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Americans took out a record number of mortgage loans in 2020. In fact, data from the New York Federal Reserve revealed more mortgages originated last year than ever before. The fourth quarter of 2020 alone saw a whopping $1.2 trillion in new home loans.
It's understandable that so many people took out mortgage loans last year. Mortgage interest rates repeatedly hit new record lows. A huge number of Americans flocked to mortgage lenders to refinance or borrow to buy a home at an extremely affordable interest rate. But some people weren't able to take advantage of the unprecedented opportunity.
In fact, the Federal Reserve's data shows it was largely Americans with excellent credit scores who benefited. The median credit score among mortgage borrowers has increased steadily. And it hit a new record high of 786 in the fourth quarter of 2020. This is considerably higher than the overall average credit score in the U.S., which The Ascent's research put at 706 in 2019.
Why are credit scores so high among new mortgage borrowers?
There are a few key reasons why average credit scores among new mortgage borrowers hit record highs.
One explanation is that many of the new mortgage loans were actually refinance loans, not loans to purchase a new home. That means the people borrowing were already homeowners who wanted to lower their interest rates. And homeowners tend to have much higher credit scores than those who don't already own property. The Ascent's research showed 73% of homeowners have scores above 760 compared with just 27% of renters.
Mortgage lenders also imposed more stringent qualifying standards during the COVID-19 pandemic, as a result of the ongoing economic uncertainty. This meant that people needed higher scores to get approved for home loans.
What does this mean for you if you have a low credit score?
If your credit score isn't 786 or higher, you may be concerned about your own ability to get approved for a home loan.
The important thing to remember, though, is that this is just an average. Some people qualify for home loans with much lower scores. You should always try to improve your credit as much as possible before applying for a home loan. That way you can have a broad choice of lenders and borrow at an affordable rate. But you don't have to give up your homeownership dreams if you can't increase your credit score much on a reasonable timeline.
In fact, there are several ways you can buy a house with bad credit. These include government-backed loans such as those insured by the FHA as well as conventional loans aimed at borrowers with imperfect credit. You will need to carefully research these loan options, as they will be more expensive. But many of them are still reasonable. And if you're willing to pay a premium to buy a home before your credit has improved, you should be able to find one that works for you.
If you do opt for a loan that costs more because it has easier qualifying requirements, your credit is still important. It's worthwhile to continue to work on improving it. Your loan can help with that, as you make on-time payments. Over time, you may be able to earn the type of excellent credit that makes you a well-qualified borrower. And when that happens, you could potentially refinance to a loan in the future that offers better terms.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
Our expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See our full advertiser disclosure here.
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