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Tighter credit requirements among mortgage lenders have produced — wait for it — borrowers with better credit.

Not exactly a Nobel-worthy finding, but a recent Federal Reserve analysis of homebuying data helps clarify our collective improvement. Current homebuyers are more creditworthy on average than at any point in the last 12 years.

Researchers who combed through the most recent Home Mortgage Disclosure Act (HMDA) data also found the average credit score of current buyers has increased about 40 points since 2006.

Those higher scores have become the new necessity in the wake of the subprime mortgage meltdown. Consumers have had to commit time and energy to credit building or postpone their homeownership goals.

Stricter lending requirements have also pushed scores of homebuyers to more flexible and financially forgiving government-backed options like FHA and VA loans, both of which continue to boom.

Government Guaranties Booming

The pool of homebuyers is no doubt shrinking, which also plays a role in both shaping and elevating credit averages. Home purchase loans in 2011 were down about 65 percent compared to 2006, according to the analysis of data from more than 7,600 home lenders.

But almost all of that decline comes from the conventional lending space, where down payments of at least 5 percent and mid-700 scores are the norm.

Government-backed programs accounted for 43 percent of home purchase mortgages last year.

VA loans in particular have surged since the housing market collapse. This nearly 70-year-old program, which recently marked its 20 millionth mortgage guaranty, has seen a 305-percent spike in loan volume since 2007.

The agency’s approved lenders are generally looking for a credit score of about 620, which has traditionally signaled the demarcation line for subprime borrowers. Qualified borrowers can purchase with no money down and find competitive rates without any form of mortgage insurance.

FHA lenders require a 3.5 percent minimum down payment but also work with borrowers in the shadow of that subprime cutoff. Last May, the average FICO score for a denied FHA loan application was 669, according to a National Association of Realtors survey.

In comparison, borrowers with scores of at least 740 accounted for 53 percent of loans in August 2011.

Commit to Your Credit

For consumers on the ground, the shift in standards leaves no doubt: Mastering your credit score is more important than ever. You can start to get a handle on your credit by checking your credit reports for free, and by using a free score monitoring service to check your progress (such as Credit.com’s Credit Report Card).

Nowhere is that lesson more evident than in the narrowing margin of borrowers on the edge. The share of borrowers with sub-620 credit able to secure home financing has tumbled from about 19 percent in 2006 to 7 percent in Q3 of 2011, according to the HMDA analysis.

In fact, the credit score separating the bottom decile of borrowers has jumped nearly 50 points over the last six years.

This latest mortgage market analysis confirms a rather self-evident trend. But it also underscores the increasingly crucial role government-backed loans are playing for consumers now cut off from conventional lending.

Landing a home loan today is still tough. Prospective borrowers who aren’t eagle-eyeing their credit profiles are making it significantly tougher for themselves to get a loan.

Image: SMcGarnigle, via Flickr

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