A strong labor market coupled with lower borrowing costs has put Americans in better shape to get a mortgage, based on average FICO scores and debt ratios for closed loans.
The average FICO score for a closed mortgage was 728 in May, matching April’s level that was the highest reading since the end of 2016, according to data from Ellie Mae. Debt-to-income ratios, known as DTIs, matched the prior two months that were the best since mid-2017.
The average “front end” ratio, measuring income compared to the debt incurred by the new monthly mortgage payment, was 25%. That ratio improves as mortgage rates go down even if borrowers aren’t earning more money because it lowers a loan’s monthly bill. The average “back end” ratio, measuring all recurring debt including housing payments, stood at 38%.
Higher FICO scores weren’t the result of lenders ratcheting up standards. The Mortgage Credit Availability Index that measures how easy it is to get a loan was near a 10-year high in May, according to the Mortgage Bankers Association.
The average U.S. rate for a 30-year fixed mortgage stood at a two-year low of 3.82% for the first two weeks of June after falling through most of 2019, according to Freddie Mac. This week, the rate rose two basis points to 3.84%. A year ago, it was 4.57%, the mortgage financier said.
“Today’s low rates, strong job market, solid wage growth and consumer confidence are typically important drivers of home sales,” Freddie Mac Chief Economist Sam Khater said.
Mortgage rates have tumbled as investors worried about the slowing of the U.S. economy and trade tensions between the U.S. and China, the world’s two largest economies, ratcheted up. The Federal Reserve left its benchmark rate unchanged at the end of a two-day meeting on Wednesday but dropped the word “patient” from its statement, signaling a rate cut may be coming as soon as next month.
For the year, the 30-year, fixed-rate mortgage will probably average 4.1%, down from 4.6% in 2018, Freddie Mac said in its June forecast. Broken out by quarters, the average rate was 4.4% in 2019’s first quarter, the lowest in a year, and probably will average 4% in for the balance of the year, according to the forecast.
Unemployment in May remained at a 49-year low of 3.6% in May, according to the Bureau of Labor Statistics. While incomes are climbing from their post-recession bottom in 2011, the growth has been slow after adjusted for inflation, said Gordon Green of Sentier Research.
“We are at a point now where real median household income is 3.5% higher than January 2000,” he said. “Not an impressive performance by any means over a period spanning almost two decades, but the overall trend line has been positive for about seven years.”