Bad Credit? Try a Conventional Loan

    credit score

    According to a quarterly survey conducted by Zillow, homebuyers with low credit scores have a better chance than they have in years of obtaining a mortgage loan.

    The online real estate marketplace said its quarterly Mortgage Access Index (ZMAI) shows that at the end of last year, it was easiest it’s been for borrowers with bad credit scores to get approved for conventional mortgage loans since 2008. That trend is due in large part to some lenders’ willingness to lower their credit score requirements and extend loans to borrowers with scores of less than 680, Zillow said.

    Even borrowers who were previously only eligible for a Federal Housing Administration (FHA) loan due to their bad credit scores, are now more likely to get a less expensive conventional loan with private mortgage insurance, according to Zillow.

    The ZMAI currently stands at 69.4 and dropped 2.1 points from the third to the fourth quarter, but is up more than 18 points from the fourth quarter of 2013. An index reading of 100 would indicate that credit has returned to pre-housing-bubble levels.

    But as the ZMAI climbs, there’s still a long road ahead toward market normalization. Zillow adds that in the fourth quarter of 2014, lenders began to offer fewer financing options to borrowers with low down payments, making them eligible only for an FHA loan. At the same time, the use of “creative” financing like second mortgages or piggyback loans, which are typically used to avoid paying mortgage insurance, fell during the fourth quarter.

    “After several years of rapidly increasing access to home loans, lenders are taking a pause,” said Stan Humphries, Zillow’s chief economist. “With the mini-boomlet in refinance activity late last year, perhaps there was less business imperative for banks to attract new customers with looser lending.”

    “Don’t expect this trend to continue, though,” Humphries said. “The new normal likely lies somewhere between current conditions and those of the early 2000s.”

    “Instead, credit access should continue its slow normalization, although it’s doubtful it will ever return fully to where it was pre-bubble. The new normal likely lies somewhere between current conditions and those of the early 2000s,” he said.

    So, although borrowers and lenders have each extended their reach, it may be prudent to consider possible pullbacks as the housing market inches toward pre-bubble conditions.

     

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