According to Fannie Mae is raising lending criteria to minimum 620 credit score which will cut demand for housing because fewer people will be able to borrow money to buy homes.

On the other hand, the effect will be dampened in some areas due to huge declines in home prices and huge increases in home sales. So, the change will be much less damaging now than it would have been a year ago.

The government-backed mortgage financier Fannie Mae is tightening its lending standards. The GSE says it will require a credit score of at least 620 for all mortgage loans delivered in accordance with its Selling Guidelines, including loans guaranteed or insured by a federal government agency, such as the Federal Housing Administration (FHA), Veterans Affairs (VA), or HUD.

The new minimum will take effect for manually underwritten loans and all government loans on November 1, and for loans underwritten using Fannie’s Desktop Underwriter, when the software is updated on December 12. Currently, the minimum score for most loan types is 580, with no minimum for government loans.

The change will also add future stability to home prices because buyers will be better qualified on average and that will mean fewer future foreclosures depressing future home prices.

The question is where will home prices settle before they become stable? Fannie Mae’s prudent change would tend to make prices settle at a lower level.