Credit Scores During Mortgage Process

Income and credit scores during mortgage processare probably the two most important factors when it comes to qualifying for a residential mortgage loan.  If you had to pick between the two, I would say income is more important because you can get a mortgage loan approval with bad credit as long as you have income, however, you cannot get a mortgage loan approval with great credit but no income.  Regardless, credit scores will dictate how much down payment you need to make as well as other factors such as debt to income ratios, pricing on what mortgage rates you will be getting, and other qualification factors whether you need rent verification and the amount of seasoned credit tradelines as well as reserves.

Credit Scores During Mortgage Process: Determinants Of Down Payment And DTI

Your credit scores will determine on the amount of down payment you need to put down on a home purchase.  If your credit scores are between 530 FICO and 580 FICO, you need to put a 10% down payment on a home purchase.  If your credit scores are at 580 FICO or higher, you can put a 3.5% down payment.  If your credit scores are below 620 FICO, your debt to income ratios cannot exceed 43%.  If you have a credit score of at least a 620 FICO or higher, your debt to income ratios can be capped at 56.9%.  Mortgage rates for FHA insured mortgage loans have 20 point adjustment caps.  For example, to qualify for the best possible FHA mortgage rate with no negative adjustment caps, a mortgage loan borrower needs a 680 FICO.  There are pricing changes for every 20 point decrease.  660, 640, 620, 600, and 580.  The lower your credit scores, the higher your mortgage rates.  This also applies to conventional loans.  For the best possible pricing on conventional mortgage loans, the conventional mortgage loan borrower needs a 760 FICO.  Like FHA, there are pricing adjustments every 20 points:  740, 720, 700.  There is a steep pricing adjustment below 700 FICO on conventional mortgage loans.  Minimum credit score required for conventional mortgage loans is normally 620 FICO.

Fluctuating Credit Scores During Mortgage Process: Which Credit Scores Will Lender Use?

A mortgage lender will only use your initial credit scores during mortgage process that is originally pulled when you sign the official mortgage application and disclosures.  A mortgage loan originator will not have you sign the official 1003 mortgage application and disclosures without the credit report he or she will be using.  A mortgage loan originator can also delay having you sign the official mortgage application and disclosures until your credit scores are high enough that you can qualify for a mortgage loan.  Also, if there are errors in your credit report  during mortgage process which is drowning your credit scores, your mortgage loan originator can help correct the errors by the use of rapid re-score and have the corrections reported to the three credit reporting agencies.  So the bottom line is that the mortgage lender will use the original credit report and credit scores that was originally pulled to qualify for your mortgage loan.  In the event if your credit scores were to go up during the mortgage loan approval process, we cannot use the newer credit report and credit scores unless you cancelled the whole mortgage loan application and choose a different wholesale mortgage lender.  On the flip side, if your credit scores during mortgage process have dropped during the mortgage approval process, you do not have to worry about not qualifying for the mortgage loan because the mortgage lender will be going by the original higher credit report and credit scores.  The mortgage lender will pull credit prior to closing again and if they notice your credit scores have dropped, no worries.  You are all set.

Try To Keep Your Credit Scores During The Mortgage Process Steady

Even though the mortgage lender will go by your original credit report and credit scores during mortgage process when it was first pulled when you completed your mortgage loan application, still try to keep your credit scores steady with no downward movement.  You need to understand that the original credit report normally expires in 90 to 120 days so if your credit report expires, a new credit report will need to be pulled and the mortgage lender will go by the new credit report and credit scores.  If your credit scores have dropped significantly, your whole mortgage application may need to be re-underwritten.  Expiration of credit reports are common on new construction home purchases.  Construction delays happen and if your credit report expires, a new credit report needs to be pulled.  If the credit scores remain the same, we have no issues.  Issues will arise if your credit scores plummet or you have charged up your credit cards where your debt to income ratios are higher than the required maximum DTI allowed.

Things To Avoid During Mortgage Approval Process

There are things you should not do during the mortgage approval process.  You should always be aware that your credit report and credit scores will be expiring within 90 to 120 days from the original credit check.  Do not apply for credit cards or make any purchases that require financing, especially get an automobile loan.  An auto loan is the worst item you can get because it will knock you off with regards to debt to income ratios.  A $300.00 automobile payment is equivalent to a $60,000 mortgage loan.  A hard inquiry on a credit card application will cost you 5 FICO points.  Do not pay off any collection accounts.   Paying off an old collection account will re-activate the derogatory item on your credit report and cost you 80 PLUS FICO POINTS.   You can have open collections and charge offs and still get your mortgage loan approved and closed.  Do not close out any credit accounts with zero balances.  Part of your credit scores consist of credit accounts with history and a credit available factor.   Never be late on your payments.  One late payment will plummet your credit scores and could cost you a mortgage loan approval.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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