A man tries to climb a ladder with missing rungs to get a mortgage loan.
Illustration by Lanette Behiry/Real Estate News

Tighter credit adds another hurdle for buyers 

Black Knight reports that recent borrowers had higher credit scores and larger down payments, suggesting that lenders have tightened their standards.

June 6, 2023
3 minutes

Key points:

  • Average borrower credit scores reached a record high of 730 in April.
  • While tightening credit is yet another challenge for buyers in the current market, it could convince the Fed to pause interest rate hikes sooner.
  • The report also found that for-sale inventory has dropped in nearly all major markets, but some regions remain affordable.

Credit appears to have gotten tighter this spring, adding another challenge for potential homebuyers facing an already tough market.

Black Knight's latest Mortgage Monitor report found that those locking in mortgages are doing so with higher credit scores and bigger down payments, a sign that more is being asked of borrowers. The report is based on the company's mortgage, real estate and public records data sets.

The average credit score in April was slightly above 730, the highest on record for the report, which started observing this metric in 2000, according to Andy Walden, Black Knight's vice president of enterprise research.

While not at peak levels seen earlier in the pandemic, the average down payment also remains high. In mid-May it was $81,500, up from around $50,000 right before the pandemic hit in the spring of 2020.

Tighter credit, reduced demand could help slow the economy

April's Senior Loan Officer Opinion Survey from the Federal Reserve noted that "lending standards tightened across all categories of residential real estate loans" during the first quarter of 2023. It also reported that there was weaker demand for residential loans, including home equity lines of credit. 

"In a sense, the gridlocked housing market has been feeding on itself," Walden said. "Demand is obviously suffering, and the fact that this spring's strengthening home prices have erased more than 60% of the 'correction' seen late last year isn't likely to help much on that front."

While tightening credit is not great news for would-be buyers in the short term, it could mean the Fed will pause interest rate hikes sooner. Less available credit helps to slow the economy, which in turn can bring down inflation. The Federal Reserve will meet in mid-June to discuss any potential action on interest rates.

This comes at a time when for-sale inventory has also deteriorated. According to the Black Knight report, inventory is at the lowest level since April 2022, with levels falling in 95% of the major markets since the beginning of the year.

Falling inventory has meant a rise in home prices in early 2023, even in West Coast metros that previously saw significant price drops in the second half of 2022. Austin, Texas, was the only market with inventory above pre-pandemic levels and prices that continued to drop in the first quarter of 2023.

Pockets of affordability in the East, falling prices in the West

While much of the Mortgage Monitor hit on the challenges for homebuyers, it did find a bright spot: There are still some parts of the country that are relatively affordable.

Cleveland, Ohio; Pittsburgh, Pa.; and Hartford, Conn. were ranked as the most affordable markets in terms of payment-to-income ratios in April, with all three coming in at under 24%. Ideally the percentage of gross income going toward a mortgage is around 28%.

California metros continue to be among the least affordable, with Los Angeles (65% payment-to-income ratio), San Diego (57.4%) and San Jose (55.2%) topping that list.

Hartford may not be affordable for long. It recently surpassed Miami as the metro with the highest year-over-year home price growth rate at 7.8%. Miami previously held the top spot for eight straight months, according to the report.

Now in second place, Miami's home prices grew 6.7%, while Milwaukee (4.8%), Virginia Beach (4.3%) and Cincinnati (4.2%) rounded out the top five.

Cities with the biggest annual price drops in the past year were Austin (down 12.8%), San Francisco (down 11%) and San Jose (down 10.4%).

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