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A recent report revealed the average credit score among home buyers in New Jersey and nationwide. The average score for borrowers using an FHA loan has dropped slightly over the last few years, while the average for conventional mortgage loans has remained somewhat consistent.
The report also showed a significant increase in the average debt-to-income ratio among borrowers. This means that people are qualifying for mortgage loans with a higher level of debt today, compared to in the past.
Average Credit Scores for FHA Loans
In October 2018, the property information company CoreLogic released a report that showed the average credit score among home buyers in New Jersey and the rest of the nation. The report also highlighted trends relating to debt-to-income and loan-to-value ratios among borrowers.
One of the most noteworthy findings has to do with FHA loans and credit scores. According to the October report, the average credit score among home buyers using an FHA-insured mortgage has declined steadily since 2011.
During the second quarter of 2011, home buyers who used that government-backed mortgage program had an average credit score of 709. But by the second quarter or 2018, that average had dropped to 681 — an overall decline of 28 points.
(Note: The widely used FICO credit-scoring model runs from 300 to 850, with a higher number being better. Borrowers with higher scores tend to have an easier time qualifying for loans, and often secure lower interest rates as well.)
This trend suggests that borrowers at the lower end of the credit-scoring spectrum tend to use the FHA program, more so than conventional home loans. It also points to a general easing of borrower qualification requirements across the mortgage industry, which is a topic we’ve covered before.
As the authors of the report pointed out, these changes are “making loans more accessible to borrowers with moderate credit history.”
The average credit score among borrowers using conventional loans has been more consistent, hovering within the 758 – 763 range since 2009.
Borrowers Have Higher Debt Ratios as Well
This report also showed that the average debt-to-income (DTI) ratio has risen steadily over the past year or so. This is true for both FHA and conventional mortgage loans. In short, home buyers in New Jersey and nationwide are now qualifying for mortgage financing with higher debt levels than in the past.
This is partly the result of policy changes made by Freddie Mac and Fannie Mae, the two government-sponsored corporations that buy loans from lenders. Both of the GSEs have raised their maximum limit for debt-to-income ratios to 50%, up from the previous limits of 45%. These changes occurred over the last year or so. Since then, there has been a corresponding increase in the percentage of borrowers with DTI ratios above 45%.
To quote the report:
“The share of loans with DTI ratio above 45 percent has increased for both the conventional and FHA products. For conventional loans, it rose sharply after Fannie Mae’s move. The share, holding steady at between 5 percent to 7 percent from early 2012 up to Fannie Mae’s announcement, had reached 20 percent in Q2 2018. Similarly, the share of FHA loans with DTI ratio above 45 percent had increased to 38 percent in Q2 2018.”
The take-home message for home buyers in New Jersey is that the mortgage industry is more flexible today than in the past. There’s a wide variety of products and programs geared toward borrowers of all kinds.
Have questions? Please contact us if you would like to learn more about the different mortgage financing options available in New Jersey.