Update: Carrington Mortgage Services now allows FICO scores as low as 500 for both FHA loans and VA loans, which is the minimum credit score for an FHA loan.
Recently, there has been plenty of moaning and groaning about the mortgage “credit box” being too tight.
In a nutshell, banks and lenders have been accused of becoming too conservative, making it difficult for less creditworthy borrowers to obtain financing.
But as home loan lending volume continues to plummet, the obvious “solution” is to expand offerings, namely, by easing guidelines. That, after all, is the easiest way to increase your customer base in the mortgage biz.
Carrington Plans to Serve the Underserved with Brokers
For all intents and purposes, a 550 FICO score is pretty abysmal. In order for your credit score to sink that low you must have done something seriously wrong.
Typically, it means missing a payment or three, whether just a credit card payment or a more major offense, such as a mortgage payment.
Regardless, Santa Ana, CA-based Carrington Mortgage announced today that it would now accept FHA loan applicants with FICO scores as low as 550, down from their prior floor of 580.
Perhaps there isn’t too much of a difference between a 550 and 580 score, but it’s still telling about the direction the mortgage industry is moving in.
With less business to go around, those determined to stay in the game are getting more creative. Whether it’s a full-blown return to subprime lending remains to be seen, but it’s certainly a hint of the past.
For the record, Carrington also lowered the minimum FICO score for VA loans and USDA loans to 550 from 580.
The pricing adjustment for a credit score that low is 2.75, according to a Carrington ratesheet. That will lead to higher closing costs and/or a higher mortgage rate.
But it still provides a source of financing for previously shutout homeowners.
Interestingly, the company plans to eliminate both conventional and jumbo loans from their wholesale product line effective April 1st.
So it appears as if Carrington wants to be the destination of choice for mortgage brokers to send their low-FICO gov loans, ostensibly because they’ll know how best to handle them.
Wells Fargo Used to Be Okay with Even Lower Scores
While 550 sounds pretty darn low, back in 2011 Wells Fargo offered FHA loans with scores as low as 500 following pressure from HUD to loosen up.
However, applicants needed down payments of at least 10% and DTI ratios couldn’t exceed 31%, a combination that was probably pretty rare.
Long story short, most individuals with really poor credit tend to not to have lots of income or assets at their disposal.
And I think that guideline was pretty short-lived because Wells just announced it was lowering its minimum credit score for FHA loans to 600 from 640.
However, I believe that allows for a down payment as low as 3.5%, which is much lower than the 10% requirement for all FHA loans with credit scores below 580.
To sum it up, lenders are coming to terms with reality and easing guidelines. It may not be 2006-2007 just yet, but if volume continues to drop, lenders will need to get increasingly creative if they want to stick around.
Further proof of this loosening is evident in the latest Origination Insight Report from Ellie Mae, which revealed that 33% of closed loans in February had a FICO score south of 700, compared to just 24% a year earlier.
Additionally, the average FICO score for a closed loan was 724 in February, which while still relatively solid, was down from 745 a year ago.
Read more: Getting a mortgage with a low FICO score.