It’s Surprisingly Hard to Qualify for a Mortgage Right Now

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Despite historically low mortgage rates and surging home loan originations, for many Americans it may be near impossible to qualify for a mortgage right now.

The Urban Institute released its Housing Credit Availability Index for the third quarter of 2020 today and shows lenders’ tolerance for risk is at the lowest level in at least two decades.

The index decreased by 0.1 percentage points to just under 5%, reaching the lowest point since 1999, as far back as the index measures. That means that while highly qualified borrowers are able to take out loans, people with low FICO scores or in need of riskier products are having trouble getting access to credit.

The median FICO for purchase loans is 40 points higher than the pre-housing crisis level of around 700.

According to Laurie Goodman, co-director of the Housing Finance Policy Center at the Urban Institute, credit requirements to qualify for a mortgage had already been getting stricter prior to the beginning of the COVID-19 pandemic. Credit has tightened even further due to the devastating economic impact of the virus.

“With the huge volume of refinance loans, originators have less time to work with first-time homebuyers with more marginal credit,” said Goodman. “The result: many renters who could qualify for a mortgage, don’t have the high credit profile required to buy a home at today’s low rates. Thus, they miss out on homeownership, which is the single best way to build wealth.”

Record low mortgage rates have led to a dramatic increase in both purchase and refinance loans.

That high demand for loan products has overwhelmed many lenders, especially during the first half of the year when the pandemic hit. As a consequence, many lenders were increasing their minimum required credit scores as a means of slowing down the flow of applications.