You’ve heard it time and time again, that a solid credit score is vital to securing a good mortgage rate, or any mortgage at all.
And it appears that this sage advice is becoming even more relevant today.
Per the latest Housing Credit Index (HCI) from CoreLogic, the average credit score for a home buyer increased nine points year-over-year between the second quarter of 2016 and the second quarter of 2017.
It now stands at a very high 745, which is quite close to the top of FICO’s credit score range of 300-850.
Put simply, it means most of today’s home buyers are very well-qualified, at least in terms of credit history.
It may also signal a seller’s desire to go with a buyer they know will qualify for a mortgage, instead of rolling the dice on someone with subprime credit, or even just average credit.
At last glance, the average FICO score for all Americans was right around 700, so if the average score for home buyers is 745, you might have a problem if you’re batting below that number.
Aside from having a problem, you might also wind up with a higher mortgage rate, and spend more money every single month until you sell or refinance to a lower rate.
Hawaii led the nation in terms of credit scoring, with an average score of 756, followed by California (751), Colorado (751), DC (751), New York, Oregon, and Virginia (all 750).
Mississippi was the worst, at 728, which is still a respectable credit score and close to the top tier (740) in terms of mortgage pricing adjustments.
Just 2% of Home Buyers Had Credit Scores Under 640
Perhaps more startling is the fact that just two percent of these home buyers had credit scores below 640.
Basically almost everyone has at least a near-prime or prime credit score, with very few in the subprime category (below 620).
Back in 2001, some 25% of home buyers had credit scores under 640. And the market seemed to be in good shape at that time.
If you look at the chart above, you’ll see that even the very worst borrowers have credit scores that are 100 or so points higher than they were about a decade ago.
And the top mortgage borrowers are sporting 800 FICO scores, not that there’s any additional benefit for a score that high.
The Competition Is Getting Stronger
The takeaway is that your peers are getting stronger in the credit score department, and if you want to win that bidding war, you better have excellent credit.
Sure, lenders may accept lower credit scores, but the sellers might tell you to take a hike. And as noted, even if you can get the mortgage, why settle for less attractive terms?
The thing I repeat over and over is that credit is something you can control. You might not be able to make a larger down payment magically appear, or get a raise at work, but you have full power over your credit scores. Make the most of it.
For the record, DTI ratios are also dropping, as are loan-to-value ratios (LTVs), meaning today’s home buyers are putting more money down and making more dough. This is happening even as home prices surge.
With inventory severely limited, there are increased expectations for borrowers to be the best that they can be.
Despite these amazing numbers, CoreLogic’s HCI has been on the rise, meaning the mortgage market is getting riskier. They attributed that to a higher share of condo loans and investment properties, and a slight uptick in low doc loans.
But as you can see from the chart below, it’s still a long, long way from the uber high-risk 2006-2007 period. Ideally, it never gets back to that level or we’ll be in big trouble.