Low credit score? You still have a chance at a conventional loan

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Despite fluctuating credit standards, people with low credit scores stand a better chance than they have in years of obtaining a conventional mortgage loan, according to Zillow.

The online real estate marketplace said its quarterly Mortgage Access Index (ZMAI) shows that at the end of last year, it was easier for borrowers with low credit scores to get approved for conventional mortgage loans than it has been since 2008. That trend is due in large part to some lenders’ willingness to lower their credit score requirements and extend loans to borrowers with scores of less than 680, Zillow said.

Even borrowers who were previously only eligible for a Federal Housing Administration (FHA) loan due to their low credit scores are now more likely to get a less expensive conventional loan with private mortgage insurance, according to Zillow.

The ZMAI currently stands at 69.4 and dropped 2.1 points from the third to the fourth quarter, but is up more than 18 points from the fourth quarter of 2013. An index reading of 100 would indicate that credit has returned to pre-housing-bubble levels.

But the news isn’t all positive. Zillow also said that in the fourth quarter of 2014, lenders began to offer fewer financing options to borrowers with low down payments, making them eligible only for an FHA loan. At the same time, the use of “creative” financing like second mortgages or piggyback loans, which are typically used to avoid paying mortgage insurance, fell during the fourth quarter.

“After several years of rapidly increasing access to home loans, lenders are taking a pause,” said Stan Humphries, Zillow’s chief economist. “With the mini-boomlet in refinance activity late last year, perhaps there was less business imperative for banks to attract new customers with looser lending.”

Don’t expect this trend to continue, though, Humphries said.

“Instead, credit access should continue its slow normalization, although it’s doubtful it will ever return fully to where it was pre-bubble. The new normal likely lies somewhere between current conditions and those of the early 2000s,” he said.

Email Amy Swinderman.