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Need A Mortgage? Now’s A Good Time To Apply

So what does it take to get approved for a mortgage to buy a house this fall, whether you’re a first-timer or planning to move up or downsize? Maybe not all that you think.

For most people, the key requirement is that you’ve got the right package of stuff — credit score, down payment, financial reserves, debt-to-income ratio — to get an acceptable grade from the automated underwriting systems, or “black boxes,” installed at the dominant investors in the market, Fannie Mae and Freddie Mac.

Although the intricate webs of algorithms and big data spun inside Fannie’s and Freddie’s black boxes are kept under tight security, we do get monthly readouts on some of the characteristics of loans they’re approving.

For example, this past summer the average FICO credit score for home-purchase loans at Fannie and Freddie was 754. That’s a big reach for millions of would-be buyers. It’s well above the national average FICO score of 700 and considerably higher than what was typical during much of the previous two decades. (FICO scores range from 300 to 850, with higher scores indicating lower risk of default.)

But that’s not the whole picture. According to data newly compiled by Ellie Mae, a mortgage origination software and analytics firm that tracks loan characteristics, substantial percentages of applications are receiving approvals from Fannie and Freddie with lower FICO scores than you might imagine. Nearly 13 percent of their approved loans in June had scores between 650 and 699. Scores like these are typical of consumers who have moderate dings in their files at the national credit bureaus or are bouncing back from credit woes suffered during the Great Recession. Another 4.3 percent of loans approved had even lower FICOs, ranging from the low 500s to 649.

Federal Housing Administration-backed mortgages that closed in June spanned an even broader range of scores. FHA’s average score for home-purchase loans was 683, but more than 1 of 4 (26 percent) of its borrowers had scores from 550 to 649. Just under 2 percent had scores FHA considers the rock bottom it will allow — 500 to 549, numbers that indicate serious derogatory items in applicants’ credit files, possibly even previous mortgage defaults or foreclosures. Note that FHA uses its own proprietary underwriting system, known as TOTAL, which often yields more-generous decisions on approvals than Fannie’s or Freddie’s.

Debt-to-income (DTI) ratios — another major factor hard-wired into the black boxes — can be dealbreakers in mortgage applications that otherwise look pretty good. DTI refers to the ratio between your monthly credit-related expenses — including rent, mortgage payments, credit cards, student loans and the like — and your monthly gross income. If you have $6,000 in income and $2,500 in total debt payments, your DTI is 42 percent.

Fannie’s and Freddie’s average DTIs look strict, but there’s actually more wiggle room for mortgage applicants this summer than any time in recent years. The average DTI for Fannie and Freddie during June was 39 percent. FHA, which tends to be more forgiving on debt matters, had average DTIs in June of 43 percent. But Fannie, Freddie and FHA recognize that even solid, creditworthy applicants can be carrying high debt loads in the current economy, and they are open to higher DTIs than the monthly statistics suggest. In an important policy change taking effect this month, Fannie raised its permissible maximum DTI to 50 percent. A study released last week by the Urban Institute predicts that this change alone could open the mortgage door to 95,000 additional home buyers. That’s potentially a big splash.

Freddie Mac has had flexibility on DTIs built into its underwriting system for years, and it also can go to 50 percent, ideally for borrowers with compensating factors such as a higher down payment or high bank reserves. FHA is by far the most liberal of the three on DTI, funding loans with total debt loads in excess of 55 percent.

Down-payment requirements also are super-low at the moment. Fannie and Freddie both have programs that permit just 3 percent down, and some lenders using those programs have cut that to 1 percent or even zero. FHA’s minimum down is 3.5 percent.

Bottom line: Get rid of preconceived notions you may have about how tough it is to get approved. Standards are more flexible and not as tough as you probably thought. At the very least, check them out.