Caiaimage/Paul Bradbury/OJO+/Getty Images

Caiaimage/Paul Bradbury/OJO+/Getty Images

If you’re eager to buy a house, go ahead and seek a mortgage preapproval, even if you have imperfect credit. Maybe you’ll be pleasantly surprised.

Mortgage watchers wonder if people with fair-to-middling credit are taking themselves out of the homebuying market because the potential borrowers fear they’ll be rejected for a home loan — even if they would qualify if they would apply.

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Opting out

In a CoreLogic Insights blog post subtitled “If credit underwriting has tightened, why have denial rates fallen?,” Archana Pradhan speculates that qualified would-be borrowers could be opting out of applying for mortgages.

The last few years’ decline in mortgage originations “could be a result of potential applicants being either too cautious or discouraged from applying, moreso than tight underwriting as the culprit in lower mortgage activity,” Pradhan writes.

Excess of caution

Jim Sahnger, mortgage planner for Schaffer Mortgage in Palm Beach Gardens, Florida, agrees that some would-be qualified buyers are too cautious to apply for home loans.

“A lot of people were impacted by the recession and developed credit issues,” Sahnger says. “Combine that with a common message played in the media how ‘it’s so hard to get a mortgage,’ and many have just decided to rent.”

Lenders loosen standards

According to Ellie Mae, the average FICO score for an approved mortgage fell from 737 in July 2013 to 720 this February — an indication that it’s easier to qualify for a mortgage. During the same time, the average FICO score for a denied mortgage application fell even further — from 702 to 645. In other words, lenders are becoming less selective, at least when it comes to credit scores.

Meanwhile, fewer mortgage applicants are being denied. According to data filed under the Home Mortgage Disclosure Act, 13.5% of mortgage applications were denied in 2014, compared to 14.7% the year before. The loan denial rate peaked at 18.5% in 2007.

Staying on the sidelines

Adding to the evidence that potential homebuyers are anxious about their credit scores, an online survey conducted on behalf of Experian found that one-third of future buyers say their credit score might hurt their ability to purchase a home.

The survey found that one-fifth of respondents say they’ll opt out of buying a home for the next 5 to 10 years because of low credit scores. Because it was an online survey, respondents weren’t picked randomly and there is no margin of error.

Make the call

For borrowers with imperfect credit, Sahnger has this advice: “Pick up the phone and ask a mortgage originator to take a look at their situation. We have worked with many folks that thought they couldn’t buy that own a home today. If you believe you have credit issues, let a professional review your credit report. You may find that you are buyer ready today.”

He notes that lending standards vary by lender. “Just because a big bank may have a minimum FICO requirement doesn’t mean a mortgage broker would for a competitive product, be it government of conventional,” Sahnger says.

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