Credit Scores Used By Lenders To Qualify For Mortgage

This Article Is About What Credit Scores Used By Lenders To Qualify For Mortgage

Takes take a mortgage case scenario on What Credit Scores Used By Lenders To Qualify For Mortgage:

• Say Mr. and Mrs. Jones are married and they are first time home buyers
• They need to qualify for a mortgage loan
• They both have jobs and want to purchase a modest home
• They are aware that their mortgage lender told them that they would need a minimum of 640 FICO to qualify for a mortgage loan
• The 640 is not HUD Guidelines on Credit Score Requirements
• Minimum credit score requirements to qualify for 3.5% down payment FHA Loans is 580
• This lender is asking for higher credit score requirements
• This is because they have lender overlays on credit scores
• What Credit Scores Used By Lenders To Qualify For Mortgage and do they go by
• Which credit reporting agency does the mortgage lender choose

In this article, we will cover and discuss the credit scores used by lenders to qualify for mortgage.

Credit Reporting Agencies

http://www.youtube.com/watch?v=Ext8BSCtQWw&ab_channel=Gustan Cho Associates-MortgageBankers

There are three credit reporting agencies:

1. Transunion
2. Experian
3. Equifax

Which Scores Are Used As Qualifying Credit Scores

Mortgage Lenders pull tri-merger credit reports on all mortgage loan applicants which is a credit pull from each of the three credit bureaus. The credit score used as the qualifying credit score is the middle credit score. If there is more than one borrower such as multiple co-borrowers, then the middle credit score on the borrower with the lowest middle credit score is used.

Multiple Borrowers

On the above example, Mr. Jones will have 3 credit scores and Mrs. Jones will have 3 credit scores for a total of six credit scores.

So, which credit scores will the mortgage lender go by the following:

• Calculating which credit score the mortgage lender will go by is a two-step simple analysis.
• I will explain it in the example below

Let’s take this scenario for Mr. Jones:

• Mr. Jones’s Transunion credit score         720 FICO
• Mr. Jones’s Experian credit score             630 FICO
• Mr. Jones’s Equifax credit score               540 FICO

Now, what is Mr. Jones’s middle credit score?

• Mr. Jones’s middle credit score is 630 FICO because the 630 credit score is between 720 and 540

For Mrs. Jones:

• Mrs. Jones’s Transunion credit score           650 FICO
• Mrs. Jones’s Experian credit score               640 FICO
• Mrs. Jones’s Equifax credit score                 630 FICO

What is Mrs. Jones’s middle credit score?

Mrs. Jones’s middle credit score is 640 FICO because the 640 FICO falls between the high score of 650 and a low score of 630

Qualifying Credit Scores Used By Lenders

Mortgage lenders will go by the lower of the two borrower’s middle credit scores.

• In this case, Mr. Jones’s middle credit score is 630 FICO
• Mrs. Jones’s credit score is 640 FICO
• The minimum credit score requirement for this mortgage lender is 640 FICO
• Mrs. Jones qualifies
• This is because her middle credit score is 640
• Mr. Jones does not qualify because his credit score is 630 FICO
• In this case scenario, both of these mortgage loan applicants do not qualify for a mortgage with this particular lender
• This is because the credit score this lender will use is Mr. Jones’s 630 credit score since he is the lower of the two middle credit scores
• The lender’s minimum credit score requirement is 640 FICO

Fannie Mae Averaging Credit Scores Of Borrowers With Multiple Co-Borrowers

Great news for borrowers with multiple co-borrowers on conventional loans. If a borrower has co-borrowers, Fannie Mae allows for the borrower and co-borrowers middle credit scores to be averaged. This is a good thing for one of the borrowers if they do not meet the minimum 620 credit score requirement on conventional loans. For example, if the main borrower had a 600 FICO and the co-borrower had a 700 middle credit score, Fannie Mae allows the main borrower and co-borrower to average their middle credit score. In this case, averaging the 600 and 700 middle credit scores yields a 650 FICO.

The borrower and co-borrower will qualify for a conventional loan since the average 650 credit score is higher than the 620 FICO required to qualify for a conventional loan. When it comes to pricing, the lender will price the rate on the lower middle credit score borrower which is 600. Pricing on rates will not be based on the 650 average scores. This holds true vice versa which means if the main borrower’s credit score was 700 and the co-borrower’s score was 600. The credit score will be average among all borrowers and co-borrowers and vice versa.

Meeting The Minimum Credit Scores

In the example above, there are several solutions. The first solution can be where Mr. Jones is not on the loan and have just Mrs. Jones on the loan.   Mr. Jones can be on the title after closing the loan. One problem this causes is that if Mr. Jones is not on the loan, his income cannot be calculated in calculating the debt to income ratio. If Mr. Jones’s income is not necessary for meeting the minimum debt to income ratio, they are in business.   If they need Mr. Jones’s income to qualify for the loan, then we need to go to option # 2.

Mortgage Lenders With No Overlays

The second option is to get a different mortgage lender with lower credit score limit guidelines. Consult with a lender with no overlays. There are many lenders with no overlays on credit scores. Another solution is to try to increase Mr. Jones’s credit score. Boosting his credit scores may be simple such as paying down credit card balances, or getting additional secured credit cards. Mortgage Loan Applicants who need to get qualified for a home loan with a lender with no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

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