Credit Score To Qualify For Mortgage

Credit Scores And Home Loans

Gustan Cho Associates

There are minimum credit score requirements to qualify for a mortgage loan.  Although there are many credit factors that need to be met by a mortgage loan applicant, to get entry to qualify for a mortgage loan, you need a specific minimum credit scores.  There are two types of mortgage lending guidelines. The first is the federal minimum mortgage lending guidelines set by HUD and Fannie Mae and the second mortgage lending guidelines are the individual mortgage lenders own mortgage lending guidelines, called mortgage lender overlays which are additional guidelines on top of the federal minimum guidelines.  For example, HUD mortgage lending guidelines for a mortgage loan applicant to qualify for a FHA loan with a 3.5% down payment is for the mortgage loan applicant to have a 580 FICO credit score.  However, most banks and credit unions have their own mortgage lender overlays that will not accept anyone for a 3.5% down payment FHA loan unless they have a minimum credit score of 640 FICO.  So if you go to your local bank and apply for a mortgage loan and they tell you that you do not qualify for a mortgage loan because your credit score is under 640 FICO, that does not mean that you do not qualify for a mortgage loan with another mortgage lender.  There are many mortgage lenders that will just go off the federal minimum mortgage lending guidelines and these mortgage lenders are called no overlay mortgage lenders.  Most mortgage lenders consider mortgage loan applicants with credit score under 620 FICO higher risk mortgage loan applicants.  Mortgage lending guidelines also have tougher mortgage lending requirements for mortgage loan applicants with credit score under 620 FICO.

Qualifying For Mortgage With Credit Score Under 620 FICO

If you have credit score under 620 FICO, you can still qualify for a 3.5% down payment FHA loan.   To qualify for a 3.5% down payment FHA insured mortgage loan, you need a minimum 580 FICO credit score.  However, there are major factors between have a credit score under 620 FICO and credit score of over 620 FICO.  Even though the down payment required is 3.5% for both under 620 FICO credit score borrowers and over 620 FICO credit score borrowers, there are other qualifying factors.

Debt To Income Ratio For Borrowers With Credit Score Under 620 FICO

If you have credit score under 620 FICO, the maximum debt to income ratio cap gets reduced from 56.9% debt to income ratio to 43% debt to income ratios.  This is not a mortgage lender overlay but HUD’s mortgage lending guidelines.  For those with higher debt to income ratios, they may need to wait until they can raise their credit scores over 620 FICO.  Also, mortgage rates are higher for borrowers with credit score under 620 FICO.  Mortgage lenders may require three months reserves for borrowers with credit score under 620 FICO.  Reserves are one month’s housing payments which include principal, interest, taxes, and insurance as well as private mortgage insurance, homeowners association fees, and flood insurance if these are applicable.

Mortgage Approval For Borrowers Under 580 FICO Credit Scores

Home buyers with credit scores between 530 FICO and 579 FICO credit scores can still qualify for a FHA insured mortgage loan as long as they have a 10% down payment and compensating factors.  Compensating factors are postive factors that a mortgage loan applicant has such as reserves, low payment shock on their new proposed housing payment from their current rent payment, high income and low debt ( low debt to income ratios ), and documented income the mortgage applicant has but cannot be used to qualify for the mortgage loan such as part-time income, bonus income, over-time income that has not been seasoned for 2 years.

What Is The Minimum Credit Score Required To Qualify For A Conventional Loan?

Minimum credit score requirements to qualify for a conventional loan is 620 FICO.  Conventional loans mortgage rates are extremely sensitive to credit scores.  A 620 FICO credit score is considered very low for conventional loan mortgage lenders and the chances are that you will get a very high conventional mortgage rate or even might have to pay points to get a conventional loan with a 620 FICO credit score.  The higher your FICO credit score is the lower your conventional mortgage rate will be.  To get the best available conventional mortgage rate, your credit score needs to be at 740 FICO or higher.  That does not mean you do not qualify for a conventional loan with credit scores under 740 FICO.  Every 20 FICO point drop from the 740 FICO credit score, your rates will be slightly higher.

Other Factors Besides Low Credit Scores To Qualify For A Mortgage

As long as you have income, you will get a mortgage loan approval.  It is not if you will get a mortgage loan approval, it is when you will get a mortgage loan approval.  Borrowers with credit score under 620 FICO get mortgage loan approvals all the time, however, there are other factors that play in the mortgage loan approval process.  There is reasons why your credit scores are low.  Have a period of prior bad credit in the past is understandable and if this is the reason why your credit scores are low, than you will have no issues.  However, mortgage lenders will review your overall credit history and they want to see a timely payment history in the past 12 months on all of your credit obligations.  Recent late payments, especially multiple recent late payments, can pose a problem and may delay your mortgage loan approval until at least six or more months of timely payments have been reported on your credit report.

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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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