More people are getting home loans with lower credit scores and smaller down payments.

Last month, the average FICO score for a closed home loan was 732, down from 750 a year ago, shows data from mortgage tracker Ellie Mae.

The average down payment was 19%, vs. 22% a year ago. What’s more, almost one-third of closed loans had FICO scores under 700, vs. 17% a year ago. The top FICO score is 850.

“We continue to see things open up ever so slightly month by month,” says Jonathan Corr, Ellie Mae president.

The standards to get a home loan remain tight, mortgage experts say. But lenders are reducing some restrictions as housing prices recover and as higher interest rates curtail their refinance business.

“We’re starting to see some of the banks … get more creative … to drive more volume to the door,” says Jeff Taylor, managing partner at mortgage analytics firm Digital Risk.

Earlier this month, Bank of America dropped its minimum down payment requirement for non-conforming loans under $1 million to 15% from 20%. Non-conforming loans, which cannot be sold to Fannie Mae or Freddie Mac, are over $417,000 in most parts of the country.

Wells Fargo also reduced non-conforming loan minimum down payments to 15% from 20% in July.

JPMorgan Chase, meanwhile, reduced down payment requirements in Arizona, Florida, Nevada and Michigan — states that were especially hard hit by foreclosures.

The bank’s minimum down payment is now 5%, down from 10%, for primary homes and 10%, instead of 20% for second homes in those states. The change brings down payment requirements in those states in line with others, says JPMorgan spokeswoman Amy Bonitatibus.

“These markets have shown strong signs of improvement,” Bonitatibus says. Improving home values lessen risk for lenders.

While U.S. home prices were up 12.4% in August from a year ago, they were up more than that in Arizona, Nevada and Florida, CoreLogic data show. Michigan was up 12.3% year over year.

JPMorgan and Wells made their changes in July after a sharp interest rate spike in May cut into the refinance business.

Along with improving home prices, more access to private mortgage insurance is also enticing lenders to do smaller down payment loans, says Keith Gumbinger of mortgage tracker HSH.com.

Mortgage giants Freddie Mac and Fannie Mae require mortgage insurance for loans where borrowers have less than a 20% stake. When the housing market crashed, the mortgage insurance industry lost billions and insurance became tough to get. Now that industry is recovering, too, Gumbinger says.

While banks are easing some loan requirements, home lending standards remain tight and will likely stay there, says Cameron Findlay, economist at Discover Home Loans.

New lending rules expected to take hold in January require lenders to make home loans that meet federal standards or face greater liability from borrower lawsuits should the loans go sour.

Findlay doesn’t expect lenders to do many loans that fall outside of the those standards.

“We’re seeing tweaking of the underwriting standards, but it’s not a wholesale loosening,” says Guy Cecala, publisher of Inside Mortgage Finance. “The pendulum is still too far toward restrictive.”

Source: Julie Schmit, USA TODAY October 23, 2013

Tags : Advisors, banks, Consutants, Dan Lussier, Down Payments, Fannie Mae and Freddie Mac, FICO score, Home loan, JP Morgan Chase, Judie Woodall, SREA, strategic real estate advisors

Mortgage lenders are starting to accept lower credit scores and smaller down payments.

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