Lender Survey: Credit Scores Matter, Often More than Downpayment Amounts

In their “Eye on Housing” blog, the National Association of Builders (NAHB) broke down the findings of the April 2015 Senior Loan Officer Opinion Survey (SLOOS), conducted by the Federal Reserve Board. In the survey, banks were asked questions that attempted to judge how they were responding to GSE guidelines issued on November 20, 2014 on life-of-loan representation and warranty exclusions. Following the GSE guidelines banks were only given two variables of a loan application—credit score and downpayment amount—and were asked whether they would approve the application. The results found that overall, a high credit score mattered more to the banks being surveyed than a higher downpayment amount.

According to the NAHB and the survey, when the credit score was made constant, the amount of the downpayment had little influence on banks’ chances of approving the mortgage application. This meant that, on average, if the applicant has a credit score of 620 and a downpayment of 20 percent of the home value, banks would likely not approve the application, as noted in the survey. However, if the applicant’s credit score jumped to 680 and the downpayment remained at 20 percent, the applicant was more likely to be approved.

The survey also broke down this data by bank size, comparing the responses received by large national banks and smaller regional banks. When looking at the responses obtained from the regional banks, the survey found that there was more variance on the downpayment amount the banks would accept—as long as the credit score was high. The survey reported that an equal number of banks were both, more likely and less likely to approve mortgage applications with a credit score of 680 and a downpayment of 5 percent. The same scenario holds even when the downpayment rises to 10 percent.