Borrowers with Low Credit Scores Found it Easier to Get a Home Loan in 2014

Mortgage lending standards loosened in 2014, making it easier for borrowers with low credit scores to get a mortgage, but borrowers with low down payments saw financing options begin to tighten in the fourth quarter, according to the quarterly Zillow® Mortgage Access Index (ZMAI). Overall, it was still easier for home buyers to access credit in 2014 compared with the prior year.

The Index, which currently stands at 69.4, 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.

In 2014, lenders lowered their credit score requirements for conventional loans, opening the door to a new subset of borrowers - those with scores of less than 680. Borrowers who were previously only eligible for an FHA loan due to their low credit scores are now more likely to get a less expensive conventional loan with private mortgage insurance.  At the end of 2014, it was easier for borrowers with low credit scores to get conventional loans than it had been since 2008.

However, in the fourth quarter of 2014 lenders began to offer fewer financing options to borrowers with low down payments. This move forced borrowers who may have previously been able to get a conventional mortgage with a low down payment back to FHA loans. Additionally, the rate of creative financing like second mortgages or piggyback loans, which are typically used to avoid paying mortgage insurance, fell in the quarter.

"After several years of rapidly increasing access to home loans, lenders are taking a pause," said Dr. Stan Humphries, Zillow 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. 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."

Variables Used to Calculate the ZMAI	Q4 2013	Q3 2014	Q4 2014
Private Mortgage Insurance (PMI) Percentage i	43.9%	47.3%	45.7%
Second Mortgage Prevalenceii	8.6%	12.4%	12.0%
Debt-to-income ratioiii	44%	44%	44%
Credit Scoreiv	682	673	674
Non-conforming Loansv	8.6%	9.8%	9.6%
Mortgage Rate Spread (percentage points)vi	1.42	1.64	1.69
Zillow Mortgage Quotesvii	35%	53%	53%
Zillow Mortgage Access Indexviii	51.1	71.5	69.4