Loan requirements pretty flexible

What does it take to get approved for a mortgage this summer? Maybe not all you think.

For most people, the key requirement is that you’ve got the right package of stuff — credit score, down payment, financial reserves and debt-toincome ratio — to get an acceptable grade from the dominant investors, Fannie Mae and Freddie Mac.

Although their automated underwriting systems, or “black boxes,” rely on secret webs of algorithms and big data, we get monthly read-outs on approved loans.

For example, in June the average FICO credit score for new borrowers was 754. That’s a big reach for millions of would-be buyers; 700 is the national average. (FICO scores range from 300 to 850.)

But that’s not the whole picture. According to data compiled by Ellie Mae, a mortgage analytics firm, nearly 13 percent of loans approved in June came with scores between 650 and 699. That’s typical of consumers who have moderate dings in their credit files or who are bouncing back from the Great Recession.

But 4.3 percent of loans came with even lower FICO scores, from the low 500s to 649.

At the Federal Housing Administration, its underwriting system yields more-generous approvals than Fannie’s or Freddie’s. The average FHA credit score was 683 in June, but 26 percent of borrowers had scores from 550 to 649, and just under 2 percent had rock-bottom scores from 500 to 549. Those scores indicate serious credit-history problems, such as mortgage defaults.

Debt-to-income ratios, which score how much monthly income goes to pay off any kind of debt, are another major factor hard-wired into the black boxes. They can be deal-breakers in mortgage applications that otherwise look pretty good.

For June, FHA had an an average DTI of 43 percent, and Fannie and Freddie, 39 percent. But they all have more wiggle room than that implies. They recognize that even solid, creditworthy applicants can be carrying high debt loads in the current economy.

In a policy change taking effect this month, Fannie raised its permissible maximum DTI to 50 percent. Freddie Mac has used 50 percent for years for borrowers with “compensating factors,” such as a higher down payment. And FHA funds loans with total debt loads in excess of 55 percent.

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

Bottom line: Get rid of preconceived notions about how tough it is to get approved. Standards are more flexible than you probably think.