Consumer access to mortgage credit got a little tighter this week as Bank of America became the latest lender to increase its minimum credit score requirement to 640 from 620 on FHA loans. The change creates additional selling hurdles for home builders, particularly those in the entry-level market, at a time when home sales have been sluggish following the expiration of the federal home buyer tax credit in April.
Bank of America's decision to increase its minimum credit requirements follows similar moves by other lending giants such as Chase, Citi, and GMAC, as they try to mitigate mortgage risk. Mortgage industry sources say it's likely that Wells Fargo will follow suit, as early as the end of this week.
Foreclosure activity, which showed month-over-month increases in July and August, according to data from RealtyTrac, is driving the new credit requirements, say industry sources.
"The reason why it's only occurring now is that the 620 to 639 bucket has 10% higher delinquencies than the 640 to 659 [bucket]," said Jeremy Radack, a mortgage consultant.
However, for builders like Eric Lipar, CEO of LGI Homes, an entry-level builder, the new minimums sideline another segment of the home buyer pool. Lipar said 50% of the company's closings in September were with buyers who had credit scores between 620 and 640.
"We are very concerned [with the new credit minimums] from the standpoint that it doesn't need to get any tougher," said Lipar. "If half your people are no longer qualified [to buy a home], you need to spend twice as much to get to the same number of people," he added.
Jamie Pirrello, CFO of Sivage Homes, agreed. "It hurts," said Pirrello of the higher credit score minimums, although he noted his company's mortgage partner still had a credit minimum of 620. "Most of the people at 620 weren't there. We worked to get them there."
Since banks began raising minimum credit score requirements well over a year ago, many builders like Pirrello and Lipar have been working with potential buyers to help repair damaged credit histories through credit counseling programs.
Every time credit standards are ratcheted up, it means more credit counseling for home buyers and more closing delays for home builders.
"It sounds like just another 20 points," said Pirrello. "But it could be two months or it could be six months to fix."
Lipar said his company currently had 150 customers enrolled in a credit counseling program. "We've been working on getting them to 620 and now we have to go back and tell them they've got to get to 640," said Lipar. "That's the pipeline for the future."
The timing of Bank of America's new credit score requirements also coincided with two other major changes: the rollout of the new FHA insurance premiums on Oct. 4 and the news that Bank of America will exit the wholesale mortgage business, meaning it will no longer buy loans from mortgage brokers. Together, these events suggest that as the government reduces its role in the mortgage industry, the private sector may be less willing than anticipated to step up to take its place, leaving a financing hole for home buyers.