Lenders expand access to borrowers with low credit scores

Minimum Credit Score Requirements

After the bursting of the real estate bubble in 2008, many lenders set a minimum credit score to qualify for a mortgage at about 640. This decision followed as a result of years of high-risk lending practices, causing the most severe housing crash since the Great Depression. Now, as the real estate market is beginning to make a slow recovery, many lenders are reconsidering that score.

Wells Fargo & Co., the biggest U.S. home lender,  cut its minimum credit score two weeks ago for borrowers of Fannie Mae-and Freddie Mac-backed loans to 620 from 660, Bloomberg reports. Other large lenders have also eased their credit guidelines to better serve the large segment of the mortgage market that includes borrowers with credit scores below 640. The U.S branch of Canada’s T.D. Bank also also lowered down payments to 3 percent while loosening credit standards, and Wells Fargo has lowered its minimum score to 600.

Last year, home-purchase loans totaled $652 billion. The Mortgage Bankers Association estimates the total to be closer to $626 billion in 2014.  One factor in this downward trend is rising home prices. Home prices have risen 28 percent since hitting a 10-year low in 2012, making many first-time home buyers hesitant to begin new loans. Lenders are hoping that new, more accessible credit standards will help restore confidence in the market.

“It’s important not to mistake the claim that we should expand access to credit because many worthy borrowers remain locked out of the market, with one that we should return to the days of reckless and unsustainable lending,” James Parrott, a former member of President Barack Obama’s National Economic Council, said to Bloomberg. “The two are not the same.”

With the loosening of credit standards, lenders can expose themselves to more risk. Having the most up-to-date and accurate credit scoring software can aid application processing and help protect lenders.

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