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Credit Score Requirement to Rise Despite Disappearing Loans

By Sally Maison
Published: Wednesday, September 30th, 2009

A mortgage financier funded by federal government is raising its lending standards in the coming months. The announcement was made amidst the decrease in the number of individual loans nationwide, a decision which puzzles consumers.

Credit Score Requirement to Rise Despite Disappearing LoansFannie Mae is increasing the minimum required score for mortgage loan applications by 40 points. The current minimum credit score is 580 which will rise to 620 starting November 1. This will be the new requirement for all manually underwritten and government loans. As for loans underwritten using Fannie Mae’s Desktop Underwriter, the increase will take into affected after the software is updated which is set to be on December 12. However, loans for non-traditional credit which are manually underwritten do not have to meet the new credit score minimum. Offerings from Fannie Mae’s Refi Plus are also part of the exception.

A newly published report by The Wall Street Journal reveals that the majority of loans in April and May were for mortgage refinancing and renewal of credit to business organizations. This means that borrowers were merely applying for new credit to settle old debts. Consumers are puzzled by the new move by government-backed lender, since they think that the government should stimulate activity in the debt sector to help the country fully overcome the economic crunch.

However, risk management is on top of Fannie Mae’s priority list, so they choose to increase the minimum credit score requirements, explains a spokesman. Brian Faith of the government credit service says the delinquency rate of borrowers whose credit scores are below 620 has risen up to nine times. He adds that the federal government strongly relies on Fannie Mae during credit crunch, which is why they cannot afford too much risk. The firm says that it is changing its lending practice to ensure more sustainable funds for housing applications. In an official statement, Faith says that the move is aimed to protect borrowers against instability in the future.

Industry specialists advise consumers to be more mindful about the way they manage their debts since lending firms, both government and private, tend to be stricter during times of instability. Their advice to consumers: cut off on unnecessary debt applications and pay their remaining balances. They also tell borrowers to be more heedful of their actions even if economists say that the recession is already over.

Fannie Mae and its sibling firm Freddie Mac provide funds to the Federal Housing Administration, Veterans Affairs, and the Department of Housing and Urban Development.

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