Americans with near-perfect credit scores reap the rewards of record breaking mortgage rates, a trend that highlights the economic divide created by the coronavirus recession. However, there are signs that lenders could relax their very strict standards a bit.

The typical credit score for mortgage borrowers was 781 in the third quarter, down from 786 in the second quarter and just off the first quarter record of 788, the Federal Reserve Bank of New York said in a quarterly report. In the days of loose lending that led to the Great Recession, by contrast, the median credit score for mortgage borrowers fell to 707.

Meanwhile, only a quarter of borrowers who obtained home loans during the summer months had credit scores below 729. According to data from the New York Fed, only 10% had credit scores below. 677.

The numbers have been skewed up in part by the large share of mortgage refinancings in 2020 and 2021. People who already own a home tend to have higher credit scores than first-time buyers.

Additionally, mortgage lenders have become more risk averse during the coronavirus pandemic. In the first few months of the recession, mortgage brokers explained that they had to conduct quasi-obsessive checks on borrowers’ employment and income.

A symptom of K-shaped recovery

The fortunes of Americans have diverged considerably during this recession. Those who can work remotely have continued to collect paychecks. Home prices have skyrocketed and stocks have regained the value they lost earlier in the year.

However, low-wage workers are struggling as restaurants, hotels and other service sector employers continue to be affected by the pandemic. Economists have invoked the K-shaped recovery to describe the disconnect – the fortunes of wealthy Americans rise as the top half of the letter, while working classes experience the downward slope of the bottom half of the K.

“A symptom of the K-shaped consumer recovery is that those with a stable financial base or higher incomes are able to to buy a house Where refinance the mortgage on an existing home, ”says Greg McBride, CFA, chief financial analyst at Bankrate. “The pool of borrowers in 2020 seems to be coming more and more from the upper part of the K.”

The highest possible credit score in the FICO system is 850. A score above 740 is considered excellent.

“A FICO score is not an indication of wealth,” says radio host and author Chris Hogan, a personal finance expert. “It’s more of an indication of how well you’ve handled your debt. “

Raising ratings has an advantage for lenders and borrowers alike: a homeowner with a credit score approaching 800 is extremely unlikely to default. For borrowers, this means little risk of a financially devastating foreclosure.

“If you sign up to buy a home before you’re ready, it may be more of a curse than a blessing,” Hogan says.

What You Can Do About Your Credit Score

Your credit score is the most important factor in determining your mortgage rate. Here’s how you can increase it – and what to do if your score won’t increase:

Pay off credit card debt: If you have the choice between paying off your debt or accumulating a larger down payment, it is wiser to focus on the debt as it should improve your credit score.

Pay your monthly bills on time: Payment history plays the biggest role in your credit score. To remember to write a check, automate your current payments. To avoid a missed payment, build your emergency savings.

Consider an FHA or VA loan: Compared to compliant loans backed by Fannie Mae and Freddie Mac, mortgages backed by Federal Housing Administration and the US Department of Veterans Affairs have less stringent rules regarding credit scores. However, the upfront costs are higher.

Know when it’s enough: The best mortgage deals go to borrowers with a score above 740, but improvements beyond that point won’t affect your rate much. Keep an eye on your score, sure, but understand that dropping it from 790 to 800 won’t get you a better deal.

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