped below 6.3% around mid-September, it marked the lowest point in almost a year. This gave financially well-off buyers an opening to penetrate the market.
According to Danielle Hale, the chief economist of Realtor.com, the recent boost in credit scores is by and large due to those who are entering the market to either refinance or purchase a home as rates get better.
Adding to this, ICE data shows the average credit score for refinancing surged to 722 in September, indicating homeowners with substantial mortgage loans are eagerly looking for opportunities to refinance at reduced rates.
"Refinancing typically sees a rise in credit scores when rates get better. Borrowers with a higher credit profile tend to have larger loan balances, which do not necessitate as much rate incentive to break even on refinancing," said Andy Walden, the Head of Mortgage and Housing Market Research at ICE.
While credit scores are a key consideration, lenders also evaluate a borrower's income and savings, indebtedness, down payment amounts, and mortgage type when approving a home loan. Credit scores can also greatly influence the mortgage rate offered to borrowers.
"Credit score holds considerable weight in determining the final interest rate offer, but it isn't the sole criterion. Buyers who are serious about their credit status will receive the most favorable terms," noted Crescenzo.
Experian data suggests that in September, borrowers with a credit score of 740 could be eligible for a 30-year mortgage rate of 6.63%. However, for those with a score of 700, the rate jumped to 6.83%, while borrowers with credit scores of 660 were offered a 7.04% mortgage rate.