How big a whack did your credit scores take during the grim years of economic distress following the housing bust? Was it 20 points, 50 points, 100 points – or maybe no drop at all?
These are key questions affecting millions of potential homebuyers who hope to qualify for mortgages and current owners looking to refinance. New research from a major credit-risk evaluation company suggests that the drop in huge numbers of Americans’ scores was dramatic.
FICO (formerly known as Fair Isaac Corp.), which developed and markets the eponymous score that dominates the home mortgage field, found that during 2008-09, approximately 50 million consumers in this country saw their FICO scores plunge by more than 20 points. Nearly 21 million of these lost more than 50 points. Many lost 100 points or more because of the most severe delinquencies.
During the same period, lenders and investors began ratcheting up their standards for acceptable scores and to extend special preferences in fees and interest rates to loan applicants who rank among the highest scorers. Consider these developments:
• Loans originated for purchase or guarantee by the two dominant home loan investors – government-run Fannie Mae and Freddie Mac – now carry average FICO credit scores in the 760 range and above, record highs for both companies. That’s good for them, but not necessarily for you if you need a loan. (FICO scores range from 300 to 850; higher scores indicate lower risk of default.)
• Even new mortgages being insured by the Federal Housing Administration – traditionally the fail-safe financing refuge for first-time buyers with modest incomes and less-than-perfect credit histories – now have average credit scores slightly greater than 700.
••During the housing boom years of 2004-06, by contrast, a score of 620-640 was adequate to earn you a good mortgage rate and terms at Fannie Mae and Freddie Mac. At FHA, the agency often approved loans where FICO scores were in the mid-500s with barely a blink.
Earlier FICO studies found that the deepest score declines – creating the toughest challenges for obtaining new credit on affordable terms – have been among borrowers who ranked among the credit elite. Homeowners with scores in the high 700s may have lost as much as 130 points when they fell three months behind or more on loan payments. They might have lost as much as 160 points when they negotiated a short sale with their bank and as a result had unpaid deficiency balances left over.