Are low credit scores hurting the housing recovery?

The housing market has been slower than many other aspects of the economy to recover from the recent economic downturn, and now some experts believe the reason for that is consumers’ generally lower credit scores.

Millions of consumers across the country experienced a slew of economic problems during the recession, many of which led to their credit scores dropping considerably. And now, some experts are saying that the drop in credit scores – and the tightening of lending standards set by mortgage issuers – have combined to slow the housing market’s recovery, according to a report from the Los Angeles Times. In 2008 and 2009 alone, more than 50 million consumers saw their credit scores drop by 20 points or more, and of those, 21 million saw drops of 50 points or more.

These tighter standards – such as Fannie Mae and Freddie Mac’s new qualifications for obtaining a loan backed by the government-run companies – have locked many would-be borrowers out of being able to obtain the best rates on their mortgages, the report said. Currently, Fannie and Freddie boast average credit ratings of 760 on the FICO scale of 300 to 850, well above the average from 2004 to 2006, when a rating of between 620 and 640 was enough to get a good mortgage rate.

Studies conducted by FICO have also found that the consumers who saw their scores suffer most during the recession were those who had the most to lose, the report said. For example, homeowners who entered the recession with credit scores in the high 700s might have lost as much as 130 points on their rating. That means consumers who previously had a healthier borrowing history – and who would therefore presumably be well-off to some extent – are the ones being locked out of obtaining home loans, when they would likely be the ones who could most afford them.

For consumers who are still struggling to rebuild their credit ratings in an effort to qualify for better loan terms from lenders, it may be a good idea to seek housing counseling, which can help them to better understand the financial hurdles they will have to overcome as they continue to get back on their feet financially.