CRYSTAL LAKE – Lenders are slowly easing the standards needed to score a home mortgage, a trend that – coupled with down-payment incentive programs – is opening the market to more buyers, local bankers say.
Whether a county rattled by foreclosures and flooded by rental properties notices it, those bankers say, is a different story.
“I think people do not know,” said Eric Schroeder, president of Mortgage Capital Group in Crystal Lake. “They believe that their only option is to go out and rent.”
Standards required to buy a home tightened after the housing market went bust. But credit score requirements have started to ease and lenders are starting to warm to the idea of buyers receiving help with their down payments.
Federal and state housing assistance programs offer grants of up to $10,000 for qualifying buyers.
In Crystal Lake, Home State Bank also offers its own “Helping Hand” plan, a down-payment assistance program that offers some borrowers up to $8,000.
“Under these programs, borrowers can get into a home with as little as $1,000 of their own money, believe it or not,” said Greg Grojean, Home State Bank division president. “When you talk about easing [standards], for us, this has been huge.”
Some banks also now will allow borrowers to put gift funds from a family member or nonprofit group toward the home.
And in some cases in McHenry County, with the price of homes back on the rise, sellers are willing to pay a portion or all of closing costs, Schroeder said – lessening the upfront burden on a buyer.
Maybe even more encouraging for the potential buyer is the fact credit score requirements are easing, some say. In the last year, Mortgage Capital Group has gone from viewing the number as a hard-line yes or no to seeing it as a piece of a bigger picture, Schroeder said.
Credit scores, which range from 300 to 850, represent an individual’s past credit history and, for lenders, serve as a basis for determining the likelihood that a borrower will hold up their end of the deal. A heavy period of foreclosures in the past seven years means many would-be buyers are strapped with poor credit and left on the outside of mortgages looking in.
But local banks have started showing a willingness to look past dinged credit, Schroeder said.
“Credit score requirements in the last year have gone down,” he said. Factors such as a good job and bank assets can help balance a less-than-stellar score, he added.
But Shelley Rhoades, mortgage lender at Castle Bank in Huntley, notes that conventional loans still go through Fannie Mae and Freddie Mac, and therefore are still subject to stringent credit-score requirements.
A score of 620 is the lowest qualifying score, she said. The lowest interest rate is reserved by Fannie Mae and Freddie Mac for credit scores of over 740.
“In the conventional world, the credit score is very much used to determine the interest rate you’re given,” Rhoades said.
The changes represent growing confidence in the market. But they also are a sign that community banks are having to draw more on loans to bring in earnings, said Dave Weber, senior lender of State Bank Group, which has six branches in McHenry County.
“Everyone was pretty tight in their credit standards, and then all of a sudden you need earning assets, and everybody is out here trying to get the same business,” Weber said. “It forces everyone to be a little more competitive.”
State Bank Group has lowered standards by 5 percentage points to a 20 percent down-payment requirement, Weber said. And the group’s “back-end ratio,” a figure that deals with how much of a borrower’s gross monthly income can be tied up in debt payments, has risen from 40 percent to 43 percent – consistent with regulators, Weber said. The group also will approve down-payment gifts if other factors meet their standards.
“We’ve eased our standards a little,” Weber said. “But we’ve been one of the more conservative lenders through the whole thing.”