Increases And Decreases Of Credit Scores During Mortgage Process

Increases And Decreases Of Credit Scores During Mortgage Process

This BLOG On Increases And Decreases Of Credit Scores During Mortgage Process Was UPDATED On February 1st, 2018

Income and credit scores during mortgage process is probably the two most important factors when it comes to qualifying for home loans.

  • If offered a choice between the two, I would say income is more important
  • This is because loan applicants can get a mortgage loan approval with bad credit with documented income
  • However, cannot get a mortgage loan approval with great credit but no income
  • Regardless, credit scores will dictate how much down payment determines the following:
    • Down Payment on FHA Loans
    • Debt To Income Ratios on FHA Loans
    • Pricing on private mortgage insurance premium on conventional loans
    • Pricing on mortgage rates

Factors Determining Down Payment And DTI On FHA Loans

Credit scores will determine on the amount of down payment needed on FHA Loans:

  • If credit scores are between 500 and 579, FHA borrowers need to put a 10% down payment on a home purchase
  • If credit scores are at 580 or higher, borrowers can put a 3.5% down payment to qualify for FHA Loans
  • Credit scores are below 620, debt to income ratios cannot exceed 43%
  • Credit score of at least a 620 or higher, debt to income ratios can be capped at 46.9% front end and 56.9% back end DTI

Loan Level Pricing Adjustments On Government Loans

Government Loans are the following:

  • FHA Loans
    • Guaranteed by the U.S. Department of Housing and Urban Development (HUD)
  • VA Loans
    • Guaranteed by the Department of Veteran Affairs
  • USDA Loans
    • Guaranteed by the U.S. Department of Agriculture Rural Devenlopment

Government Loans are home loans originated and funded by private lenders but guaranteed by a government agency. Government Loans have lower mortgage interest rates and little to no down payment requirements. Lenders are able to offer low rates and little to no down payment on government loans because if borrower defaults and property forecloses, the respective government agency will guarantee the loss.

Loan Level Pricing Adjustments are pricing hits on mortgage rates.

  • 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 on government loans
  • There are pricing changes for every 20 point decrease. 
    • 660
    • 640
    • 620
    • 600
    • 580
  • The lower credit scores, the higher the mortgage rates
  • This also applies to conventional loans

Loan Level Pricing Adjustments On Conventional Loans

Conventional Loans are not guaranteed by any government agency. However, lenders follow Fannie Mae and/or Freddie Mac Guidelines when qualifying, originating, and funding conventional loans. Reason lenders conform to Fannie and/or Freddie Mortgage Guidelines is because Fannie and Freddie purchases conventional loans if they conform to their mortgage guidelines. Conforming Loans are more sensitive to credit scores than government loan programs:

  • For the best possible pricing on conventional mortgage loans, the conventional mortgage loan borrower needs a 740
  • Like FHA, there are pricing adjustments every 20 points: 
    • 740
    • 720
    • 700
  • There is a steep pricing adjustment below 700 on conventional mortgage loans
  • Minimum credit score required for conventional mortgage loans is normally 620

Fluctuating Credit Scores During Mortgage Process

Which Credit Scores Will Lender Use?

Mortgage Lenders will use the middle credit score of the lower credit score borrower if there is more than one borrower. A mortgage lender will only use initial credit scores during mortgage process that is originally pulled. Most lenders will just stick with the original credit scores until the loan closes. However, The Gustan Cho Team at USA Mortgage can repull credit during the mortgage process and if borrowers scores are higher, we can use the higher credit score for pricing and locking the mortgage interest rates.

  • A mortgage loan originator will not have applicants sign the official 1003 mortgage application and disclosures
  • A mortgage loan originator can start the mortgage process as long as the borrower meets the minimum credit score requirements
  • Mortgage application and disclosures are sent to borrowers
  • If there are errors in credit report during mortgage process which is drowning credit scores, mortgage loan originator can help correct the errors by the use of rapid re-score
  • Rapid Rescores expedite errors and can update tradelines reported to the three credit reporting agencies in a matter of 5 business days
  • 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 mortgage loan

What If Credit Scores During Mortgage Process Increased?

  • In the event if credit scores were to go up during the mortgage loan approval process, most lenders cannot use the newer credit report and credit scores
  • In order to use the higher credit scores for pricing mortgage rates, borrowers need to cancel the whole mortgage loan application and restart the mortgage proces
  • However, The Gustan Cho Team at USA Mortgage can use the new higher credit scores to get borrowers pricing

What If Credit Scores During Mortgage Process Dropped?

  • On the flip side, if credit scores during mortgage process have dropped during the mortgage approval process, borrowers do not have to worry about not qualifying for the mortgage loan
  • This is 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
  • If they notice credit scores have dropped, no worries

Try To Keep Credit Scores During The Mortgage Process Steady

Even though the mortgage lender will go by original credit report and credit scores during mortgage process when it was first pulled still try to keep credit scores steady with no downward movement.

  • Mortgage applicants need to understand that the original credit report normally expires in 120 days
  • If credit report expires, a new credit report will need to be pulled
  • The mortgage lender will go by the new credit report and credit scores
  • If credit scores have dropped significantly, mortgage application may need to be re-underwritten
  • Expiration of credit reports are common on new construction home purchases
  • Construction delays happen and if 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 credit scores plummet or when consumers have charged up credit cards where debt to income ratios are higher than the required maximum DTI allowed

Things To Avoid During Mortgage Approval Process

There are things borrowers should not do during the mortgage approval process.

  • Should always be aware that credit report and credit scores will be expiring within 120 days from the original credit check
  • Do not apply for credit cards
  • Do not make any purchases that require financing, especially get an automobile loan
  • An auto loan is the worst item to purchase because it will sky rocket 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 drop 5 points 
  • Do not pay off any collection accounts
  • Paying off an old collection account will re-activate the derogatory item on  credit report and drop scores
  • Open collections and charge offs do not have to be paid off
  • Do not close out any credit accounts with zero balances
  • Part of credit scores consist of credit accounts with history and a credit available factor
  • Never be late on monthly minimum payments
  • One late payment will plummet credit scores 

Qualifying For Mortgage With Direct Lender With No Overlays

Home Buyers and/or homeowners who need to qualify for mortgage with direct lender with no mortgage overlays on government and conventional loans can contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com. We are always available 7 days a week.

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