During my latest mortgage refinance, the loan officer said that he hadn’t worked with a borrower with under an 800 credit score in over two years.
I found this statement preposterous because I clearly remember during my previous refinancing that lenders would look for 720 credit scores or higher to provide the best terms.
The first time we talked, one of the questions the mortgage guy asked was whether I had over an 800 FICO score in order to get the mortgage interest rate he was quoting, a 10/1 ARM at 3% with -2.75 points towards closing.
“Umm, I think so,” I responded with the might of a baby koala.
If I had said “no,” it felt like I would be wasting his time.
After our conversation I did what any good personal finance blogger would have done. Research into the veracity of his boldness. I was surprised at what I found.
But first, let’s do a refresher on credit score fundamentals.
Credit Score Range And Fundamentals
Your credit score ranges between 300 – 850. Therefore, the average credit score should be somewhere around 575-600 if the scores are equally distributed. But they are not.
If your score is between a 300 – 579, you’re probably never going to get credit due to some type of non-payment you made in the past.
If your score is between 580-669, your rating is fair, but you’re still considered a subprime borrower. As a landlord who checks credit scores, I’ve seen doctors right out of medical school with scores in the low 600s due to massive debt and a short credit history.
It’s only after you get over 700 are you considered an attractive borrower. In the past, the magic number was 720 or above. Today, it seems like the average number has shifted to 740 or above.
For more detail, take a look at the FICO score ranges by Experian, one of the big three credit agencies.
Factors That Affect Your Credit Score
We obviously want the highest credit score possible in order to get the lowest borrowing rate and the most amount of credit possible.
You also need at minimum a 580 FICO score to get an FHA loan with the ability to put down only 3.5%. If you have under a 580 FICO score, you need to put down 10%. The more down the better I say.
The FHA government program seems irresponsible to require so little down.
Here are all the factors that affect your credit score.
- Payment history for loans and credit cards, including the number and severity of late payments
- Credit utilization rate
- Type, number and age of credit accounts
- Total debt
- Public records such as a bankruptcy
- How many new credit accounts you’ve recently opened
- Number of inquiries for your credit report
The most important factors in your FICO score are your payment history on loans and credit cards, total debt, and the length of credit history.
Not considered in your FICO score analysis is your race, color, religion, national origin, sex or marital status, salary or occupation, or where you live. It’s the same law when you are deciding on a prospective tenant.
The Average Credit Score Over Time
Now that we know some credit score fundamentals, take a look at the average credit score over time according to Fair Isaac Corporation (FICO).
Are you impressed with your credit score improvement or what? While the chart makes the improvement appear like a San Francisco historical home price chart, in actuality, there’s only been a 2.6% increase since the bottom in 2009 (686 to 704).
Either way, I’m impressed the average American now has a 704 FICO credit score. Not only have we all gotten much wealthier since the financial crisis, but we’ve also gotten financially more responsible.
The trend is our friend!
Since the financial crisis, banks have become very picky about whom to lend to. For example, I was rejected for a refinance back in 2015 because I didn’t have two years of 1099 (freelance income) history despite having a large number of assets.
Even today, despite showing 3X more assets than the amount I’m trying to refinance, my relationship bank is being extremely thorough.
For example, even though I paid off one of my properties in 2015 in which they were the lender, I still have to prove to them the property was paid off by sending the latest insurance policy statement.
Overall, I’ve sent my bank over 30 documents already and counting.
A Real Estate Correction Won’t Be As Bad
With stronger lending standards, low mortgage rates, and a large increase in home equity since 2009, it’s hard to envision another real estate correction similar in magnitude to the one that occurred between 2007-2010.
Think about it.
Let’s say you put down $200,000 on a $1,000,000 home in 2012. You locked in a 10/1 ARM at 3.25%. Since then, your property has appreciated to $1,500,000. Meaning you’ve got at least $700,000 in equity if you didn’t take out a HELOC and spend it.
Further, your income has increased from $170,000 to $215,000 and your liquid net worth and pre-tax investments have increased from $250,000 – $500,000.
Even if your $1,500,000 home has declined by 30%, it’s still worth $1,050,000, or $50,000 more than what you bought it for. You’re certainly not going to suddenly stop paying your mortgage and allow the bank to confiscate your remaining $250,000+ in equity with a foreclosure.
New buyers could get smashed if there’s a correction and they need to sell. But the new buyers today are more creditworthy than the buyers of the past. There won’t be a cascade of foreclosures like before.
A Good Credit Score After All
I was worried that I was telling an untruth when my mortgage guy asked for my credit score. I really didn’t know for sure since the last time I checked was in 2015 during the failed refinance. I just assumed it would stay about 800.
It looks like I was truthful. Here’s my latest credit score of 804 according to Equifax.
What I find interesting about this latest credit score is that it actually went down one point since 2013 when I first wrote about joining the 800 club. There is no secret handshake. But there is a peace of mind you’re always going to get the best terms with lenders.
Perhaps the credit score decline has to do with me paying off my rental condo in 2015 and paying off $815,000 of mortgage debt in 2017 after I sold my rental home. Hard to say because like a Lannister, I always pay my debts.
The other interesting thing about this report is that it says the scores range from a low of 334 to a high of 818, instead of a range of between 300 – 850. Maybe when my credit score was pulled, that was the range at that particular time.
Finally, even though I got an 804, it still only ranks higher than 86 percent of U.S. consumers. This is a very bullish indicator for the economy and the real estate industry. I thought a 804 would be at least in the top 5%.
If someone like myself who is in his early 40s, always pays his bills on time, writes about personal finance 3X-4X a week, and has seen a healthy increase in net worth since 2009, yet is still outranked by 14% of Americans, then surely America as a whole is doing well.