Are Subprime Borrowers Back From the Dead?

After the housing bubble burst, it seemed like the subprime mortgage market was dead, never to return.  But one major bank has resurrected the subprime mortgage.

Wells Fargo says it will consider mortgage applicants with credit scores as low as 600, says Franklin Codel, a Wells Fargo mortgage executive. The minimum credit score had been 640, and this change applies to purchase mortgages guaranteed by the Federal Housing Administration.

Lenders routinely re-evaluate their standards as consumer credit trends shift, and Wells Fargo considered applicants with credit scores in the low 600s as recently as the fourth quarter of 2011, said Tom Goyda, a Wells Fargo spokesman. In fact, that threshold was 500 in January 2011. The 640 benchmark had been in place since about November 2012, before the change to 600 last year.

Credit Scores & Mortgages

There are dozens of credit scoring models, but most lenders use the 301 to 850 range, and anything in the 600 to 649 bracket is considered poor, or subprime. Consumers in the next highest credit tier (650 to 699, aka near prime) enjoyed increased access to home loans over the last several quarters, according to data from Experian-Oliver Wyman Market Intelligence Reports and Experian’s IntelliView tool. (The tool uses the VantageScore model but breaks down borrowers into tiers like prime, near-prime, etc.)

In the third quarter of 2013, the most recent data available from Experian, subprime borrowers made up 5% of new home loans, and that share has hovered between 3% and 5% for several quarters. It’s a bit different if you look at the near-prime borrowers: 21% of new home loans in the third quarter went to near-prime borrowers. A year earlier, they made up 16% of originations.

Increasing Mortgage Access With Caution

New mortgage regulations went into effect in January, so it remains to be seen how those impact consumers’ access to home loans. Borrowers must meet strict ability-to-repay requirements mandated by the Dodd-Frank Act. Credit scores are only part of the equation.

For example, when Wells Fargo took applications from aspiring homeowners with credit scores of 500, Goyda said a lot of those people didn’t satisfy other criteria required for FHA loans, and this may be the case with applicants in the low-600s. Still, the idea is to open up loan products to consumers who have recently been underserved by the mortgage industry.

“We’ve done what we believe is an appropriate balance of access to credit — especially for first-time and low-income homebuyers — with responsible lending,” Goyda said. With the lending market flowing more toward purchase mortgages, as opposed to refinancing, Goyda said those consumer groups could use more support.

Whether such a shift truly increases credit access, given the other changes to the mortgage application process, remains to be seen.

Knowing your credit score is always a big part of the homebuying process, however. If your credit score is lower than you’d like it to be, consider allowing yourself time to improve it before filling out mortgage applications. It’s not the only thing lenders consider, so it’s also necessary to organize the documentation needed to get a home loan, but a good credit score can be the gateway to homeownership.

Using a free tool like the Credit Report Card, you can see two of your credit scores and analyze which behaviors are helping or hurting those scores. If you’re worried about having a good enough credit score to get a home loan, it’s smart to see where you stand now and use that information to help you raise your scores going forward.

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