Consumers looking for mortgage, auto or personal loans today may be surprised at their interest rates. A few years ago scores in the 600s were considered adequate for a loan approval at a moderate interest rate. In April of 2008, that required credit score jumped to 740. According to Rodney Anderson, senior managing partner of Rodney Anderson Lending Services, “What once was thought of as acceptable credit is no longer going to get consumers the money they need. Some people would kill for a 600 credit score, but in today’s world lenders are looking for a much higher score… scores in the 600s are considered risky.”
The state of lending today
Prior to the recession any score of 700 or higher would have no problem finding a lender. Now, rate adjustments begin at 740, with every 20-point drop adding another adjustment. The result of the shift in credit scores is that people with decent scores need to pay more for loans or make quick changes in their credit habits to increase their scores. Some drops in credit scores may even be hidden to consumers. For example, Todd Huettner, president of Huettner Capital, said, “One of my clients always had a credit score of 740. When she went to refinance, she found out her score was at 719. The reason was she put a new washer and dryer on a store credit card. Many store cards are actually revolving credit, which means your limit is essentially your starting balance. So that purchase maxed out her card and caused a 20-point score drop.”
How things changed in the world of credit
Last year the nation’s two largest mortgage lenders, Fannie Mae and Freddie Mac, struggled in the market. Due to the lending crash, both companies changed their definition of “risk.” Any borrower with a credit score below 720 fell under this new definition and is affected by its change. Sean Cragg, VP of sales for Gold Star Mortgage Financial Group, said, “These fees have nothing to do with the mortgage company or its various products and cannot be negotiated away.” All providers of mortgage, auto and personal loans must comply with the new rules. Only financial institutions holding their own portfolios can dictate and follow their own guidelines.
Is there hope for the future?
So the question is: Is there hope for the future in lending? David Chung, managing director of CreditXPert, Inc., said, “There are many factors, including proposed legislation and regulation that continue to change the mortgage lending landscape. In the near term, it is more likely that this benchmark will continue to rise than fall.”
To individual borrowers that means more difficulties in finding funding. Chung added, “Often, lenders will quote rates that include the adjustments, without calling attention to them, in order to avoid a negative reaction from their customer.” What is stable, however, are the general requirements for finding funding. In today’s world of credit, here are the requirements:
- Great credit
- Stable income, with a minimum of two years of steady employment
- Reserves after closing
- Low debt-to-income ratio
- Good loan-to-value percentage
Being proactive with credit
For any consumer looking for mortgage, auto or personal loans, it is more important than ever to work on credit scores. Chung said, “Virtually everyone can raise their scores by at least 10 to 20 points, sometimes significantly more in 30 days.” It may take some persistence and care, but in the end the savings will be worth it.